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FSB Task Force Study Finds Companies in Early Stage of Adopting Climate Risk Disclosure Framework

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International Task Force on Climate-related Financial Disclosures Issues 2018 Report

The September 2018 Status Report from the Task Force on Climate-related Financial Disclosures (TCFD) provides an overview of the extent to which companies in their 2017 reports included information aligned with the core TCFD recommendations published in June 2017. The report also provides information to support preparers of disclosures in implementing the TCFD recommendations.

The TCFD is an industry-led initiative launched in 2015 by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system. The TCFD seeks to develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers, and investors. The task force recommended four areas companies should cover in their public disclosures: governance, strategy, risk management, and the use of metrics and targets. Within those four areas, the TCFD listed 11 types of disclosures companies should provide, including plans for dealing with long-term risks and taking advantages of opportunities identified through the use of scenario analysis.

According to the 2018 report, the TCFD found that disclosures of a majority of companies assessed were already aligned with one or more of the 2017 TCFD recommendations. The TCFD surveyed disclosures of over 1,700 firms from diverse sectors with broad geographical representation. Other findings include:

  • While many companies describe climate-related risks and opportunities, few disclose the financial impact of climate change on the company.
  • A minority of companies disclose forward-looking climate targets or the resilience of their strategies under different climate-related scenarios, including a 2°C or lower scenario, which is a key area of focus for the Task Force.
  • Disclosures vary widely across industries. For example, more non-financial companies reported their climate-related metrics and targets than did financial companies. However, financial companies were more likely to disclose how they had embedded climate risk into overall risk management.
  • Disclosures are often made in sustainability reports or spread across financial filings, annual and sustainability reports.

"The review results also indicate that climate-related financial disclosures are still in early stages," the TCFD said in the report. "This is consistent with the Task Force's view that implementation of its recommendations is a journey and companies are in different places in terms of their exposure to climate-related risks and opportunities and their reporting capabilities."

The TCFD used artificial intelligence to examine the fiscal year 2017 financial, annual and sustainability reports of 1,734 companies across the banking, insurance, energy, materials and building, transportation, and agriculture, food and forest products sectors. In addition, some members of the TCFD took a more detailed look at the reports of 200 large companies across those sectors that were viewed as the most likely to disclose climate change information.

Of the sectors reviewed, the report found that energy companies had the highest percentage of disclosures that appeared to align with five of the 11 recommended disclosures. Unlike many other sectors, the most common disclosure by energy companies involved the impact of climate-related risks or opportunities on the company's businesses, strategy, or financial planning.

The most common disclosure among banks and insurance companies involved the entities' processes for identifying and assessing climate-related risks and other issues. Banks and insurance companies tended to be more likely than the companies in other sectors to release the information in financial filings versus on their websites or through other means.

311 insurance companies from 54 countries were included in the AI review. They ranged from $2.6 trillion to $52 billion in asset size. 519 documents were reviewed, of which 85% were financial filings or annual reports and 15% were sustainability reports. Overall, insurance companies disclosed information that appeared to align with the recommended disclosures less frequently than the other five groups included in the AI review.

Of 25 insurance companies that were examined in more detail, the majority were found to describe board-level oversight of climate-related issues, and some described the frequency of relevant board-level meetings (governance); disclose information on their climate-related risks and opportunities, including information on the impact of climate-related issues on their business, strategy, or financial planning (strategy); provide information on their risk identification and assessment processes related to climate change, though significantly fewer reported on specific risk management processes (risk management); and, disclose the metrics they use to assess or monitor climate-related issues as well as the targets they use to manage climate-related issues (metrics and targets). 

The FSB has asked the Task Force to publish a further status report in June 2019 which will allow for analysis of disclosures made in 2018 financial reports.

RELATED NEWS

California Insurance Commissioner Encourages Others to Follow Lead and Adopt Climate-Related Financial Disclosure Recommendations
California Department of Insurance (09/26/18)

In a CDI Press Release, California Insurance Commissioner Dave Jones welcomed the Task Force on Climate-related Financial Disclosures (TCFD) 2018 Status Report. Jones is the self-proclaimed first financial regulator in the United States to adopt the TCFD recommendation to use scenario analysis to assess insurers' exposure to climate-related transition risk. Jones has undertaken a number of initiatives as insurance commissioner intended to increase insurers' understanding and focus on climate-related risk. The Commissioner says, "Widespread adoption of the TCFD climate risk disclosure recommendations will help ensure climate-related risks are routinely considered in business and investment decisions and encourage an effective dialogue between companies and banks, insurers, and investors, about those risks, which in turn will lead to smarter, more efficient allocation of capital and greater resiliency in the face of climate change."