Global financial regulators on Wednesday issued a series of recommendations for corporate disclosure of climate-related risk as part of a consultation on standards for financial reporting.
The Task Force on Climate Related Financial Disclosure recommended that companies consider the impact of climate change as part of their governance, risk management and strategy.
The TCFD's draft paper sets out metrics and scenarios that firms should consider disclosing.
The paper, which launches a 60-day consultation, seeks input from publicly listed companies, investors, lenders and insurance underwriters about the financial risks companies face from climate change.
The standards are intended to be voluntary in the first instance, allowing companies to work within a standardized set of reporting guidelines, helping investors assess and compare corporate exposure to climate risk.
The TCFD's work aims to allow investors to make better informed decisions on capital allocation by avoiding projects, companies and sectors most exposed to climate risk and related regulation.
The task force was set up in December 2015 by global financial watchdog the Financial Stability Board, at the request of the G20 group of most industrialized countries.
Its purpose is to provide investors with the information they need to assess corporate exposure to climate change, within a wider FSB remit to mitigate threats to the global financial system.
The FSB's focus is to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of global financial stability.
"The disclosure recommendations will give financial markets the information they need to manage risks, and seize opportunities, stemming from climate change," FSB chairman and Bank of England Governor Mark Carney said in a statement Wednesday.
"As a private sector solution to a market issue, the Task Force has focused on the practical, material disclosures investors want and which all capital-raising companies can compile," Carney said.
Key Climate Risks
In a speech in London in 2015, Carney set out the key types of risk that companies face from climate change:
- Direct physical risks: damage through floods and other climate related events on property and business activity
- Liability risks: legal actions in future by parties affected against those they hold responsible
- Transition risks: financial risks that could result from the process of adjustment to a low carbon economy
UK-based financial analysis group Carbon Tracker Initiative said the climate risk disclosure standards would address an information gap in the market.
"Even before last year's watershed Paris Agreement, climate risk was high on the agenda of the world's largest institutional investors and asset managers," it said in a statement Monday ahead of the task force's report.
"Record-high shareholder support (against board recommendations) for resolutions asking oil and gas companies to stress test their business models against a two-degree consistent climate outcome demonstrates that this is squarely a financial concern," said Carbon Tracker.
"The recommendations mark a significant step forward towards meeting that market demand while also highlighting some of the most pertinent elements of existing voluntary disclosure frameworks," it said.
"The focus on making a market for these risks -- underpinned by the international reach of the FSB -- should signal to capital markets regulators around the globe the prospect of consistent, comparable disclosure standards on climate risk both within sectors and across stock exchanges," it said.