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Guide outlines ways asset owners can apply climate disclosure framework

The United Nations Principles for Responsible Investment issued a guide on how asset owners around the world can implement the recommendations of the Task Force on Climate-Related Financial Disclosures.

"TCFD reporting will be a journey," said the guide, issued May 11. "Preparers could start with the soft information disclosure, but also indicate a multi-year reporting plan that would ratchet up in complexity over time."

Companies that have said they plan to adopt the framework are expected to post that information in a variety of ways, including in annual reports, financial filings and on their websites.

The TCFD was formed by the Financial Stability Board, an international body of governmental, regulatory and banking financial officials. The FSB launched the task force in 2015 to create a voluntary, common international framework for companies of all sectors and investors to make informed decisions about their exposure to climate-related risks and opportunities.

Since the task force issued its recommendations in June 2017, at least 275 companies and 47 other organizations have voiced support for the recommendations that broadly fall within several buckets: governance, strategy, risk management, and the use of metrics and targets.

"Climate change is a risk multiplier," PRI's guide said in explaining why asset owners should care about the TCFD recommendations. Climate change "exacerbates existing issues with energy, resource and food security and is changing the odds on extreme weather events."

In addition to being susceptible to physical risks, investor's capital may also be at risk during the multidecade transition to a low-carbon economy, particularly within the energy sector, the guide said. The guide highlighted some practical actions that asset owners can take and have taken and detailed the tools and resources that can support scenario analysis. Asset owners include individuals and institutions such as pension plans, sovereign wealth funds and insurance companies that have legal ownership of their assets, although many have outsourced management of those assets.

Given that some components of the TCFD recommendations will take additional work and time to implement, the guide suggested some initial steps asset owners could take. For starters, it said the owners should review their governance arrangements to ensure their boards have effective oversight and internal management processes to manage climate-related risks and opportunities.

The guide said asset owners also should begin analyzing the resilience of their portfolio under climate-related scenarios, including one reflecting the Paris Agreement on climate change that seeks to limit global warming to 2 degrees C from pre-industrial levels. It said asset owners also should assess if climate-related risks are financially material to their investment portfolios and what actions are needed to mitigate those risks and capture new opportunities. Asset owners should also measure the greenhouse gas emissions tied to each fund or investment strategy if the data is available or can be reasonably estimated.

In addition, the guide said asset owners may have to engage with companies and external fund managers to encourage greater transparency and alignment with the TCFD recommendations. The owners should also publicly disclose their actions.

The guide also recommended that asset owners ask their fund managers if they plan to issue reports reflecting the key pillars of the TCFD framework. Fund managers should be asked to describe their governance practices on climate change, their strategy for identifying related risks and opportunities, and their processes for integrating climate-related risks and metrics into investment decisions, the guide said.

Asset owners can also promote the wider adoptions of the TCFD's recommendations by supporting climate-related resolutions at companies' annual proxy meetings, engaging with companies directly and participating in collaborative investor initiatives such as Climate Action 100+, the guide said. It added that asset owners could also set climate-related targets to reduce the carbon intensity of a portfolio or limit exposure to coal and fossil fuel reserves and exploration.

The Principles for Responsible Investment is a project the UN launched in 2006 that is now made up of an international network of more than 1,800 investors working together to use six principles for responsible investment in their investment decisions and ownership practices. The six principles largely offer a menu of possible ways to incorporate environmental, social and governance issues into those practices.