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Firms must boost climate disclosure so investors can assess risk - G20 group

Companies around the world need to improve their climate-related disclosure so that investors can more accurately assess climate change risk, according to the influential Task Force on Climate-related Financial Disclosures.

The task force, or TCFD, reviewed financial reports for more than 1,100 companies from 142 countries in industries including banking, insurance, energy, media and transportation, and found that, while many were making progress, more firms needed to disclose how climate change would affect their business.

The Task Force was established in 2015 by the Financial Stability Board, which monitors vulnerabilities in the global financial system, prompted by the G20 group of major economies.

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Investors and regulators have become increasingly concerned about the impact of climate change on businesses, fearing that if industries like coal and gas become obsolete, financial institutions will be left with stranded assets. A report released on June 4 showed that the world's largest companies are expecting to take a hit of almost $1 trillion from climate change over the next five years.

'Problematic'

The TCFD has provided companies with a voluntary disclosure framework since June 2017 to help improve financial reporting standards. It outlines how large firms should assess and disclose their physical and transitional risks associated with climate change and focuses on governance, strategy and risk management as well as metrics and targets.

"While the Task Force found some of the results of its disclosure review and survey encouraging, it is concerned that not enough companies are disclosing decision-useful climate-related financial information," the TCFD said in its 2019 status report released June 5.

"This could be problematic for financial markets if market participants do not have sufficient information about the potential financial impact of climate-related issues on companies."

The other sectors studied included technology, consumer goods, materials, agriculture, food and forest products.

The TCFD also pointed out that three out of five companies using scenario-analysis do not disclose information on the resilience of their strategies.

Furthermore, it said that risk management and finance departments, as well as executive management, should be more involved in driving climate disclosure.

Banks outperforming other sectors

Banks are improving more quickly than companies in other sectors. They improved on all 11 TCFD-recommended disclosure measures between 2016 and 2018. For example, 48% of the banks studied disclosed information aligned with recommendations in 2018, up from 34% in 2016.

In the insurance industry, companies increased their disclosure for nine of the 11 recommendations, and most often reported on the risks and opportunities from climate change in their strategy.

Energy companies disclosed mainly on the impact of climate-related risks and opportunities. The quality of disclosure on emissions fell slightly between 2016 and 2018, but there was a 15-percentage-point increase in reporting on board oversight of climate-related risks and opportunities.

In transportation, there was 12-percentage-point increase in disclosure of climate-related targets over the period.

Some market participants have criticized the TCFD for disappointing results so far and have called for regulation to improve climate change disclosure.

But the TCFD said support for it continues to grow. The number of companies and other organizations committing to support the TCFD has grown to 785, up from 513 entities at the time of its last status report in September 2018.

The TCFD will provide a third status report in September 2020.