Consultation on Climate Disclosures

Shanny Basar

Recommendations have been published on voluntary changes to financial statements as creditors and investors are demanding access to consistent risk information and climate-related financial disclosures.

The Financial Stability Board set up the task force on climate-related disclosures in December 2015 after the G20 asked market participants to review how financial statements can take account of climate-related issues. The task force published recommendations yesterday for voluntary, climate-related disclosures to be made as part of mainstream financial filings which are open for public consultation until 12 February 2017.

The report said several climate-related disclosure standards have been released but users have said there is a lack of information on the financial implications and that data is inconsistent.

Mark Carney, FSB chair, said in a statement: “The disclosure recommendations will give financial markets the information they need to manage risks, and seize opportunities, stemming from climate change. 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.”

The recommendations are structured around four themes –  governance, strategy, risk management, and metrics and targets. The task force said all types of organizations can develop disclosures consistent with its recommendations which provide a foundation for immediate adoption and are flexible enough to accommodate evolving practices.

“As data analytics and modeling for climate-related information become more widespread, disclosures can mature accordingly,” said the report. “This initial level of disclosure will allow investors to review, recognize, and understand how organizations consider climate-related issues and their potential financial impact.”

The recommendations will only be successful if there is widespread adoption and the report said this will require ongoing leadership by the G20 and the FSB.

“A variety of stakeholders, including stock exchanges, investment consultants, credit rating agencies, and others can provide valuable contributions toward adoption of the recommendations,” added the task force.

Consultancy Promontory Financial Group said in a report: “While the recommended disclosures are voluntary, they will likely become best practice.”

Promontory added that the task force provides supplemental guidance on developing climate-related financial disclosures specifically for the financial sector, including banks, insurance companies, asset owners and fund managers.  “Furthermore, the multifaceted nature of climate change will require financial institutions to bring together people from a variety of disciplines to understand and assess their climate-related risks,” said the consultancy.

Analysts at S&P Global Ratings research said in a note that the recommendations are likely to elevate the importance of climate-related risks and opportunities for both corporations and investors and improve allocation of capital.

“We believe that adoption of the recommendations, which are subject to a 60-day response period, will be strong,” said S&P. “Recommendations by the previous Enhanced Disclosure Task Force were widely implemented even though they were voluntary as well. Some countries such as the UK saw implementation rates as high as 92%.”

The ratings agency continued that the scenario analysis recommendation should provide valuable insights into how business strategy deals with climate change, especially for those corporates operating or investing in carbon-intensive areas. “We anticipate improved disclosure will spur more financial and investment activity, such as green bond issuance, related to environmental and climate issues,” said the note.

Swiss Re, the insurer, said it is adopting the recommendations from the task force and switching to environmental, social and governance benchmarks for its listed equity and corporate bond portfolios.

Guido Fürer, Swiss Re’s group chief investment officer, said in a statement: “We were early in realising that, as an investor, ESG factors can offer us potential long-term performance advantages. Furthermore, as one of the first signatories to the Principles for Responsible Investment in 2007, we have been active in the realm of ESG for almost a decade. Today’s adoption of these ESG benchmarks is a clear continuation of our strategy.”

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