by Njoud Mashouka
Financial climate-related risks faced by businesses.
The current climate crisis’s catastrophic consequences are currently affecting populations and countries all over the world with no exception. Ranging from wildfires to extreme winter blizzards, the world is now more than ever under extreme threat. One entity facing these climate-induced risks is private business.
The challenges that the climate crisis poses to business range from operational impacts, scarcity of resources, and – lately especially – regulatory uncertainty. On a smaller scale, the climate crisis could impact a business’ supply chain and drastically increase operational costs thus reducing profit.
The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 to address risks faced by businesses due to climate change. The organization’s main goal is to encourage transparent climate-related disclosures to provide clearer information to investors, lenders, and insurance underwriters. This will allow the mentioned stakeholders to thoroughly assess the climate-related risks and opportunities.Through this process, the TCFD is promoting international financial stability.
The 2021 Status Report by the TCFD reveals that its Disclosure Recommendations have been followed by 2600 organizations worldwide, a significant 70% increase since the 2020 Status Report. This increase indicates the urgency felt by the private sector and finance institutions to address risks and opportunities imposed by the climate crisis. The TCFD Recommendations issued in 2017 features climate-related metrics and targets. This report lists the information that companies need to disclose in order to help stakeholders such as investors. The Recommendations revolve aroundfour main areas: governance, strategy, risk management, and metrics & targets.
Following its publication, a number of businesses expressed difficulty with the complex metrics and implementing the measures. As a result of this, TCFD published a supporting document: Annex on Implementation of the Recommendations.Following the consultations held in October 2020, the organization also published a Guidance on Metrics, Targets and Transition Plans. Combined, the three documents advocate for specific disclosures that align with TCFD’s framework.
Moving towards mandatory disclosure
The initial TCFD framework encouraged voluntary disclosures, however as of recently it is moving forward with mandatory disclosures. In November 2020, the United Kingdom announced a Roadmap regarding mandatory TCFD-aligned disclosures for UK economic actors to fulfill by 2025. The United Kingdom’s Financial Conduct Authority published a new rule requiring all UK premium listed companies to comply within the TCFD framework.
As of now, the United Kingdom is the first G20 country to implement a mandatory framework for its largest businesses to disclose their climate-related risks and opportunities. The new legislation will come into effect on April 6th 2022.Moving forward, nearly 1300 registered companies will have to disclose climate-related financial information in alignment with TCFD’s Recommendations. Through mandatory disclosures the United Kingdom hopes to achieve an increase in climate-related reporting. It hopes to help investors and financial institutions have a clearer image of the climate crisis’ financial impacts and associated price risks. This will allow investors and financial institutions to make more informed decisions, and crucially encourage private businesses to reduce their emissions and gain sustainability credentials to attract these investments.
According to Greg Hands, the British Energy and Climate Change Minister, if the country was to meet its 2050 commitments, it needs the nation’s “thriving financial system, including our largest business and investors, to put climate change at the heart of their activities and decision making.” Through this, the United Kingdom has become a global pioneer in encouraging greener financial systems. Following the UK’s decision, the G7 finance ministers met in London to commit to mandating the TCFD framework moving forward where they outlined a significant structural change to meet their net-zero commitments. Among the G7 countries, Japan was quick to act by publishing a revised Corporate Governance Code which introduced the TCFD aligned climate disclosure requirements. Although initially a voluntary disclosure, under the UK’s leadership the TCFD has become an initial step towards a greater implementation of a greener economy.
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