Why disclosing climate risks and opportunities is vital
We Mean Business coalition
Since their launch earlier this year, the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are being embraced by more and more forward-looking businesses as a way to manage climate risk, maximize opportunities and demonstrate to investors they are taking climate issues seriously.
We caught up with S&P Global, Aviva and Ernst & Young at COP23 in Bonn, Germany to discuss the recommendations and the importance of disclosing climate risks and opportunities to investors.
Michael Wilkins, Managing Director at S&P Global Ratings
“At S&P Global Ratings we’ve been following climate risk, and environmental risk in general, in our credit ratings for a long period of time. In fact, we have those risks embedded in our credit ratings methodology already.”
“Just to illustrate that point, we published a report… to coincide with COP23, which provided a two-year look back over 9,000 research updates we’ve done on credit ratings in the corporate space. Out of those there were around 800 cases where environmental and climate risk actually had a meaningful impact on the analysis, both upwards and downwards.”
“Over 100 cases where credit ratings, in that two-year period alone, were moved up or down precisely because of climate risk. So we can show rating by rating where the climate risk is and produce case studies to allow investors to have much better information and transparency on where these risks actually impact credit quality.”
“This is important in light of the recommendations put forward by the Task Force on Climate Related Financial Disclosures and that’s requiring investors and companies to disclose more information about how climate risk and opportunities affect their business.”
“We feel at S&P Global Ratings that if we can do that analysis, using that better disclosure and then show how that impacts ratings by showing instances where the rating has moved either up or down… that’s going to add to much better capital allocation and the movement of capital towards better financial decision making.”
Steve Waygood, Chief Responsible Investment Officer at Aviva
“As an insurer we’re exposed to (climate) risks. As an owner of thousands of other companies we’re particularly concerned to make sure that the companies we invest in are helping our shareholders, by making sure they deal with climate risks.”
“We expect their boards to think about these issues, we expect their strategy team to develop a strategy that’s commercially sustainable, we expect their risk management committee to look at these risks and govern them properly. And then as owners and investors we want to see data – key performance indicators that tell us what are the targets and how is the company performing.”
“As a member of the FSB Task Force on Climate Related Financial Disclosure, I’m also advocating that the companies that we own are delivering a stress test. Or in other words a scenario plan, that stresses their own product mix against climate change and makes sure they are dealing with the physical risks or climate change, the transition risks of moving to a zero-carbon economy as well as any liabilities they might be incurring.”
“We’re a big long-term owner, seeking to promote big change within the companies that we own on climate risks because we’re concerned about the US$43 trillion that could be wiped off the value of global capital markets if we get to 6°C by 2100.”
“We’re also a big equity investor, we have a lot of ownership of a lot of companies and we take action at the AGM on the way that we vote. Since 2001 we’ve voted against the reports and accounts of a company that doesn’t include the climate change data that we feel that we need.”
“The TCFD helps companies manage risk and it helps them disclose those risks to the market and they are being used more and more by market participants.”
“We’ve recently announced that over time we’ll be voting against the reports and accounts of firms that aren’t using TCFD data and using the recommendations and committing to do that. If a company hasn’t published the data and we need it, if they commit to do then we’ll still support them. If we’re not that worried about that sector because it’s not a massive material issue we won’t focus on them first. But one of the reasons why businesses should be taking this stuff seriously is if you want to re-elected at your AGM, investors are taking more and more action.”
Alexis Gazzo, Partner – EY Cleantech and Sustainability at Ernst & Young
“Many large companies have improved the way they integrate climate risks in their reporting, based for some on long-term scenario planning. There still is a long way to go to put the right metrics, reporting processes in place and to embed climate in the strategy and governance.”
“Many companies still don’t realise this entirely, this is why it is urgent to define what it means to be TCFD-compliant.”
“The concrete benefits for taking action on climate are in the short-term really identifying risks and communicating those risks for investors and we think that transparency here is a key issue for communicating with investors, but also customers.”
“The other bit is about identifying new revenue streams that you can build upon that are related to your businesses or are a bit peripheral.”
“The other thing is also about finding new ways to transform your activity so that it’s actually going to evolve in a 2°C world and that’s what we’re telling to our clients – how will your business exist in a 2°C world, or in a 1.5°C world?”