Two and a half years on from the Paris Climate Accord, investors are increasingly demanding transparency on climate related risks and opportunities. In Australia, there are currently only about 10 companies that disclose climate related risks but I expect this will jump after the 30 June 2018 reporting season with the new Task Force on Climate-related Financial Disclosures (TCFD) guidelines now being available.
No company I work with denies climate change; and almost every company I work with uses a carbon price for internally testing investment decisions. But in Australia we have been relatively slow to understand the breadth of climate-related risks and opportunities inherent in our companies.
Most data required exists and is already in the public domain. As management teams become aware of just how materially financial many climate-related risks and opportunities are to their business, I anticipate that more companies will take the existing data and allocate resources to complete the analysis.
There is no denying the risks are real and there is certainly no lack of desire by shareholders to understand the impact climate change may (or may not) have on their investment. It’s now 12 months since shareholders in the US passed a resolution forcing Exxon to disclose more on financial risks. Climate change litigation is also emerging as a key risk.
The Task Force on Climate-related Financial Disclosures (TCFD) announced that, as of 31 December 2017, 240 companies with a combined market capitalisation of over $6.3 trillion have publicly committed to support their recommendations on voluntary, consistent climate-related financial disclosures.
I have noticed that some companies see the TCFD guidelines as just a new disclosure to tick off. This is wrong. Investors care that climate related risks are investigated and mitigated. The TCFD guidelines are a support tool to help companies analyse and understand these risks so that they can comprehensively disclose their management of these risks to investors.
Climate risks and opportunities can be revealed through conducting scenario analysis. At least three scenarios are necessary because the climate related risks and opportunities change, dependent on how the world responds. If we act quickly and avoid more than 2°C then a company is likely to be exposed to some transition risks such as, carbon pricing and potentially high carbon stranded assets. But, if we continue on our current emissions trajectory the physical risks (such as more intense cyclones) are likely to be highly salient to most companies.
The Centre for Policy Development in November 2017 released recommendations for reporting, urging companies to adopt standardised analysis of climate impact on business.
In their paper, Climate horizons: next steps for scenario analysis in Australia they recommended five key principles for robust scenario planning.
- Be genuinely consistent with Paris targets – incorporating a high probability of limiting warming to well below 2°C.
- Include both transition risks and physical impacts from climate change. The latter is likely to be significant even if warming is kept be below 2°C.
- Engage with the best available resources for understanding the sectoral or regional impacts of climate change.
- Be transparent about assumptions and parameters used.
- Show clear evidence not just of analysis of climate risks, but of responses to them through strategy, governance and risk management.
But it’s not always easy. There are many stakeholders to manage beyond just investors. Sometimes getting agreement from within an organisation can be difficult. Multiple scenarios, require multiple inputs and assumptions from many people who may not have worked together previously.
Communicating this within the company, let alone to investors can be difficult. Many companies are not used to scenario planning and surprisingly many don’t have business plans beyond three years. Even once the analysis is complete communication could tell an uncomfortable story.
In my experience it takes at least two years to communicate this effectively both internally and externally. Some will take much longer.
So, my suggestion, build agreement to report to the TCFD, conduct a gap analysis using the TCFD guidelines, be realistic about what you can achieve each year and resource so that you can appropriately mitigate your climate-related risks and take advantage of the opportunities as well as, disclose your progress annually to investors and other stakeholders.