With organizations around the world acknowledging that climate change is one of the 21st century’s most pressing challenges, investors are also demanding more of the companies they invest in.
Climate risk reporting is one of those demands; transparency is key as it relates to transition and physical risks, as well as the opportunities created by a changing climate. The standards for reporting have been evolving over time and will continue to develop as we get better at identifying the most effective frameworks for mitigating climate change.
While not an exhaustive list, the timeline below highlights key dates and strategic organizations significant in the move toward more advanced climate risk reporting.
1970 –The US established the Environmental Protection Agency (EPA) in response to many environmental crises the country was facing. The EPA became responsible for developing and enforcing environmental standards.
1987 - The Brundtland Commission published its “Our Common Future” Report, a landmark assessment of the combined social and environmental barriers to sustainable development, which influenced the development of standards for sustainability reporting.
1992 – The United Nations Environment Programme Finance Initiative (UNEP FI) formed to encourage the implementation of sustainability issues by the private sector and the global financial sector.
1997 – Global Reporting Initiative (GRI) was formed to provide global standards for reporting and launched their first GRI guidelines three years later.
2000 – CDP (initially Carbon Disclosure Project) formed to provide climate change data.
2000 – The UN Principles of Responsible Investment (PRI) formed for investors to incorporate environmental, social, and governance (ESG) disclosures into investment decision making.
2007 – Climate Disclosure Standards Board (CDSB) began to develop a framework to guide organizations in reporting their environmental impact.
2010 – The Securities and Exchange Commission (SEC) requires public companies to disclose climate change related material, financial and reputational risks.
2010 – International Integrated Reporting Council (IIRC) was established to integrate reporting across sectors.
2010 – The International Standards Organization publishes its ISO 26000 guidelines for social responsibility reporting.
2012 – Sustainability Accounting Standards Board (SASB) sets standards for financial disclosures and focuses on the environmental, social, and governance (ESG) issues that affect an organization’s financial performance.
2015 – Task Force on Climate-Related Financial Disclosures (TCFD), an initiative of the Financial Stability Board (FSB), began in an effort to guide climate-related disclosures so financial stakeholders are well informed.
2020-2021 - The International Financial Reporting Standards (IFRS) published a consultation paper on creating a global sustainability standard and in the Trustees’ feedback review, they have stated an intent to develop standards based on the TCFD and other existing frameworks.
H.R. 3623, Climate Risk Disclosure Act of 2019, is a bill pending a vote in the House of Representatives which would require public companies to conduct climate scenario analysis (reporting on physical and financial climate risks based on different climate scenarios). It also includes the obligation to explain risk management strategies and corporate governance processes and analyze social costs surrounding a company’s emissions.
In January 2020, US Securities and Exchange Commission (SEC) Chairman Jay Clayton discussed increasing attention to climate-related securities law disclosures and mentioned the SEC’s commitment to disclosures based on materiality to provide investors needed information regarding material risk.
SEC Regulation S-K [17 CFR Part 229] outlines details of the disclosures companies must make in the reports they file with the SEC, but missing from those required disclosures is climate change risk information. In August 2020, SEC Commissioner Allison Herren Lee criticized its absence in a published final rule in which the SEC had received overwhelming public comment.
The commissioner also stressed the importance of climate risk reporting, so investors have the information they need. In July of 2020, a group of investors had reached out to request that the SEC develop rules to govern climate change risk disclosure.
Those investors are not the only ones asking for guidance. Calls for increased regulation are growing, even from regulators themselves. In October 2020, the US Commodity Futures Trading Commission (CFTC) published a report that concludes climate change poses a significant threat to the stability of the US financial system and calls on the financial industry to implement solutions.
Internationally, New Zealand announced in September 2020 that it would make TCFD disclosures mandatory for its banks and financial institutions by 2023 and Hong Kong will require the same of its financial institutions and listed companies by 2025. In November 2020, the UK’s Financial Conduct Authority (FCA) adopted new rules requiring premium listed companies to either disclose financial risk in accordance with the TCFD’s recommendations or provide a detailed explanation on failure to comply. The FCA has outlined plans to expand its obligations to additional entities in 2022 and establish mandatory TCFD reporting by 2025.
Already in place are initiatives such as the Paris Agreement — the 2015 international climate change treaty that’s charting a path for accountability in reducing greenhouse gas emissions (GHGs) and crafting carbon solutions — and the revised EU Non-Financial Reporting Directive, which requires climate risk reporting, among other mandatory disclosures.
With the election of Joe Biden to the US presidency in 2020, the world began looking again to the US to see what impact the new administration might have. Immediately following his inauguration, President Biden signed an executive order rejoining the Paris Agreement.
The SEC announced in February 2021 that it would soon update its guidelines for climate-related risk disclosure to investors. It may align its guidelines more closely with the TCFD and SASB to ensure greater standardization for disclosure.
“In addition to or combined with reversal efforts, the new [Biden] Administration will pursue new regulatory, program, and policy initiatives. These will likely be aimed at such things as directing resources to development of renewable energy, re-visiting oil and gas leasing plans both offshore and onshore, adding scrutiny and requirements for use of federal lands, revising the approach to considering such topics as climate change and environmental justice in federal decision making, adding or increasing mitigation requirements, and considering regulatory reform related to species protection.”
- Ann D. Navaro and Ryan M. Eletto, National Law Review
International audit, tax, and advising firm KPMG predicts the future of climate-risk reporting will have significant impacts on business. Risk disclosure will be mandatory, and investors will pull out of companies that are not implementing net-zero emissions practices.
“We all need to be thinking about climate risks and opportunities impacting our businesses today and in the future and the need for a clear climate change narrative.”
– KPMG, Reporting on Climate Risk: Are You Ready to Meet the Requirements?
In the TCFD’s 2020 Status Report, the organization revealed that just under 60 of the largest public companies in the world had confirmed their support of reporting according to the TCFD requirements and that support continues to grow. The companies that had led on disclosure to that point were those in the materials and buildings industry and the energy industry. The Task Force believes there’s room for more progress in organizational disclosures to clients and other stakeholders.
The TCFD’s report also noted that climate-related financial disclosures have increased since 2017, with a 6% increase being in TCFD-aligned information. The area still in need of improvement is disclosures of the potential for financial impact related to climate change.
Following the publication of IFRC’s consultation paper on creating a global sustainability standard, its first feedback review session summary indicates that the Trustees and commenting organizations see value in global standardization of sustainability reporting and an interest building off of the TCFD framework.
The pressure from investors for companies to reveal their climate risk is likely to continue increasing with regulations by governing bodies also growing in the years ahead.
Companies looking to meet the demands of investors and regulators alike can turn to the Climanomics® software platform for the best in climate risk analytics. The platform is a climate risk assessment tool that subscribers can use to align reporting with TCFD standards when they run various climate scenarios.
The Climanomics® risk analytics tool has the advantage of allowing subscribers to:
Climanomics® subscribers include Fortune 500 firms, the world’s biggest banks, real estate investors, asset managers, and more.