How financial disclosure can shape our climate change response

Recently I held a Twitter chat in which I answered a number of your questions on climate risks, specifically the state of play following COP22. It was immensely enjoyable and raised some challenging and highly relevant questions, none more so than those around the recommendations put forward by the G20’s Taskforce on Climate-related Financial Disclosures (TCFD) last week. For my latest blog, therefore I wanted to expand on my thoughts a little more than the Twitter chat allowed, on what I believe are the most important aspects of the recommendations.

Business and the Environment

The primary objective of the TCFD recommendations, and the most important consideration when implementing them, is to draw a closer connection between financial and economic arguments for climate change measures and those made from an environmental position. I believe that market-led solutions are central to our approach in combating climate change. There is no divergence between long-term business interests and environmental priorities, so we should therefore work on a united, collaborative response when it comes to our actions to combat climate change.

The power of Investors

TCFD’s call for full disclosure and increased transparency when it comes to companies’ financial reporting will go a long way to empowering investors – and capital more broadly – to be able to price in companies’ risk exposure and management structures, including corporate responses to carbon-intensive business practices. By including climate-related financial disclosures in standard public filings, markets will have more information with which to assess material risk (including climate risks), and price accordingly.

Importantly too, increased transparency and greater disclosure will empower both shareholders and potential investors. Existing shareholder engagement is more likely to focus on the climate implications of company actions when they have more information on the subject, not to mention if they know that the market can also react accordingly. Similarly, potential investors can play a scrutinising role on business, and this scrutiny has much more strength when provided with greater information. The TCFD recommendations relating to financial disclosures cover Governance, Strategy, Risk Management, and Measurements (specifically Metrics and Targets), and this framework is a great starting point to deliver the increased transparency needed for investor scrutiny and shareholder pressure to shape business responses to climate-related risks.

A focus on positivity

Finally, I appreciate the choice of language taken by the TCFD, focusing on climate-related opportunities as much as risks. Taking action against climate-related considerations that have a direct impact on a business can be a truly empowering step to take, and can deliver short-, medium-, and long-term benefits to organisations who embrace the change and use it to their advantage. Climate change does indeed represent a broad spectrum of risks both to business and wider society, but within this challenge there are fantastic opportunities, and I believe the TCFD recommendations will help companies and organisations to embrace them.

I’d like to thank you all again for your questions during the Twitter chat. I'd love to hear any more thoughts and views, so please share in the comments below.