The dilemmas of disclosing financial risks
The challenges facing companies embracing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) were highlighted at the recent Bloomberg Sustainable Business Summit in London.
The summit explored the narrative that there is a clear increase in climate change-related financial reporting among firms, inspired by TFCD requirements. But panelists made different critical observations when they were questioned, namely whether this was enough in terms of the type of information disclosed and the data being made available on the issue.
James Purcell, head of sustainable and impact investments at UBS Wealth Management, said: ‘It is clearly encouraging. The number of companies signing up [to the TCFD recommendations] is increasing, and this can only be a good thing for investors. [But] there is a bias in the breakdown of who is reporting what – and that is toward financials.’
Investigating the issue of financial risk reporting in more detail, he added: ‘But the other element that is important to touch on is that this is, for the most part, focused on reporting and disclosure, rather than the impact on the wider business model. Some of that comes back to us as investors to provide that from the data, but there is room to move from [financial risk] disclosure to looking more at what it means for the overall business.’
Meryam Omi, head of sustainability and responsible investment strategy at Legal & General Investment Management, echoed Purcell’s point but added: ‘It hasn’t been that long [since companies have been following the TCFD].’ The TCFD was established in June 2017.
Addressing the issue of target measurements, Omi said: ‘Talking about targets – these should be stretched science and meaningful targets. Having a tick box on the board for governance is not the point of TCFD. So how are [companies] really talking about risks and their balance sheet? And who are the actual leader companies and who are those lagging behind [the TCFD recommendations]? This would be useful, rather than just giving stars for good disclosure, so it is an important first step, but there is a lot more to do.’
Robert Bailey, director of climate resilience at Marsh & McLennan, stressed that working with investors and ‘science in the real economy’ means there can be a big gap between where a company is today and its long-term intentions.
He revealed that his company has undertaken a global survey of 45 banks to ask them what their intentions are – and a clear majority offer a statement of intent on implementing climate risk-related changes. ‘They are also clear that this is a journey, with the most optimistic ones saying it would take them three years, and a lot saying it would take up to five years,’ Bailey said. ‘It is going to take some time.’
IR Magazine’s newly published Reporting & Disclosure report focuses on many of these issues.