The tone from the G7 Summit in Cornwall, UK, this month suggests we should expect an emphasis on accelerating the global transition toward decarbonisation and increased pressure on financial markets to improve climate-related financial disclosures.
The G7 presidency, held by the UK, has made climate change one of its priorities and announced an agreement to mandate climate reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It will now aim for an international agreement among the G20 countries in time for COP26 in November.
Climate-related financial disclosures have come into focus because they seek to provide insight into how organisations identify, evaluate and manage climate-related risks and opportunities. Climate change has implications for an organisation’s business, strategy and financial planning based on the actual and potential climate-related risks and opportunities.
For the investor, climate-related financial disclosures support informed investment decision-making and engagement with companies on the resilience of their strategies and capital spending to the transition to a lower-carbon economy. Climate risk is investment risk, and companies should disclose how their businesses will be compatible with a lower-carbon economy.
The TCFD was established in 2015 by the Financial Stability Board to develop a framework for the consistent disclosure of climate-related financial risk disclosures. The TCFD recommends four overarching thematic areas that represent the core elements of how companies do business: governance, strategy, risk management and metrics and targets.
Climate-related disclosures needn’t necessarily be compiled separately.
They can be included in the integrated annual report but a scenario analysis (of how strategies might change to address potential climate-related risks and opportunities) for a 1.5°C and a 2°C scenario (these relate to temperature growth above pre-industrial levels) is included.
Global corporate climate disclosures at present fall short of what is needed to mitigate the impacts of climate change and associated financial risks. All the while, investors are becoming increasingly aware of the potential financial risk that climate change poses. In the Netherlands, Shell was ordered by a civil court to cut its CO2 emissions by 45% by 2030 compared to 2019 levels.
Tighter regulations aimed at addressing climate change threaten at least half of the value of coal, oilfield, and gas reserves. Total wrote off $7bn of its Canadian oil sands assets in July of 2019.
The transition to a low-carbon economy, and limiting global warming to under 2°C of pre-industrial levels, could mean leaving about 80% of known coal reserves, 33% of oil reserves and nearly half of all gas reserves in the ground, putting $4-trillion in equity and $1.27-trillion in debt at risk from the transition and physical impacts of climate change. To put this into perspective, it took only $250bn in losses to cause the 2008/2009 financial crisis.
Physical risks can be event-driven (acute) or result from longer-term changes (chronic) in climate patterns.
These shifts in climate patterns may, and are resulting in, direct damage to assets or indirect impacts from supply chain disruptions.
In the agricultural sector, water quality and availability affected by climate change have profound implications, with reductions estimated between 15% and 50% in agricultural productivity in Southern Africa, according to a study led by Charles Nhemachena and a long list of people with all sorts of designations before and after their names.
Hoteliers must contend with extreme weather events that cause damage to assets and business interruption, for example changing weather patterns, which often result in higher operational costs.
This means hotel groups need to be smarter about which regions they are investing in and about their exposure to the physical risks of climate change in their growth strategies. Investors need to see that companies have reviewed their portfolios and have considered where and when to invest or disinvest to limit their exposure to the physical risks of climate change.
But perhaps the most exposed industry to such risks is the insurance industry because it would probably have to pay for much of these impacts.
Incomplete information about risks leads to the mispricing of assets and the misallocation of capital and threatens the stability of the financial markets. We need to know the financial implications of climate-related issues to any organisation’s business, particularly how climate-related issues inform investment, lending and insurance underwriting decisions, both over the medium and long term.
It’s important for our shared future and — I can’t stress this enough — for our money.
*Dube is Sustainability Consultant & ESG Analyst at The ESG Guy
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