top of page
  • Writer's pictureMarc Allen

Follow the money

Risks ahead

Back in 2009, the G20 formed the Financial Stability Board (FSB) as the successor to the Financial Stability Forum. The FSB has a critical role in the reform of international financial regulation. At the G20 meeting in 2015, the FSB were asked to start to consider climate risk. The major economies that make up the G20 have a vested interest in ensuring financial systems are resilient to risks that may materialise in the future. In the years preceding the 2015 G20 meeting, there had been increasing focus on a concept known as the "carbon bubble". The carbon bubble refers to the hypothesis that the market valuations of fossil fuel companies is based, amongst other things, on the future value of reserves that haven't yet been developed. If however, the world is to contain temperature rise such that it is less than 2 °C by reducing combustion of fossil fuels, those reserves may not be able to be exploited and would have a value of zero. There runs the risk that some assets may be stranded which then implies that the market valuation of these companies is exaggerated.

In 2015, Mark Carney - the Governor of the Bank of England - delivered a lecture to Lloyd's where he said that limiting global warming to 2 °C appears to require that the "vast majority" of fossil fuel reserves be "stranded", or "literally unburnable without expensive carbon-capture technology", resulting in "potentially huge" exposure to investors in that sector. In December 2015, the FSB formed an industry group called the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD, chaired by Michael Bloomberg, draws its membership from across the finance industry, insurance, advisory firms, resources companies and institutional investors; and was charged with developing recommendations for more effective climate-related disclosures.

The TCFD has just released its final report, available to download here. The final report provides a consistent disclosure framework that should improve the ease with which companies can complete the analysis and provide investors with the ability to easily analyse the information whilst considering whether to invest in that company or not.

The report recommends companies disclose information over four main themes:

  • Corporate governance around climate risks and opportunities

  • The actual and potential impact of climate risks and opportunities on overall business strategy

  • How the company identifies, assesses and manages climate risks

  • What metrics and targets are used to assess and manage climate risks

The climate risks being assessed include both physical risks and so called transition risks - i.e., those associated with policy levers used to achieve global emissions reductions (see more information here).

It's important to note that the disclosure frameworks and recommendations provided by the TCFD are completely voluntary. However, given that a number of major global lenders and investors have been involved in the development of the report, it is reasonable to expect that they may insist on disclosure using these frameworks as a condition of debt or equity. Recent years have seen increasing incidences of shareholder activism with shareholder resolutions for increased disclosure of company performance against the 2 °C scenario becoming a regular occurrence in company AGMs, particularly in fossil fuel companies. With the backing of institutional investors with large shareholdings, a number have been actually passed this year - including with ExxonMobil.

It remains to be seen how ExxonMobil responds to this requirement and whether it will be enough to satisfy the shareholders. It is clear however that all companies should be prepared to answer these questions in coming years.

29 views0 comments

Recent Posts

See All
bottom of page