top of page
Search
  • Writer's pictureMarc Allen

Financial risk and climate change

  • The framework for climate risk disclosure from the Task force for Climate Related Financial Disclosure is gaining traction

  • The ASEAN region is highly exposed to physical risks in the longer term - and the industries in the region are exposed to the transition risks

  • There are over 280 public supporters of the framework - including a large number of banks, pension funds and investors

  • This will have an impact on businesses, who will be expected to disclose their exposure to climate risk

This time last week, I attended an event here in Singapore - the ASEAN Conference on the Recommendations of the TCFD, hosted by the SGX. As I've written before, the Task force for Climate-related Financial Disclosure (TCFD) has prepared a framework that describes a view on appropriate disclosure of the risks of climate change that face a business. Climate change is such a pervasive issue that realistically, all companies are exposed to risks in some way, though the level of materiality of this risk, in relation to other risks they may face, does depend on individual circumstance.

The event featured a wide range of speakers from industry and the financial sector along with voices from the TCFD itself, from consultants and advisors and finally a number of local corporations shared their own journeys with sustainability reporting/climate disclosure - and the links into the TCFD framework.

From an ASEAN point of view, it was made clear that the ASEAN nations combined make up the world's 5th largest economy - and are highly exposed to the physical risks of climate change. The keynote speech, by Ranjit Ajit Singh - Executive Chairman of the Malaysian Securities Commission, discussed how action on climate change requires a realignment of markets such that the financial economy and the natural economy work together. The financial economy is, by definition, a subset of the natural economy after all - as everything ultimately comes from the natural economy. Green bonds were discussed as a way of mobilising finance - and the ASEAN Capital Markets Forum has set up an ASEAN green bond standard.

On the TCFD framework itself, the keynote speech, and a number of the other presentations through the day explained that there is no one size fits all approach to disclosure that will apply to all industries and all companies equally. It is important to determine what's important and what's material to an individual company's stakeholders and disclose information in line with expectations. This is one of the reasons that the TCFD framework itself is quite high level. It's key to understand what constitutes a material risk from climate change. Presentations through the day also reiterated that disclosure of climate risk using the TCFD framework is not about creating a new report, or a new compliance requirement. It's about incorporating appropriate disclosure into existing systems and existing reporting vehicles. It is suggested in the framework that climate risks that have a material financial impact should be reported in annual filings.

The TCFD itself, which was formed under the Financial Stability Board to create this disclosure framework has had its work extended to at least September 2018. Now that the framework has been released, the task force's new task is to promote the adoption of the framework. The CDP (formerly the Carbon Disclosure Project) has also adapted its 2018 questionnaire to reflect the TCFD framework. Expect to see more exposure of the TCFD framework in coming months.

As the TCFD framework gains traction, and the list of supporters grows (there are currently over 280 public supporters of the TCFD), there will be more pressure on companies to understand and disclose their exposure to climate risk. The following chart shows the breakdown of the types of organisations supporting the TCFD.

TCFD supporters

From the chart, the majority of supporters are investors, pension funds and banks - regulators and insurance companies also contribute a significant proportion of supporters. This suggests that access to equity funding (investors and pension funds) and access to debt (banks) may end up being more difficult without quality disclosure in line with the TCFD framework. It could also be a consideration when insurers are exploring the risks involved with insurance policies.

TCFD framework

So what does is mean to assess the level of climate risk that a company is exposed to. The TCFD framework suggests exploring level of exposure to transition risk and physical risk. There's quite a bit of devil in the detail however. The first thing to explore are the emissions a company generates - up and down the entire value chain both now and forecasted into the future. This includes upstream emissions associated with a company's inputs (i.e., raw materials), direct emissions from a company's activities and downstream emissions associated with a company's outputs (i.e., carbon intensive products such as fossil fuels, products that are inputs to carbon intensive processes and even destinations for company investments in the case of the financial industry). This is the Metrics and Targets portion of the TCFD framework.

Using the high level risk descriptions in the TCFD framework, the risks a company is exposed to through the value chain can be analysed. Will they be subject to a carbon price and if so, how much? Will global and national carbon policy have an impact on the market for that company's products? Finally, what if the world was on a path to 2 degrees, which implies deep decarbonisation. What does that do to carbon prices and markets for products? How resilient is the company to that world? This is where scenario analysis is important as it's a way to explore the impact of different potential futures on a company's bottom line. The potential physical risk to facilities and companies then needs to be explored through asking questions about how prepared facilities are for extreme weather events? Or water scarcity? Or long term changing weather patterns?

Climate change strategy

Developing a corporate climate change strategy involves this sort of risk analysis, and coming up with mitigation strategies for the risks the company is exposed to. In some cases, disclosure may be enough. In others, it will be a combination of disclosure, abatement of emissions (emissions reductions within the corporate boundary), offset of emissions (emissions reductions outside of the corporate boundary - funded by that company) and other forms of stakeholder engagement.

Finally, a the last piece of the TCFD puzzle involves governance. Recent legal opinions state that climate change can now be considered to be a foreseeable risk and that boards must consider and ultimately disclose the level of climate risk that they are exposed to. The work completed with regard to climate risk analysis should be done under the direction of the board - and the results must be presented to and discussed by the board. In this regard, it may also be advisable to have board members who have some exposure to climate change and assessment of climate risk.

As an example of how mainstreaming of climate risk is happening, those in Australia may have noticed that Four Corners from two weeks ago had an episode that concentrated on climate change impacts and the importance of disclosure of climate risk to markets. Starting from a basis of exposure to physical risks of climate change, this episode went across the country looking at how different companies were being affected. From the agricultural industry, which has seen changing weather patterns, to big corporates exposed to climate transition risks, to Government agencies such as the WA Water Corporation - which has had to accelerate the use of "climate independent" water sources to account for hugely reduced stream inflow. If you're in Australia, and haven't seen it, it's definitely worth watching - https://iview.abc.net.au/programs/four-corners/NC1803H005S00


57 views0 comments

Recent Posts

See All
bottom of page