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environmental risk

G20 Task Force: Companies Should Disclosure Climate-Related Financial Risks

environmental riskCorporations should disclose the financial impacts of climate change on their business and how they are managing these risks, according to a task force convened by the G20’s Financial Stability Board.

The Task Force on Climate-Related Financial Disclosures published a report on Wednesday that outlines a set of voluntary recommendations for companies to include in their public financial filings. “The Task Force believes climate-related risks are material risks for many organizations, and this framework should be useful to organizations in complying more effectively with existing disclosure obligations,” the report says.

The report recommends companies describe the board’s oversight of and management’s role in managing climate-related risks and opportunities.

It calls on corporate reporters to disclose how they identify, asses and manage climate risks and opportunities in the short-, medium- and long-term and how these impact their business, strategy and financial planning.

It also recommends companies disclose their scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and related risks, along with the metrics and targets used to assess and manage their climate-related risks and opportunities associated with water, energy, land use and waste management.

The sectors most likely to be affected by climate change are the energy, transportation, materials and buildings, and agriculture, food and forest products industries, the report says.

The task force members are executives from the private sectors and users of corporate financial disclosures. This is important, as Pete Grannis, New York State first deputy comptroller, said in a call with reporters because “the recommendations were developed by people who will be doing the reporting.”

Michael Bloomberg, the task force’s chairman, said the recommendations “represent an important effort by the private sector to improve transparency around climate-related financial risks and opportunities.”

“Climate change is not only an environmental problem, but a business one as well, Bloomberg said in a statement. “We need business leaders to join us to help spread these recommendations across their industries in order to help make markets more efficient and economies more stable, resilient, and sustainable.”

The task force says the recommendations give corporate reporters a foundation for immediate adoption, and they are also flexible enough to evolve as climate-related disclosure practices mature. It says the recommendations benefit companies by promoting board and senior management engagement on climate-related issues and helping them plan for future climate-related financial risks.

Anne Simpson, investment director of sustainability at the California Public Employees Retirement System (CalPERS), which manages the state’s $300 billion pension fund, said a recent carbon footprint of CalPERS’ 10,000-company portfolio found 100 companies were responsible for 50 percent of emissions. The majority of those companies do not disclose their climate-related risk because they say they don’t know which framework to use.

“The beauty of this report,” Simpson said in a call with reporters, “is that it has given us a framework around which companies and investors can agree we need to start gathering information.”

The task force recommendations come as a growing number of investors are asking companies to disclose and manage their climate-related risks associated with water, energy and deforestation.

Earlier this year, California insurance commissioner Dave Jones announced new requirements for insurers to publicly disclose carbon-based investments annually. The first disclosures were due July 1.

In an earlier interview, Jones said he will make public insurers’ financial risks associated with carbon investments this month.

“While I may be the first financial regulator in the US to ask for divestment and impose disclosure requirements on a sector of the financial sector, it’s very consistent with what ministries of finance and bank regulators are doing,” Jones said.

In response to the task force recommendations, CDP and the Climate Disclosure Standards Board (CDSB) said both of their organizations “are committed to adopting the Task Force recommendations across all sectors.” CDP sends out an annual questionnaire asking the world’s largest companies to disclose their climate-related risks, and CDSB is a consortium of businesses and environmental groups that promotes climate-related disclosures in financial reports.

CDP, which began securing climate disclosure from companies in 2002, and the Climate Disclosure Standards Board (CDSB), the NGO advancing non-financial reporting in mainstream filings, today welcome the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations to integrate climate information into mainstream financial reporting.

“We welcome the TCFD recommendations as they have the potential to further ‘normalize’ climate information in companies mainstream financial filings,” Paul Simpson, CEO of CDP said in a statement. Earlier this year the CDP, along with other climate disclosure groups, submitted comments advocating for mandatory environmental, social and governance disclosure by the SEC.

“Nearly 6,000 companies disclosed through CDP this year representing some 60 percent of global market capitalization” Simpson said, responding to the task force’s recommendation. “However, many companies have yet to align business strategies with the requirements of the Paris agreement and the TCFD recommendation on scenario analysis will enable better information for investors to assess this risk. … The next step will be for the G20 governments to consider whether such disclosure should become mandatory over time.”

Indeed, that is the next question: will climate-related disclosures become mandatory in the future? At any rate it’s a good idea to answers investors’ voluntary calls for disclosure now, which will help mitigate environmental risks — and the threat of lawsuits — in the future.

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