Climate-related financial disclosure in spotlight

This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.

Many companies in various sectors consider the potential revenue from climate-related opportunities to be higher than the financial impacts of climate-related risks, which are likely to emerge within five years. This is one of the conclusions drawn from the Global Climate Analysis published in June by the Carbon Disclosure Project (CDP).

The CDP is a global environmental reporting system aligned with the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations. Its report is based on information collected from almost 7,000 companies worldwide, including 366 of the world’s 500 largest companies.

The CDP analyzed the information and outlined what the companies disclosed about the risks and opportunities they face.

In addition to declaring significant financial implications, respondents in a number of sectors — including fossil fuel companies — also calculated the value of potential opportunities arising from climate change. They reported that these have a much higher value than that of risks such as increased government regulation, taxes related to greenhouse gas emissions and impaired assets.

Also, for all sectors except the power sector, it was reported that prevention is less expensive than the cost of managing the risks once they have materialized. This seems to indicate that companies may be investing more heavily in the transition to a low-carbon economy. In the power sector, the cost to mitigate the risks and realize opportunities outweighs their implications in the future, in part because the assets in this sector are long-lived and require significant capital investment.

The report suggests that companies in other sectors take note and learn from the power sector as energy companies that did not integrate climate-related risks into their strategies earlier are now facing greater risk and higher costs than they initially anticipated. However, the CDP’s analysis also highlights the absence of specific financial figures for the identified risks and opportunities in the Global 500 corporate reports, and this raises questions about the accuracy and completeness of the climate-related risk assessments being conducted and the disclosures being provided.

The TCFD issued its second status report, also at the beginning of June, and this one focused on the progress of companies in disclosing information on climate-related risks and opportunities. It found that, to varying degrees, investors have seen companies’ efforts to implement the TCFD’s recommendations pay off through increases in the availability and quality of disclosure.

The report indicates that “more than 340 investors with nearly $34 trillion in assets under management have committed to engage the world’s largest corporate greenhouse gas emitters to strengthen their climate-related disclosures by implementing the TCFD recommendations.” As a result of this growing demand for decision-useful climate-related data by investors and stakeholders, it seems inevitable that companies will soon start being required to report this information. Investors and stakeholders will likely start pushing for mandatory climate-related disclosures to ensure they are able to make informed investment decisions.

Moreover, the risks identified in the CDP’s analysis all seem to be in the respondents’ direct operations — many companies have yet to assess transition and physical risks in their supply chains, a key area that has already been disrupted by climate change.

As Canada has already proposed legislation that would impose mandatory human rights reporting and compliance obligations on companies in their supply chains, and is currently consulting on these and other supply chain impacts, it seems to be only a matter of time before these requirements are extended to include the issues brought about by climate change.

Further, the Equator Principles, adopted by 96 financial institutions worldwide, including many in Canada, require a minimum standard of due diligence and monitoring of environmental risks before financing projects. The proposed amendments, released June 24, require that the Environmental and Social Impact Assessment needed for various projects include an evaluation of transition and physical risks of climate change, and that greenhouse gas emission levels be publicly disclosed annually for those projects. If the amendments are passed, companies will be forced to provide climate-related information in order to obtain financing for their projects.

As major public companies continue to identify significant risks and opportunities due to higher rates of board oversight and stakeholder scrutiny, it is in their best interests to address climate risks and impacts head on, and to report on the measures they are taking in order to minimize stakeholders’ concerns, reduce reputational risks and maintain the demand for their goods and services. It is even more crucial for these companies to be proactive to prepare for not only what nature may bring, but also for probable future regulatory developments.