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More U.S. companies are preparing to disclose their climate-related financial risks, but are faced with the challenge of measuring these risks and integrating them into their financial reports.
A report released by Donnelley Financial Solutions (DFIN), Gargiulo + Partners and the Society for Corporate Governance, titled, “The State of Climate Risk Disclosure: A Survey of U.S. Companies” explores the extent to which U.S. companies have adopted the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The report includes the results from a survey of members of the Society for Corporate Governance, the leading association dedicated to advancing corporate governance practices among U.S. companies.
The survey’s principal findings, detailed in the report, are summarized below:
- U.S. companies are at varying stages in their implementation of the TCFD recommendations. One-third of respondents said their companies have begun the risk assessment process and are at least a year from making disclosures, a finding that underscores the complexity of the task.
- Companies are beginning to use advanced analytic tools to assess their climate risks and opportunities; 44 percent of respondents say they use scenario modeling or stress testing. A recent update from the TCFD noted that scenario modeling is a challenge for many companies and few have used it in their climate disclosures so far.
- Board engagement — a key recommendation of the TCFD report — is crucial for identifying and managing climate risks. The survey indicated that boards mainly review climate risks on an as-needed basis. About 24 percent review the issues on a quarterly or annual basis, while 20 percent of respondents said their board never discusses climate issues.
- The impediments to TCFD implementation include a lack of measurement tools for assessing climate risks and opportunities and difficulty integrating climate risk with the financial reporting process.
What is the TCFD?
The Task Force on Climate-related Financial Disclosures (TCFD) was created to address the need for better information on climate risks to support informed investment, lending and insurance underwriting decisions. In June 2017, the TCFD released its report and presented recommendations in four areas (governance, strategy, risk management, and metrics and targets), supported by 11 recommended disclosures to help investors and others understand how reporting companies assess climate-related risks and opportunities. The recommendations were designed to:
• Be adoptable by all organizations.
• Solicit decision-useful, forward-looking information on potential financial impacts of climate change.
• Bring the “future” nature of climate-related issues into the present through scenario analysis.
• Have a strong focus on risks and opportunities related to the transition to a lower carbon economy Since the report was released, nearly 800 public and private-sector organizations have announced their support for the TCFD and its work, including global financial firms responsible for assets in excess of $118 trillion.
For more information on the 2017 TCFD report and its potential effects, please see our earlier white paper: “Preparing for Climate Risk Disclosure: Practical Suggestions for Public Companies.”
Granville Martin, General Counsel of the Society for Corporate Governance, said: “Understanding climate risk disclosure is an area of growing interest for our members. They will welcome the insights offered in this paper, particularly on the organizational structures companies are creating to manage their climate disclosures. “
John Truzzolino of Director of Corporate Governance and Compliance Services, with DFIN, a leading risk and compliance company, said, “Climate disclosure is part of a larger effort by companies to report on ESG issues. It is encouraging to see that many companies are using existing reporting frameworks to present emissions and environmental data, as well as other information according to CDP, GRI, SASB and other standards.”
Richard Mahony principal author of the report for Gargiulo + Partners, a strategic communications firm, said, “There is growing recognition by investors that climate risk affects companies in many industries, not simply those in energy-intensive sectors, and that will continue to drive companies to enhance their disclosures.”
The paper also includes interviews with senior executives at three companies that have led the way in climate disclosure including, Chevron, Citigroup and Microsoft. They offer constructive insights and advice for companies on the implementation of the TCFD recommendations.
To learn more, download the paper now.
Or please register and join our web cast December 4th at 2:00PM, ET Climate Risk Disclosure: What you need to know now!