Aligned Climate Reporting Key to Net Zero
Commitments, collaboration, awareness and targets are one thing when it comes to climate change, but meaningful action, quite another. For the sake of society and, in fact, the entire planet, governmental, corporate and finance actors need to do much more in terms of ramping up the pace and scale of that action to ensure warming is restricted to reasonable, manageable levels, and that this crisis is prevented from becoming an existential threat.
Put simply, it is essential that global net zero carbon dioxide emissions are achieved by the early 2050s. According to the Intergovernmental Panel on Climate Change (IPCC) report ‘Climate Change 2022: Mitigation of Climate Change’, limiting warming to 1.5°C (2.7°F) means global greenhouse gas emissions must start to drop no later than 2025, with a 43 percent reduction thereafter achieved by the end of this decade, alongside methane reductions of a third. This requires comprehensive action from all sectors, whatever it takes.
“With governments across the globe beginning to mandate climate-related financial disclosure in accordance with the TCFD disclosure recommendations, this is important stuff.”
An oft overlooked ingredient to success in addressing climate change is transparency regarding action, for from this will spring the right policies and the appropriate allocation of capital resources. Moreover, it serves to bind companies, governments, investors and civil society to their commitments and breeds a culture of accountability. To this end, the fact that the Task Force on Climate-Related Financial Disclosures (TCFD) has emerged as the pre-eminent framework for full disclosure on the management of climate related risks and opportunities is a welcome development, since it speaks to international alignment.
With governments across the globe beginning to mandate climate-related financial disclosure in accordance with the TCFD disclosure recommendations, this is important stuff. In the UK, publicly listed companies, now have to mandatorily report against them, and by 2025 most large outfits will have to do so.
It is the same story elsewhere, with the EU, the US and Canada, as well as the likes of Brazil, Japan, Malaysia, Australia and many more besides, providing varying degrees of formal support. In the case of the US, its Securities and Exchange Commission has gone as far as to propose putting US capital market requirements in line with the TCFD, with reporting from 2024. In addition, strategic multilateral platforms, such as the G20 and G7 have lent their support to incorporating the TCFD recommendations into climate-related reporting standards.
Beyond an enhanced reputation with stakeholders, better disclosure opens the door for companies to secure easier access to capital, since they will be able to evidence that their climate-related risks have been properly assessed or managed, and that their products and services are in alignment with a low carbon economy. Investors, meanwhile, are able to efficiently and effectively assess climate-related risks and therefore make more informed decisions about capital allocation and so better determine risk and exposure across portfolios both in the short term and into the future. It stands to reason then, that with so many benefits on offer, the TCFD has seen uptake significantly increase.
It is no exaggeration to say that full climate disclosure is an essential ingredient in directing investment flows to where they are needed and in sufficient volumes to limit warming to reasonable levels. The global capital and liquidity indisputably exists, yet flows are currently three to six times south of where they need to be by 2030 for this to happen.
The signs are promising, yet more, undoubtedly, needs to be done. In a nutshell, this equates to comprehensive and realistic climate transition plans from businesses which afford investors and wider stakeholders the opportunity to determine a company’s progress in reaching climate goals, so ensuring corporate governance plays its part in decarbonising the economy. Even within the ranks of those organisations already disclosing, those with low carbon transition plans are in the minority. This needs to change, with fit for purpose plans that can meet or even exceed expectations and stand up under exacting scrutiny from governments, investors and consumers.
Again, net-zero commitments are one thing, measurable progress on climate transition quite another.
Headed up by Former New York Mayor, philanthropist and business guru, Michael Bloomberg, the activities of the TCFD are underpinned by a recognition that climate change presents financial risk to the global economy. This is because without clear, comprehensive, timely and accurate information on the impacts of climate change, investors, lenders and insurance underwriters cannot hope to understand either the risks or opportunities presented by rising temperatures, climate-related policy and emerging technologies. As a result, they may incorrectly price or value assets, such that capital is misallocated.
The TCFD’s disclosure recommendations relate to four core business elements; namely: governance, strategy, risk management, as well as metrics and targets, which are supported by 11 recommended disclosures.
Through their widespread adoption, climate change-linked financial risks and opportunities will inexorably and beneficially become a core constituent of risk management and strategic planning processes.