By Elisa Jiménez Alonso
Last year marked several groundbreaking and game-changing events for the financial sector and how it deals with climate change. It became obvious that physical and transitional climate change risks to financial portfolios can no longer be ignored. Now, the pressure on businesses is increasing to disclose those risks and climate-proof their portfolios.
Final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
In June 2017, the TCFD, a task force set up by the Financial Stability Board in 2015, published its final recommendations to help companies disclose climate-related risks and opportunities. At the time of publication, over 100 businesses with a total market value of roughly $3.5 trillion and financial institutions responsible for assets worth about $25 trillion publicly committed to support the TCFD’s recommendations. In January 2018, the number of businesses pledging to regularly disclose their climate change risks as per the TCFD’s recommendations has risen to over 200; these firms together manage a combined $81.7 trillion.
The final recommendations are structured around four thematic areas that correspond to how companies operate, and the information investors need to make better informed decisions: governance, strategy, risk management, and metrics and targets.
Michael Bloomberg, Chair of the TCFD said: “Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important. The Task Force brings that framework to the table, helping investors evaluate the potential risks and rewards of a transition to a lower carbon economy. We’re pleased to see so many businesses and investors around the world support the recommendations of the TCFD and hope others will be encouraged to join our initiative.”
Legal pressure in Europe
During the same month the TCFD released its final recommendations, article 173 of the 2015 French energy transition law came into force. The article forces institutional investors and asset managers in France to disclose how their business strategies cover climate change. Institutional investors, such as insurance companies and pension funds with a balance sheet above €500 million, are required to report both physical and transition risks.
In February 2017, the European Union passed a legislation that required pension funds to include climate change in their investment strategies. European pension funds manage over € 3 trillion on behalf of 75 million people. With this legislation investors are tasked with considering environmental, social and governance risks when defining their investment strategies. This includes acknowledging climate risks to medium and long-term investment decisions, as well as putting pressure on investors to drive adaptation action.
Motivation in the financial sector
In September 2016, BlackRock released a report stating that climate change is a significant risk and “climate-proofing portfolios is a key consideration for all asset owners,” adding, “risks are under appreciated, yet could soon start to unfold.” The publication by BlackRock, which is one of the world’s largest asset managers was a clear signal that the finance sector would have to step up to the plate in terms of climate change risks. The publication emphasised “The longer an asset owner’s time horizon, the more climate-related risks compound. Yet even short-term investors can be affected by regulatory and policy developments, the effect of rapid technological change or an extreme weather event.”
In October last year, the Financial Times reported that “In votes at seven of the largest US energy companies this year, the 30 largest investors switched their votes to support disclosure on climate risk a total of 38 times, having opposed similar resolutions in 2016, according to ShareAction, a campaign group.” In the same article, Rakhi Kumar of State Street Global Advisors said “As an index investor, you can hold all the companies in your portfolio to the same standard. You don’t need regulation,” illustrating just how important the private sector can be in driving climate action.
Now, following the release of the TCFD recommendations, a group of 16 leading banks is participating in a UNEP Finance Initiative project, co-lead by Acclimatise and Oliver Wyman, that will develop a harmonised methodology for the banks to help them strengthen their assessments and disclosure of climate-related risks and opportunities.
The financial sector’s engagement on climate change clearly gained momentum in 2017. Following Climate Action Tracker’s last report, which found that the world is still way off track to reach the Paris Agreement long-term warming goals, the sector’s action also comes at a critical time when private sector leadership is much needed to reduce global climate risks.