By Acclimatise staff
EU Directive 2014/95, the Non-Financial Reporting Directive requires large public interest entities with over 500 employees (listed companies, banks, and insurance companies) to disclose certain non-financial information. As required by the directive, the European Commission has published non-binding guidelines to help companies disclose relevant non-financial information in a more consistent and more comparable manner.
As part of its Action Plan for Financing Sustainable Growth the Commission has committed to updating the Non-Binding Guidelines on Non-Financial Reporting, specifically with regard to the reporting of climate-related information. The Commission intends to publish the new supplement on the reporting of climate-related information in June 2019, and held a public consultation with stakeholders on the update of the non-binding guidelines in early 2019. The consultation document can be found here.
Acclimatise responded to the Commission’s consultation document in March 2019. We understand that the Task Force on Climate-related Financial Disclosures (TCFD) recommendations have been an important step change in the climate risk governance landscape. As such, Acclimatise supports the integration of the TCFD recommendations within these guidelines. Aligning strategies to stabilise both financial and climatic systems is vital. Corporate and financial institutions have a significant role to play in this. The incorporation of climate risk analysis and disclosure in their governance systems and decision-making processes is key if we are to ensure a sustainable and climate compatible future.
Acclimatise’s responses, in full, are as follows:
On Chapter 2 ‘How to use these guidelines’:
1) In response to ‘According to the Non-Financial Reporting Directive,[…]’: Climate-related information can be considered to fall into the category of environmental matters.” It is important to establish, however, that climate change is not just an environmental issue, it is also a socio-economic challenge. As recently pointed out by Batten (2019) from the Bank of England (BoE), gradual global warming is likely to affect the productive capacity of the economy through several channels, such as through impacts to natural capital (e.g. natural resources), physical capital (e.g. infrastructure) and human capital (employees) among others. Similarly, climate change can impact human rights, affecting access to natural resources and generating social conflict. Climate change is therefore a cross-cutting issue that also needs to be accounted for when companies disclose information on non-environmental issues that are nonetheless affected by climate change. Acclimatise understands that climate change should not be considered as, primarily, an environmental issue; as this diminishes the social and economic impacts, the financial consequences and the scale and systemic responses needed.
2) In response to ‘climate-related risks’: It is worth noting that physical risks will also result in corporate liability. Attribution science is changing the ‘foreseability’ of climate extreme events, challenging the use of ‘force majeure’ clauses. This means companies may become liable in cases where potential risks are foreseen, yet not mitigated or avoided. The more foreseable any climate related peril, the less tenable will it be a force majeure defense, and the greater the more the incentive to manage the risk. In our report for the World Bank in 2016. ‘Emerging Trends in Mainstreaming Climate Resilience in Large Scale, Multi-sector Infrastructure PPPs’ we explored the challenges and risks around the use of force majeure clauses.
3) In response to ‘climate-related opportunities’: A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This framework can assist banks in understanding the potential finance needs of their clients, and their role in providing finance for climate resilience. The taxonomy could also be utilised by corporates. See section 4 of our ‘Navigating a changing climate’ report.
On Chapter 3.1: ‘Business Model’:
The nature of business network relationships strongly influences companies’ strategic identity and risk profile. Companies should therefore:
- Examine how business relationships may increase/reduce their exposure to physical and transitional risks;
- Identify how new opportunities to take climate action can stem from their existing network of relationships; and
- Evaluate how new opportunities may also arise from the development of new business relations.
Regarding ‘Type 2 disclosures on the business model’:
Companies should consider how business interdependencies engrained in their market positioning might generate risks from a changing climate. Important considerations to account for are relationships across their value chain, for example, with input providers (e.g. are providers located in areas exposed to climate hazards?) and with customers (e.g. will costumer demands shift under a changing climate?).
On Chapter 3.2: ‘Policies and Due Diligence Processes’:
On type 2 disclosures: Further information relating to physical risks should be included. For example:
- How the company’s engagement with its value chain is helping to tackle physical risks;
- How managing physical risks would require an investment in employee´s skill sets, such as the development of geospatial in-house capabilities to evaluate the physical exposure of asset’s locations.
On Chapter 3.3: ‘Outcomes’:
In the process of better aligning climate action targets in the public sector with private sector activities, it would seem useful to further explore how companies’ climate related policy outcomes align with Government’s Nationally Determined Targets. There seems to be a general gap on how private sector targets contribute/complement national commitments; how they fit together to reach global goals. This document offers an opportunity to encourage companies to aggregate asset level data to the country level for disclosures to say something meaningful about how their contribution towards climate action align with UNFCCC government pledges.
However, there must be an incentive for companies to undertake additional reporting against national
government policy targets. Note also that this can only produce an accurate evaluation of the private sector contribution towards national targets if disclosure is regulated, is mandatory (at all levels, including SMEs) and follows a standardised process. It is not clear how such a process would command the support of the private sector.
On Chapter 3.4: ‘Principal Risks and Their Management’:
The 2018 report ‘Advancing TCFD guidance on physical climate risks and opportunities’ offers valuable recommendations that could provide further guidance to businesses on how to disclose principal risks and their management. This source is cited at the beginning of the document but has particular relevance to this section. Recommendations 1-7 on Risk management and 13-18 on Scenario Analysis could assist companies preparing their risk disclosures.
Further information can be found in the report commissioned by the European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) (2018) here.
On Chapter 3.5 ‘KPIs’:
Type 2 under physical risks: It is worth noting that the KPIs included for transition risks are not normative in the sense they collect ‘neutral’ information, whilst the KPIs on adaptation are directly asking to report on negative outcomes (e.g. ‘Assets committed in regions likely to become more exposed to acute or chronic physical climate risks’). KPIs for physical risks could also include indicators on financial performance (e.g. loss of income, increased OpEX and increased CaPEX).
There are no KPIs on physical risks addressing risk mitigation activities at the supply chain level. Consider referring to www.adaptationcommunity.net for indicators on climate impacts that could be turned into KPIs at the sector level.
On Annex I ‘Proposed disclosures for Banks and Insurance companies’:
A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI-led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This can assist banks in understanding the potential finance needs of their clients, and the role of banks in providing finance for climate resilience. The taxonomy could also be applied to corporates. For more information, see section 4 of our ‘Navigating a changing climate’ report, available here.
Several questions stem from the review of this Annex:
- Why are scenarios accounted for in the lending activities and not in investments?
- Why do KPIs for asset management activities not link to risks and opportunities as for the other segments?
Acclimatise has worked on physical climate risk and adaptation with corporates and financial institutions for over a decade, helping them identify and respond to physical risks and to take advantage of emerging opportunities generated by a changing climate. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.
To discuss how your organisation can meet climate risk disclosure requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com