Category: climate risk disclosure

Using Earth Observation data in climate risk assessment for financial institutions

Using Earth Observation data in climate risk assessment for financial institutions

By Robin Hamaker-Taylor and Jennifer Steeves

Working with financial institutions to understand analyse and disclose physical climate risks and opportunities to loans, investments and across portfolios demands the application of the most up-to-date climate data and information. By deploying data from historic climate observations, modelled projections of future climate and various social, environmental and economic datasets it is possible to begin to build a picture of risk exposure to financial institutions. In recent years, Acclimatise has also been working with new data sources such as Earth Observation (EO) data, which offer the potential to develop our understanding of real-time risk exposure, especially in areas where other data is sparse.

Acclimatise worked with leading programmes, such as the European Space Agency’s Earth Observation for Sustainable Development Climate Resilience (EO4SD CR) cluster, to demonstrate the potential of EO data to build climate resilience. The potential of EO data is enormous, and the developments in the temporal and spatial resolution of satellite data is a powerful tool of analysis. In recognition of this, Acclimatise this month became an Associate Member of Group on Earth Observations (GEO). The GEO is an intergovernmental partnership that improves the availability, access and use of EOs for a sustainable planet.

What is EO and EO data?

EO is the collection, analysis and presentation of information about the Earth’s physical, chemical and biological systems and has the capability to do so across remote and inaccessible terrain. It involves monitoring and assessing the status of and changes in the natural and man-made environment. There are now thousands of data buoys operating in the world’s oceans, hundreds of thousands of land-based environmental monitoring stations, tens of thousands of observations from aircraft platforms and numerous environmental satellites orbiting the globe, according to GEOSS and other academic research.

EO satellites can collect real-time data on a wide range of indicators such as water distribution, land use, water cycles, atmospheric profiles, heat mapping, sea surface evaluations, and global-regional energy exchanges. EO data provide large quantities of timely and accurate environmental information, which, when combined with other datasets, can give unique insights into managing climate risks.

Of the 50 Global Climate Observing System (GCOS) essential climate variables, roughly half can only be observed from space, making EO an irreplaceable component of climate monitoring. EO datasets are critical in regions where insufficient information is available from weather stations (which is often the case), and its consistency facilitates coordination of information sharing. It is also very useful where on-the-ground assessments of infrastructure are not possible, for example, due to safety concerns.

Why is EO data useful for financial institutions?

Financial institutions (FIs) are accustomed to integrating data from various sources into their risk screening processes. As FIs become increasingly aware of the need to consider physical climate risks in their assessments, EO data offers enormous potential. FIs often lend or invest in diverse geographies with varying levels of available climate hazard data.

EO datasets can complement data held by FIs on their borrowers or investments including data on physical assets, on-site operations, supply chains, markets and logistics. High-quality data on climate parameters combined with other critical investment-relevant information helps investors and asset managers understand current and future risks to their investments across sectors. EO data is often used for post-disaster damage assessment. EO data can also be integrated into existing tools platforms and analyses used by FIs.

Evidence from current uses of EO data by financial institutions

To date, EO data has been used in the context of climate risk primarily by development finance institutions (DFIs), which indicates how commercial FIs could eventually use this type of data. The EO4SD Climate Resilience Cluster provides EO-based products and services to DFIs that have investments in developing countries to support climate resilience. DFIs and other agencies supported through the project include the World Bank, Asian Development Bank (ADB), Inter-American Development Bank (IDB), African Risk Capacity (ARC), Multilateral Investment Guarantee Agency (MIGA) and the International Finance Corporation (IFC).

For example, the EO4SD project is collaborating with a World Bank urban development initiative in Greater Monrovia, Liberia to provide EO-based products and services. An example of this is a coastal erosion service involving 41km of shoreline evolution monitored through a 34-year satellite series, which has been acquired through analysis of satellite images from Landsat, Sentinel 2 and Worldview 3. The analysis estimates that the land loss area from 1984 to 2019 in the 50 km coastline of Greater Monrovia is 0.8 km2. This can be overlaid with data on population and critical infrastructure to aid investment planning.

Flood mapping is also benefiting from EO-based services as EO data provides consistent historical information on floods. The 34-year high-resolution sea-level rise data was also used to identify coastal and inland flood risk areas in parts of Monrovia. The model integrates sea level rise projections to 2030, mapped against a digital terrain model to identify high flood risk areas. These flood maps help the World Bank and local authorities identify the most effective flood management actions and enable better planning decisions to avoid unnecessary development in risky areas.

The direction of travel: What next for EO?

EO data can help banks and lenders around the world understand and prepare for climate change impacts, accounting for future climate risks and opportunities in investment and lending decisions. As EO data gets easier to extract and apply, its use in climate risk assessments will continue to unfold.

One exciting potential application of EO data is in the context of trend analysis where past events are correlated to experienced losses to help paint a picture of risk. There is also potential to develop statistical information using EO data for certain climate hazards such as flooding. Processed climate data will soon be available on flood return periods, for example, as will statistics on flood extent and flood duration. Acclimatise are now gearing up for phase 2 of the EO4SD project, which will build the capacity of DFIs and partner agencies in the practical application of EO data.


Stay in touch with how this project unfolds and how we are using EO to build climate resilience here.

Australian corporate regulator updates guidance on climate-related disclosure

Australian corporate regulator updates guidance on climate-related disclosure

Earlier this month the Australian corporate regulator, ASIC published updates to clarify the application of its existing regulatory guidance to the disclosure of climate change-related risks and opportunities.

ASIC reviewed its guidance following the recommendations of a Senate Economics References Committee report on Carbon Risk and the Government’s response which encouraged ASIC to consider whether its high-level guidance on disclosure remained appropriate.

While ASIC’s review found that its existing, principles-based regulatory guidance remains fit for purpose, to help stakeholders to comply with their disclosure obligations, the organisation has updated its guidance to, amongst other things:

  • incorporate the types of climate change risk developed by the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD) into its list of examples of common risks that may need to be disclosed;
  • highlight climate change as a systemic risk that could impact an entity’s financial prospects for future years and that may need to be disclosed in an operating and financial review (OFR);
  • reinforce that disclosures made outside the OFR (such as under the voluntary TCFD framework or in a sustainability report) should not be inconsistent with disclosures made in the OFR; and
  • make a minor update to INFO 203: Impairment of non-financial assets: Materials for directors to highlight climate change and other risks that may be relevant in determining key assumptions that underly impairment calculations.

The guidance has also been updated to make clear that in ASIC’s view, the risk of directors being found liable for a misleading or deceptive forward-looking statement in an OFR is minimal provided the statements are based on the best available evidence at the time, have a reasonable basis and there is ongoing compliance with the continuous disclosure obligations when events overtake the relevant statement made in the OFR.

ASIC’s review of regulatory guidance follows last year’s publication of ASIC Report 593: Climate Risk Disclosure by Australia’s Listed Companies targeting listed companies, their directors and advisors. High-level recommendations set out in REP 593 included to:

  • adopt a probative and proactive approach to emerging risks, including climate risk;
  • develop and maintain strong and effective corporate governance which helps in identifying, assessing and managing risk;
  • comply with the law where it requires disclosure of material risks; and
  • disclose meaningful and useful climate risk-related information to investors –the voluntary framework developed by the TCFD has emerged as the preferred standard in this regard and ASIC strongly encourages listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.

ASIC commissioner John Price said, ‘Climate change is an area which ASIC continues to focus on. The updates to our regulatory guidance, together with the publication last year of Report 593, round out ASIC’s response to the Senate Report on Carbon Risk. Our updates will help stakeholders to comply with their disclosure obligations in prospectuses and the operating and financial review for listed companies’.

ASIC welcomes the continuing emergence of the TCFD framework as the preferred market standard, both here in Australia and internationally, for voluntary climate change-related disclosures. ASIC considers this to be a positive development and we again strongly encourage listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.

‘While disclosure is critical, it is but one aspect of prudent corporate governance practices in connection with the mitigation of legal risks. Directors should be able to demonstrate that they have met their legal obligations in consideringmanaging and disclosing all material risks that may affect their companies. This includes any risks arising from climate change, be they physical or transitional risks.’ Mr Price said.

In the coming year, ASIC will conduct surveillances of climate change-related disclosure practices by selected listed companies. ASIC will also continue to participate in the Council of Financial Regulators’ working group on climate risk and participate in discussions with industry and other stakeholders on these issues.


Read ASICS updated regulations here:

Advancing climate-related financial risk disclosures in the Financial Sector

Advancing climate-related financial risk disclosures in the Financial Sector

By Laura Canevari

Transitioning to a low carbon and climate-resilient future is a challenge of unprecedented scale. The financial sector has a fundamental role to play in this transition. However, to enable the sector to play this role, there is a need for a systemic shift in the way the financial system operates and in the way investment decisions are made.

Critical to a smooth transition is the effective management of climate risks and opportunities. The underestimation of climate risk poses a threat to the stability of the financial system, in particular, when capital is allocated without a full understanding of the potential climate implications on adjusted risk returns. Similarly, responding to climate change and transitioning to a low carbon economy offers huge investment opportunities, many of which remain largely untapped.

The role of the Task-Force on Climate-related Financial Disclosures (TCFD) Recommendations

Through the release of the TCFD Recommendations in 2017, financial institutions (FIs), along with corporates, have been given a robust compass with which to navigate climate disclosures. The TCFD recommendations  encourage FIs and companies to incorporate climate-related considerations in their governance, strategy, risk management, metrics and targets, and to provide climate-related disclosures in their public financial fillings. The recommendations effectively require organisations to assess where they stand in their ability to understand and manage climate related risks. The TCFD knowledge hub has been established, which is an interactive portal that collates resources for organisations to aid their disclosure activities. Many FIs and corporates are still coming to grips with how best to analyse and disclose climate risks, though the direction of travel is clear – the TCFD recommendations has been a game changer in putting climate risks on their radar.

Investors clearly understand the value of this information and the demand for useful, climate related financial information continues to grow, according to the second TCFD status report, released in June 2019. Climate risk disclosures not only help investors to make more informed decisions, they also help reduce litigation risks.

Many organisations have started to disclose in alignment to the TCFD Recommendations (see the TCFD Knowledge Hub). Similarly, voluntary disclosure frameworks such as CDP, GRI and SASB have started to align their disclosure frameworks to the Recommendations of the TCFD. Others, such as PRI are making it mandatory for members to disclose certain types of climate related information.

Managing climate risks has become imperative for regulators, investors and the market

In early 2019, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), 36 members in total, have joined forces to promote collective action to manage climate-related financial risks. Frank Elderson, Chair of the NGFS and board member of De Nederlandsche Bank, notes that climate-related risks are a source of financial risk. Elderson points out that climate-related risks are therefore within the mandates of central banks and supervisors, and it is up to them to ensure the financial system is resilient to these risks. In their most recent report, the NGFS published a set of recommendations around the distinctive elements of climate change-related financial risks and the need to ensure resilience in finance. These recommendations send a powerful signal to others within the finance sector that financial regulators are increasingly interested in robust climate disclosures.

Regulators have also independently started to tackle climate risks. In the UK, for example, The Prudential Regulatory Authority (PRA), has released a new supervisory statement setting out its expectations for banks and insurers on managing climate-related financial risks  and established, together with the Financial Conduct Authority (FCA), a Climate Financial Risk Forum. In France, Article 173 made it mandatory for institutional investors to disclose climate-related information.

Rating agencies such as Moody’s and S&P Global have started to incorporate climate change considerations in their rating systems as well. Their assessments now illustrate how much climate factors can impact (negatively and positively) on the risk rating of companies and municipal bonds.

Similarly, investors have started to integrate climate change considerations as part of their due diligence processes and as part of their risk management and investment strategies. Early findings provided by BlackRock suggest that investor portfolios integrating climate change are already outperforming those that do not. Yet, BlackRock also suggests that most portfolios are still failing to fully account for climate related risks.

Growing action among banks and investors

The number of FIs that have started to align with the TCFD recommendations has steadily grown since the release of the final recommendations in 2017. Over 200 entities dedicated to banking, asset management or banking and insurance have become official supporters of the TCFD recommendations, and some have started to release their first climate-related risk disclosures.

Their activity is supported by a number of global initiatives with the mandate to help FIs understand and address climate related risks. For example, the TCFD pilot project established by the UNEP-FI with 16 commercial banks (with the support of Acclimatise, Oliver Wyman and Mercer) has led to the publication of a set of novel methodologies to help banks appraise and manage physical and transition credit risks.

Similar initiatives are proliferating across the world. In Mexico and South Africa, for example, the Cambridge Institute for Sustainable Leadership (CISL) and GIZ have established an initiative to help financial institutions incorporate environmental scenario analysis into routine financial-decision making. Similarly, in Mexico, the Inter-American Development Bank (IDB) and the Mexican Banking Association (ABM) have established a Climate Risk Capacity Building Program aimed at strengthening the institutional and operational capacity of Mexican banks to identify and manage climate, environmental and social risks. Within this program, a new stage started with the objective to analyse the gaps in governance systems and in the management of climate, environmental and social risks in Mexican banks in relation to the TCFD recommendations.

On the investor side, The Institutional Investors Group on Climate Change (IIGCC) has launched a new project to develop guidance for investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. This physical risk and opportunity guidance will be available in Summer 2019. This guidance will build on other guidance reports issued by the IIGCC, such as the 2018 practical guide on how to apply the principles of scenario analysis.

A proactive approach will likely pay off 

It is clear that the way to do business is changing as the climate risk governance landscape is changing. The role of FIs is shifting in light of these broader changes. Similarly, the conversation around risk is also clearly shifting, from being centred on individual companies or investments, to a broader recognition of the environmental and societal risks that climate change is posing.

The financial sector has a privileged role to play in the coming years in steering economic development towards a more resilient future. Those who begin the journey early will help set the benchmark on best practice and start reaping the benefits that stem from making climate conscious decisions. Those that do not may be left behind.


Cover photo by Jannes Glas on Unsplash.
Voluntary climate disclosures can reduce litigation risk

Voluntary climate disclosures can reduce litigation risk

By Robin Hamaker-Taylor, Richard Bater, Nadine Coudel

Climate risk disclosures are now a crucial part of the voluntary disclosure activities of many corporates and financial institutions. As these disclosures grow, questions around the extent to which they may leave disclosers exposed to litigation linger. Recent analysis from the accounting literature indicates that voluntary disclosures can actually lead to reduced litigation risk however. This article looks to these recent studies in other areas of voluntary disclosure to explore this question, and reviews changes underfoot that could increase litigation risk in the medium-term.

Does voluntary disclosure reduce or increase litigation risk? 

As capital markets began to grow and open up in the last century, it soon became clear that traditional financial reporting frameworks were not able to fill the information gaps between shareholders (investors) and corporate management according to researchers Schuster and O’Connell. Voluntary disclosure grew out of the need to fill the gap between the management’s view of the company’s value and what the market or investors saw as the view of the company’s value.

Corporates’ key performance data, for example, was not fully captured in conventional financial reports. As such, a number of frameworks for value-based reporting emerged in the 1990’s, which call for a range of voluntary disclosures such as forecasts of threats and opportunities, information on tangible and intangible assets, and management, among others. Coupled with the advent of technological advancements such as the internet, which for the first time allowed for rapid information dissemination via corporate websites, voluntary disclosures among corporates took off and are now part and parcel of firms’ external communications.

As public interest in the transparency around the procedures, policies, governance structures, and risk management strategies of corporates and financial institutions continues to grow, an important debate has unfolded around the relationship between voluntary disclosures and litigation risk. Litigation risk is, simply put, the potential that legal action could be taken because of a corporation’s products, actions, inaction, etc. The current debate centres around whether or not voluntary disclosure reduces or increases litigation risk, and following that, if litigation risk increases voluntary disclosures.

Researchers Dong and Zhang find evidence – in the US context – that litigation risk increases voluntary disclosure. The authors hypothesise that this may be the case either because disclosures could work to invalidate claims the firm is withholding information from investors, or because disclosures can help prevent one trigger of investor lawsuits – namely stock price crashes. Further analysis also indicates in the US, in instances of lower litigation risk, the likelihood and frequency of disclosures (e.g. earnings forecasts) are reduced, in particular for companies conveying negative news. This is a much-studied question in the accounting literature, however, and empirical evidence suggests litigation risk may deter disclosures. This may be the case because lawsuits could emerge after forward-looking disclosures are proven untrue after the fact.

Disclosing climate change-related risks may reduce litigation risks

Climate risk disclosures are now firmly part of the voluntary disclosure landscape, in part due to voluntary carbon disclosure frameworks such as the CDP and the more recent Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The Financial Stability Board (FSB) established the TCFD in 2015, who published its final voluntary recommendations for climate risk and opportunity assessment and disclosure in 2017. The FSB was concerned that because of the information asymmetry between financial markets and those they are lending to, investing in, and insuring, climate risks are a threat to the stability of the wider financial system.

The TCFD recommendations have been taken up with gusto among corporates and financial institutions, with over 500 official supporters as of early 2019. Recent analysis shows that two out of three companies assessed have started to disclose climate change-related risks, though importantly, the quality of disclosures is still low, and disclosures have varied greatly across markets in the first few years of reporting, according an annual climate risk disclosure study. Given the growing number of finance and corporate actors starting to voluntarily disclose climate risks and opportunities, and the varying scope and quality of disclosures, the debate about the influence of voluntary disclosures on litigation risks is reawakened.

There is, however, a general anxiety among corporates and financial institutions that they could be held liable for their climate risks disclosures, concerns which have been used as reasoning for lack of action in this space. Others argue that companies and their directors are actually more likely to face litigation if they fail to assess and disclose climate-related financial risks. Evidence is emerging to that effect: in 2017, shareholders of the Australian Commonwealth Bank sued, alleging the Bank violated the Corporations Act of 2001 by failing to disclose climate-change risks in its 2016 annual report. Though the case was settled, it may be a sign of what is to come.

The Hutley opinion, a 2016 landmark legal opinion set out the ways that company directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence. The 2019 supplementary opinion, provided again by Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker, reinforces and strengthens the original opinion by highlighting the financial and economic significance of climate change and the resulting risks, which should be considered at board-level. As the 2016 opinion explains: “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company”.

There has been a marked increase in climate disclosure litigation since 2017, underpinned by innovations of legal argument, increasing awareness, and progress in scientific evidence. This can give rise to considerable legal and reputational costs regardless of outcome, especially where liabilities are not covered by liability insurance. The disclosure trajectory is clear, therefore firms that get ahead of the game stand to benefit from unearthing opportunities, win the confidence of investors and consumers, and minimise liability risk. To be clear, firms should follow best practice in order to reduce concerns around liability associated with TCFD-style scenario-analysis and disclosures. Further recommendations on this are available here.

Future legal developments

The legal and physical environment in which organisations (e.g. firms, municipalities, and financial institutions) are operating is in a period of rapid flux. Past knowledge and assumptions about the resilience of assets, investments and supply chains to climate risk may no longer be valid, potentially giving rise material financial risks that investors have a right to be informed about. Several changes are afoot that could increase litigation risk in the medium-term. In April 2019, the Bank of England’s Prudential Regulation Authority released a Supervisory Statement (SS) concerning banks’ and insurers’ management of climate risks. The SS sets out clear expectations regarding the strategic approach that banks and insurers will be expected to take, including appropriate disclosure of climate-related financial risks, with mandatory requirements not an impossibility in the medium term.

The obligations that Directors, boards, financial intermediaries are under are also in flux. New and existing reporting frameworks increasingly require reporting and / or disclosure of climate-related risks, whilst the attitude of investors, consumers, and regulators is hardening. All of this is serving to steadily evolve standards of professional practice and reasonable expectations of fiduciaries and officers under existing law.

Following the release of the recommendations of the High-Level Expert Group on Sustainable Finance, in March 2019 the EU published is Action Plan on Sustainable Finance. With its declared ambitions to become a global leader in this area, the European Commission has announced that it will review reporting frameworks on non-financial information in line with TCFD and update accounting standards. The Commission is steadily laying the groundwork for sustainable finance regulation based on the Action Plan, whilst the European Parliament is also considering amendments to the IORP II Directive, that could require investment firms to consider and disclose ESG risks associated with occupational pensions. In the United States, there are legislative proposals to strengthen disclosure of climate risks to the SEC. From 2020, signatories to the widely-adopted Principles for Responsible Investment Reporting Framework will be required to report (not disclose) climate-related risks consistent with the TCFD.

A rapidly evolving legal and climatic context is shifting the context in which firms are operating. As firms and legal systems adjust to this new regime, litigation can be expected to hold firms accountable, test expectations, and clarify the law. Failing to keep pace with demands to manage and disclose climate risk in a dynamic climatic setting is likely to increase litigation risk, such as for breaches of duty, false or misleading disclosure, or non-disclosure. Organisations will need to ensure that disclosures are based on rigorous assessment and are accurately communicated to minimise litigation risk.


Acclimatise – experts in physical risk for responding to TCFD recommendations

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 TCFD requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com

To discuss how changes and developments in climate-related regulations may affect your operations, please contact Nadine Coudel: N.Coudel(a)acclimatise.uk.com

Cover photo by Kelvin Zyteng on Unsplash.
MinterEllison announces new guide on developments in climate risk governance and disclosure

MinterEllison announces new guide on developments in climate risk governance and disclosure

By Georgina Wade

A new guide from law firm MinterEllison is highlighting developments made in climate risk governance and disclosure that are critical to the provision of a true and fair view of financial position, performance and prospects, and to the management of misleading disclosure risks under the Corporations Act.

                  The guide, “Are your finance and governance teams ready? Responding to heightened expectations on climate-related disclosure and assurance”, contains a useful background to the evolution of climate change from an environmental to a financial issue, and goes on to capture contemporary developments in the realm of financial risk disclosure. Recent developments include the AASB/AuASB’s joint guidance on the integration of climate change-related risks into financial statement materiality considerations, to scenario-planning under the recommendations of the Taskforce on Climate-related Financial Disclosures.

                  This comes just after their recent Insight publication, “New developments impact climate change related risks”, examining recent developments that are likely to impact the way that Australian listed companies consider climate change related risk.

                  Click here to access the guide.

Learn more about Acclimatise’s work on climate risk disclosure here.


Cover photo by Brandon Jacoby on Unsplash.
Acclimatise becomes an official signatory of TCFD

Acclimatise becomes an official signatory of TCFD

Acclimatise today became an official signatory of the Financial Sustainability Board’s (FSB) Taskforce on Climate-Related Financial Disclosure (TCFD). The initiative, established by Mark Carney and Michael Bloomberg, has been central in providing momentum for climate change action in the financial services industry.

Acclimatise has worked with UNEP FI and the world’s leading banks to help consider how they might implement the TCFD recommendations. Through its work, Acclimatise has helped develop methodologies for assessing physical climate risk to loan portfolios and is a leading advisor on climate risk and opportunity to the financial services industry.

The company’s supporting statement under the TCFD reads:

“Aligning strategies to stabilise our financial and climatic systems is vital. Corporate and financial institutions have a significant role to play in this. The incorporation of TCFD recommendations in their governance systems and decision-making processes is in fact key if we are to ensure a sustainable and climate compatible future, particularly in light of unmet governmental climate targets. We are proud to support this initiative and we will continue to excel at developing methodologies and metrics to help corporates and financial services organisations to identify, quantify, and disclose physical climate risks and opportunities.”


For more information about Acclimatise’s work on climate risk and financial services click here.


Image: World Economic Forum: Mark Carney, Governor of the Bank of England. World Economic Forum, Davos, Switzerland. CC by 2.0.

Embracing uncertainty: How disclosing uncertain information on climate risk can reduce legal liability exposure

Embracing uncertainty: How disclosing uncertain information on climate risk can reduce legal liability exposure

By Marcela Scarpellini, right. based on science UG

As climate related damages increase, the need to allocate funds and apportion blame will inevitably follow. In this context, the mechanisms used for determining responsibility are likely to become, to say the least, very creative.

Pressure for proactive climate action and better response is mounting thanks to legislation and regulation, litigation, shareholder demands, citizens calling for more action, carbon taxes and concrete mitigation and adaptation plans.

The status and intent of current regulations relating to climate change and the legal infrastructure that is expected to support or deter the transition to a low carbon economy, provide a good indication of the stringency and certainty of the measures that will follow.

After Bank of England Governor Mark Carney’s famous warning in his 2015 speech regarding the threat climate change posed to our financial systems, financial institutions and governments started to wake up to the issue. This meant paying attention to – and developing an understanding of – how climate risks might play out and affect businesses future profitability and the stability of the wider financial system. In response, the G20’s Financial Stability Board established the Task Force on Climate-Related Disclosures (TCFD).

Point in time: Disclosure

The TCFD‘s purpose is to provide corporates and financial institutions with a framework for climate risk disclosure in two key respects. First, with regard to the analysis of the physical and transition risks and opportunities they may face due to climate change. Second, with regard to the development of appropriate strategies to respond to the consequences of those risks materialising.

This initiative, which already has 513 official supporters across businesses, advisory firms, and financial institutions, is a voluntary framework. The main political intention behind it – in combination with the EU Directive on Non-Financial Disclosures, EU Shareholders Directive and other upcoming EU financial regulation – is to foster transparency by requiring corporates and financial institutions to disclose information on material impacts of the physical and policy risks (transition risks) connected with climate change.

The TCFD recommendations are just a first step. Increasing transparency is a means to an end, not an end in itself: boilerplate and vague disclosures will not cut it. The intention of climate risk disclosures is to provide legislators with a broad understanding of the current state of investments and business bets into a certain world, in order to come up with evidence-based legislation that actually has a chance of reshaping our economies.

In this context, corporates and financial institutions have started to work out the best ways to generate relevant disclosures. The first attempts to generate this information using the TCFD framework have been released, but there is still a long way to go.

Hot topic: scenario analysis

One of the challenges of applying the TCFD framework has been the use of scenario analysis. Scenario-analyses are forward-looking tools intended to allow users to imagine how a range of possible futures could look, the risks and opportunities entailed in those different futures and get its users to pin down how their companies would be affected if any of those futures materialized. The overarching purpose is to enable firms to develop strategic and resilient business plans to incorporate envisioned or possible changes.

A concrete way in which companies make use of scenario analyses is by using them to understand how their capital requirements might be impacted under a range of plausible scenarios. Using scenario analyses, companies can peer into the future and build resilient responses to a world in which extreme events and their financial impacts are no longer sporadic but recurrent.

Scenario analysis is a time and capacity consuming challenge. Despite this, many companies, particularly within the oil & gas sector, have been using these tools for some time, and companies in other sectors are starting to do so too.

Another significant hurdle for companies performing scenario analysis stems from having to disclose the information generated. Many businesses are wary of this since, it is suggested, the information generated by scenario analysis is just hypothetical, which could, in turn, be misconstrued as a fraudulent, deceptive or incorrect disclosure, potentially opening the door to liability exposure. However, in reality, this constitutes a narrow view of the story.

Understanding risk

Properly understood, scenario-analysis is a risk assessment tool, so the information derived from it is the same in nature as information relating to other risks that might affect a company. Risks are hypothetical by nature and gain validity when substantiated through evidence and justification.

What it takes to reduce disclosure-related liabilities is a thorough and well-presented substantiation of the information provided, with clear and precautionary wording regarding how this information ought to be interpreted and construed.

A stream of forward-looking legal experts, within the Commonwealth Climate and Law Initiative, are of the opinion that disclosing forward-looking information in line with the TCFD Recommendations might, on the contrary, reduce liability exposure. Their claim is justified by understanding the core intentions of the TCFD’s recommendations, namely transparency and accountability. Therefore, firms able to demonstrate that they are acting to understand and manage climate risk will be acknowledged for that in the light of corporate responsibilities such as due diligence and good corporate governance. In understanding the purpose of disclosure, firms are allowed to make mistakes, though they are not allowed to be fraudulent, deceptive and manipulative about the future in order to ensure certain business interests.

As more firms get on board with the TCFD recommendations, using them as guidelines for disclosure, it is likely that they become reference points and that national laws start to be interpreted in light of the most advanced practices. In jurisdictions such as the UK, where an objective test applies to determine the extent and manner in which directors have exercised their duty of care and due diligence, this determination is likely to be done on the basis of what others in the industry are doing. If and when TCFD becomes best-practice, this is likely to become the yardstick against which these determinations will be made[1].

Good practice to reduce liability

Scenario-analysis remains a beneficial tool, despite the fact that it is still becoming an established best practice and mandated by law. To reduce firms’ concerns around liability associated with scenario-analysis, and to encourage them to start using it and disclosing climate risk information prudently, a series of recommendations follows:

  • Use proper cautionary language.
  • Use a variety of scenarios, at least three would be advisable.
  • Place all scenarios within the same section and under the same fonts in your disclosure as to avoid that any be interpreted as being favoured.
  • Use multiple sources for data and narratives and seek insights from new sources.
  • Use current data and justify your choice of providers.
  • Ensure your scenarios reflect the variance (climate, political, social, regulatory) and are relevant to the entirety of the company´s operations.
  • Use information derived from scenarios in order to justify likelihood and not infallible certainty.
  • Not disclosing any forward-looking information under the false pretence that it might make your company liable is a greater risk than disclosing uncertain information.
  • If you are not sure of how to go about it, hire consulting services to guide you along the way.

Further reading:

https://www.right-basedonscience.de/2017/08/04/better-safe-than-sorry/

Marcela Scarpellini studied law at the Universidad Católica Andrés Bello in Caracas (Venezuela) and has an LL.M. from the University of Stockholm (Sweden) in the field of environmental law. Within right.based on science (“right.”) she works at providing the legal context upon which right.´s X-Degree Compatibility (“XDC”) model and other metrics are developed.

right. based on science is a data provider founded in August 2016, which measures a single economic entity’s contribution, be that of e.g. a company or a lending project, to manmade climate change. With a team of experts with backgrounds in law, science, economics, psychology and mathematics, right. is devoted to the development of the XDC Model, which calculates science-based climate metrics on the basis of latest climate research and regulatory requirements, in order to deduct an entity’s X-Degree Compatibility.


[1] Concerns misplaced: Will compliance with the TCFD recommendations really expose companies and directors to liability risk? Alexia Staker, Alice Garton & Sarah Barker. Commonwealth and climate law initiative.


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Accounting bodies call for climate disclosure standards but are wary of adding to rulebook

Accounting bodies call for climate disclosure standards but are wary of adding to rulebook

Major accounting bodies are grappling with how best to deal with corporate climate risk disclosures. While there appears to be a significant shift towards encouraging climate risk to be reported on as part of companies’ financial reporting processes, for now standards boards appear reluctant to make reporting mandatory.

Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), said that while the organisation sees climate reporting as important, it does not currently think that enforcing mandatory rules is the right approach.

Hoogervorst said that existing rules governing reporting need to be consolidated and reporting requirements need to be standardised before rules could be implemented effectively. Instead, Hoogervorst called for international standards to be agreed that focus on the impact of sustainability issues on future profit.

IASB standards are used in 144 countries around the world, so Hoogervorst’s statements will be seen as a strong indicator of the current state of play when it comes to reporting climate change risks as part of financial reporting processes.

Change is coming

Despite IASB’s reluctance to pursue a rules-based approach at this stage, there are clear signals from elsewhere that standards boards are taking climate-related disclosure seriously. Late last year, for example, the Australian Accounting Standards Board (AASB) published a practice statement called ‘Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2”.

The publication argues that climate-related risks and other emerging risks are currently discussed separately from companies’ financial statements, if at all. The paper says that this must change as physical climate impacts and investor expectations make such risks ‘material’, therefore warranting disclosures when preparing financial statements.

It also notes investor statements on the importance of climate-related risks to their decision making so that entities can no longer treat climate-related risks as merely a matter of corporate social responsibility and should consider them also in the context of their financial statement. The paper notes that while rules are currently not mandatory “entities in Australia are already being subject to law suits regarding lack of disclosure”.

The AASB provides a series of recommendations for entities preparing financial statements and for auditors of financial statements. Entities preparing financial statements in accordance with Australian Accounting Standards should consider:

  1. Whether investors could reasonably expect that emerging risks, including climate-related risks could affect the amounts and disclosures reported in the financial statements and have indicated the importance of such information to their decision making; and
  2. What disclosures about the impact of climate-related risks are material to the financial statements, as summarised in the decision tree below:

Auditors of the financial statements should consider:

  1. Climate-related risk and other emerging risks as part of their risk assessment. If there is an assessed risk of material misstatement in the financial statements, the auditor should respond appropriately to the risks of material misstatement;
  2. Whether climate-related risk and other emerging risks are relevant for accounting estimates including assumptions used to arrive at a fair value estimate and potential impairment.

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The global law firm Clyde & Co. launches climate change liability risks report

The global law firm Clyde & Co. launches climate change liability risks report

By Nadine Coudel and Dr Richard Bater

In March 2019, Clyde & Co. launched its climate change report Climate change: Liability risks, a rising tide of litigation‘. The report explores the liability risks that organisations have faced and continue to face as plaintiffs attempt to use the courts to further their cause or sue for damages.

The report provides a broad overview of the evolving litigation risk landscape arising from the effects of climate change, identifying some of the key themes, controversies and legal hurdles.

The authors suggest that the significance of this trend should not be underestimated, with over 1200 climate change cases having been filed in more than 30 jurisdictions to date. As both litigation approaches and scientific evidence evolve, litigation increasingly represents a powerful tool in the hands of those who seek to attribute blame for contributing to effects of climate change or failing to take steps to adapt in light of available scientific evidence.

In as much as the physical risks of climate change raise both direct and indirect implications for a diversity of sectors, so too do the associated legal risks. As Clyde & Co Partner Nigel Brook remarks, “As the volume of climate change litigation grows and legal precedents build, new duties of care are emerging and the liability risk landscape is undergoing a shift which is likely to affect a wide range of commercial sectors”.

The authors classify litigation which has been emerging over the last two decades into three broad categories:

1. Administrative cases against governments and public bodies;

2. Tortious claims against corporations perceived as perpetrators of climate change;

3. Claims brought by investors against corporations for failing to account for possible risks to carbon-intensive assets or for failing to account for or disclose risks to business models and value chains in financial reporting.

The report also addresses novel approaches that claimants are adopting when bringing climate litigation, as well as the practical and legal considerations that these give rise to.

Finally, the report looks at global trends in climate litigation and their implications for businesses in different industries around the world, highlighting the issues which should be on companies’ radars over the months and years to come. The authors indicate that climate change litigation has already been deployed against companies beyond the oil and gas majors and suggest that this trend is likely to continue.

Litigation has advanced far from being targeted at first line ‘emitters’ to being used as a means of holding companies accountable for how they respond to the physical and financial risks of climate change. Clyde & Co. plans to explore these liability risks in greater depth in future reports.


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Update to landmark legal opinion highlights growing climate liability of company directors

Update to landmark legal opinion highlights growing climate liability of company directors

By Robin Hamaker-Taylor and Nadine Coudel

An update to the landmark 2016 Hutley opinion has been released by the Centre for Policy Development (CPD) on 29th March, 2019. The 2016 opinion set out the ways that company directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence.

The supplementary opinion, provided again by Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker, reinforces and strengthens the original opinion by highlighting the financial and economic significance of climate change and the resulting risks, which should be considered at board-level. It puts an emphasis on five key developments since 2016 that have built up the need for directors to take climate risks and opportunities into account and reinforced the urgency of improved governance of this issue. While the 2019 opinion is rooted in the Australian context, just as the 2016 opinion, it has much wider applicability, as much of the developments discussed in the update have been simultaneously happening in jurisdictions outside of Australia.

The five areas of development covered in the 2019 supplementary opinion include:

  1. Progress by financial supervisors: The 2019 opinion suggests statements made by Australian supervisory organisations such as the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and the Reserve Bank indicate they now all see the financial and economic significance of climate change. Similar realisations have been happening among supervisory organisations in the UK, with the Prudential Regulation Authority (PRA) due to imminently release a supervisory statement on banks’ and insurers’ approaches to managing the financial risks from climate change, following a public consultation on the matter in late 2018 / early 2019. At the European level, the wider sustainability of the financial system is under review with the European Commission rolling out its Action Plan for Financing Sustainable Growth;
  • New reporting frameworks: Three new reporting frameworks have emerged since 2016. The most broadly applicable is The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. 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. The Principles for Responsible Investing (PRI) and CPD frameworks have now both aligned their climate-reporting frameworks with the TCFD recommendations. The other two reporting frameworks mentioned in the 2019 supplementary opinion are more relevant for the Australian context, and include the new recommendations on assessing climate risk materiality from the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB), as well as the updated guidance from the ASX Corporate Governance Council;
  • Mounting investor and community pressure: Investors and community groups are increasing voicing concern around climate risks;
  • Development of the scientific knowledge: The UN Intergovernmental Panel on Climate Change (IPCC) published a special report on the impacts of 1.5 °C warming in 2018. The opinion recognises this as a “notable development in the state of scientific knowledge” that affects the gravity and probability of climate risks which directors need to consider; and     
  • Advances in attribution science: Important developments in attribution science have now made it easier to identify the link between climate change and individual extreme weather events.

The opinion suggests management of climate risks will require engagement with company directors in certain sectors in particular. These include banking, insurance, asset ownership/management, energy, transport, material/buildings, agriculture, food and forest product industries.

CPD CEO Travers McLeod, explains the implications of this supplementary opinion for company directors, stating “the updated opinion makes it clear that the significant risks and opportunities associated with climate change will be regarded as material and foreseeable by the courts. Boards and directors who are not investing in their climate-related capabilities are exposing themselves and their companies to serious risks”, according to a press statement.

Mr Hutley and Mr Hartford Davis write “the regulatory environment has profoundly changed since our 2016 Memorandum, even if the legislative and policy responses have not” […]“These developments are indicative of a rapidly developing benchmark against which a director’s conduct would be measured in any proceedings alleging negligence against him or her.”

The 2019 update to the 2016 landmark Hutley opinion also provides ample evidence as to why company directors all over the world not only need to be aware of their firms’ contribution to climate change – it is just as important to assess and disclose their potential climate risks in a transparent manner. It is therefore vital to ensure that future business plans are in line with the Paris Agreement and to also anticipate and prepare for climate change impacts, both in terms of risks and opportunities. The voluntary TCFD recommendations provide a framework for both corporates and financial institutions for assessing and disclosing climate risks and opportunities, and mandated disclosures are on the horizon. 


Acclimatise – experts in physical risk assessment and disclosures

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 TCFD or other disclosure requirements, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com

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