How hard will it be for companies to meet the recommendations of the Task Force on Climate-related Financial Disclosures? Not as hard as many might think.
Investors and the rest of the world are watching to see how companies will respond to the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)commissioned by Mark Carney, governor of the Bank of England and chair of the G20’s Financial Stability Board. Simply put, the TCFD is asking companies to report on their response to the risks and opportunities created by climate change. The TCFD emphasizes that these disclosures can be done in existing reporting formats (such as 10-Ks).
The Motivation for Implementing the TCFD Recommendations
Despite the voluntary nature of the TCFD recommendations, companies have several reasons to start implementing them. First is investor pressure: Investors need this information and are mobilizing to ensure companies take the recommendations seriously. For example, ShareAction, a U.K.-based NGO, and Boston Common Asset Management LLC have organized a campaign (representing $1 trillion in assets under management) to implement these recommendations at 60 of the world’s largest banks. It is likely that many more shareholders will be clamoring for a response at upcoming 2018 annual general meetings.
Second, investors may be less inclined to invest in companies that do not implement the recommendations.
Third is self-interest: Companies that comply with the recommendations will have better strategies for adapting to climate change and will be better able to explain these to the investment community.
Fourth, the recommendations will likely lead to regulation; laggards will find themselves playing catch-up, perhaps under time pressure and great expense if they’ve done nothing to lay the groundwork for following the TCFD’s recommendations. The stakes are high for investors, companies, and the world.
The Practicality of Implementing TCFD Recommendations
How hard will it be for companies to implement the TCFD’s recommendations? Consider an industry that is among the most severely challenged by climate change: oil and gas. We examined the disclosures from 2016 of 15 the largest oil and gas companies by market cap listed on the New York Stock Exchange (NYSE): Anadarko, BP, Chevron, CNOOC, ConocoPhillips, Eni, EOG Resources, ExxonMobil, Occidental, Petrobras, PetroChina, Shell, Sinopec, Statoil, and Total. We reviewed each company’s 2016 SEC Form 10-K (used by U.S. domiciled listed companies) or Form 20-F (used by companies based outside the United States that have listed equity shares on U.S. exchanges) and their sustainability reports.
This makes for a good test. How much more disclosure is being recommended by the TCFD than already exists today? The short answer is that while there is work to be done, oil and gas companies won’t be starting with a blank sheet of paper. There are even a few that have already made good progress in adhering to the TCFD’s recommendations. While we don’t want to underemphasize some of the challenges, identified below, we also want to make it clear that the TCFD is not making recommendations that would be impossible to meet.
The TCFD report has four broad recommendations with the suggestion that companies provide these disclosures in their annual financial filings:
Governance. Disclose the organization’s governance around climate-related risks and opportunities.
Strategy. Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.
Risk Management. Disclose how the organization identifies, assesses, and manages climate-related risks.
Metrics and Targets. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Robert G. Eccles and Michael P. Krzus – Read the full article on MIT Sloan Management