Last year, we blogged about the Financial Stability Board’s formation of an industry-led “Task Force on Climate-Related Financial Disclosures.” Now, the Task Force has issued its 74-page final report – Recommendations of the Task Force on Climate-related Financial Disclosures – along with supporting materials – which provide a standardized framework & guidance for voluntary climate-related financial risk disclosures in SEC filings.
While lots of climate change disclosure principles exist – here’s one of our many earlier blogs – this Task Force is significant because it was organized by the G20 – which coordinates national financial authorities & standard-setting bodies, including the SEC. Also, the press release highlights that companies with a combined market cap of $3.5 trillion – and financial institutions responsible for assets of $25 trillion – have committed to support the recommendations.
Here’s an excerpt from this Davis Polk blog:
The recommendations boil down to four thematically related areas: governance, strategy, risk management, and metrics & targets.
– Governance: organizations are encouraged to disclose their governance around climate-related risks and opportunities, including board oversight and management’s role in assessing and managing these risks and opportunities.
– Strategy: one of the centerpieces of the recommendations and likely the most controversial and difficult, is the TCFD recommendation that organizations disclose the actual and potential material impacts of climate-related risks and opportunities on their businesses, strategy and financial planning, including (i) climate-related risks identified in the short-, medium- and long-term (not defined); (ii) the impact of such risks on the organizations’ businesses, strategy and financial planning; and (iii) the resilience of the organizations’ strategy under different climate-related scenarios including a 2ºC or lower scenario. Importantly, the TCFD is not recommending any specific 2ºC scenario, instead providing criteria to aid each organization’s design of its own 2ºC scenario.
– Risk Management: the TCFD recommends disclosure of processes for identifying, assessing and managing climate-related risks and a description of how these processes are integrated into the organization’s overall risk management.
– Metrics & Targets: if material, the TCFD recommends organizations disclose (i) the metrics used to assess climate-related risks and opportunities in line with their strategy and risk management processes; (ii) their Scope 1, 2, and 3 greenhouse gas emissions (defined as direct emissions, indirect emissions from consumption of purchased power and other indirect emissions through the organization’s value chain) and related risks; and (iii) the targets used and the organization’s performance against such targets.
While the framework is useful, it’s also intentionally ambitious – and practices will continue to evolve. Check out our “Climate Change” Practice Area for up-to-date guidance – and tune in for our October 10th webcast: “E&S Disclosures: The In-House Perspective.”
The World’s First Climate Ratings for Funds
Recently, ISS teamed with UK & EU organizations to launch “Climetrics” – the first climate rating system for funds. Here’s an excerpt from the ISS announcement:
The rating – symbolized by “green leaves” issued on a scale of one to five– will enable investors to gauge and compare the climate impact of investments in funds and potentially encourage growth in climate-responsible fund products.
The equity fund market – worth more than €3 trillion in Europe – could be a significant lever for mitigating climate change. But, despite fast-growing institutional and customer demand for climate-conscious investing, to-date no rating system has allowed investors to compare funds’ climate-related impacts.
Climetrics will rate European funds based on the climate change impact of their portfolio holdings – as well as the asset managers’ application of climate impact as an investment & governance factor and the funds’ ESG policies. Investors can see the ratings for free on climetrics-rating.org.
Preparing For – & Responding To – Climate Change Proposals
Last month, we blogged about a possible trend: climate change proposals passing with historic levels of support. This recent Weil blog lays out suggestions for companies and boards who’ve received climate and sustainability proposals & engagement requests – or who want to prepare in advance.
Conveniently, Annex A of Weil’s blog also summarizes and links to the voting policies for a number of institutional investors. Check out this blog from Dorsey’s Cam Hoang for info on the pressure that these investors are getting to change their E&S policies.
Visit our “ESG/Social Responsibility” Practice Area for even more resources on this topic…
– Liz Dunshee