What will it take for major corporations to take climate risks seriously, making sustainability reporting a routine part of financial filings? The G20's Task Force on Climate-related Financial Disclosures (TCFD), a global push by investors and companies to include information about these exposures in mainstream reports to regulators, is helping companies make that transition on a five-year implementation timeline.

One of the top headlines from Climate Week 2017 in September was that 10 companies were the first to commit to implementing the TCFD recommendations by working with the Climate Disclosure Standards Board (CSDB), an international consortium of business and environmental NGOs that prepared a framework for implementing the climate disclosures within just three years. Those heavy hitters included insurer Aviva, life sciences company Royal DSM, technology firm Philips Lighting and retailer Marks & Spencer.

Since that time, corporate commitments to that three-year pledge have doubled. And mainstream momentum is picking up appreciably: As of Dec. 12, an estimated 237 companies from 29 countries — with a combined market capitalization of more than $6.3 trillion (PDF) — publicly had committed to supporting the TCFD recommendations. Among them were 150 financial firms responsible for assets of $81.7 trillion, such as Bank of America, BlackRock and Citigroup.

The TCFD, established in December 2015 in response to a call from the G20 and the Financial Stability Board (FSB) for complete and comparable information about climate change in corporate filings, aims to get companies to voluntarily integrate sustainability reporting in the Form 10-K, mandated by the U.S. Securities and Exchange Commission (SEC) for companies based in the United States, and 20-F for non-U.S. companies that have securities, stocks or indices that are registered and traded domestically.

Without effective disclosure of these risks, the financial impacts of climate change may not be correctly priced.

Spearheaded by Bank of England Governor Mark Carney (also the head of the FSB) and the former New York mayor and United Nations special envoy on climate change, Michael Bloomberg, the TCFD recommends that companies across all sectors describe the potential impacts of global warming in line with a 2 degrees Celsius scenario on their business, strategy and financial planning. It also asks them to disclose their strategies for dealing with and mitigating climate impacts, including internally used carbon prices.

"Without effective disclosure of these risks, the financial impacts of climate change may not be correctly priced," Bloomberg writes. "And as the costs eventually become clearer, the potential for rapid adjustments could have destabilizing effects on markets."

The organization will report on progress at the end of 2018 at the G20 summit in Argentina, according to Carney.

The case for speaking up

Reporting through TCFD recommendations allows companies to measure the risks and business opportunities related to climate change, protect themselves against potential physical impacts and identify sustainable investment opportunities.

Aviva, for example, commissioned research in 2015 that found up to $43 trillion of its assets are at risk by 2100 due to climate change. In response to this material risk, it published an initial response to TCFD recommendations in its 2016 annual report.

"Asset owners, investors and fund managers need more information from businesses because some companies, and their shareholders, could suffer big losses as governments introduce measures to limit climate change," said Zelda Bentham, group head of sustainability for Aviva. "We are concerned about the material risks around climate change and we want to ensure that the companies which we invest in are well-positioned to transition to a 2 degree C world."

This is less about a company's impact on the environment, but how it will impact the company financially.

Complying with the TCFD encouraged the insurer to commit $3.4 billion toward investments in lower-carbon infrastructure between 2015 and 2020, divest in fossil fuels where necessary and engage with companies to achieve resilient business strategies, Bentham said. It also broadened the company's understanding of the risk horizons that different areas of the business are exposed to.

"We believe that if the TCFD recommendations are adopted by companies, it will divert millions of dollars away from carbon-intensive activities," Bentham told GreenBiz. "And investors will be able to make more informed investment decisions for the long-term value of their investments."

Investor interest

The TCFD recommendations draw from existing climate change reporting frameworks such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) Standards; it doesn't seek to force companies to invest in yet another set of surveys or information-gathering exercises.

"What's different is that this is coming from a financial reporting perspective," said Chris Doherty, senior manager of climate change and sustainability services at EY. "This is less about a company's impact on the environment, but how it will impact the company financially."

Under TCFD, companies report against governance, strategy, risk management metrics and targets related to climate risks using a 2 degrees C scenario and disclose information related to water consumption, energy use and efficiency, land use and development or use of products and services designed for a low-carbon economy.

The message is that all companies will have to account for climate risk now and in the future, wrote Paul Simpson of CDP: "The question has become not whether to manage climate risk, but how to do it."

Although KPMG found that 75 percent of companies have yet to provide investors an analysis of the business value at risk from environmental impacts, as companies become more aware of their exposure to climate-related risks, the demand for fossil fuel declines and cheap renewable energy technologies emerge, they will need to prepare.

If investors make the case that climate disclosure will be used to drive capital market decisions, companies will see that it's important.

TCFD adoption will be driven by investors, ratings agencies, stock exchanges and consultancies, predicted Pricewaterhouse Coopers (PDF). Investors such as BlackRock are promising action if companies don't disclose in line with the recommendations. Meanwhile, ratings agencies can enable companies to consider the financial impacts of climate change in their credit and equity ratings. Stock exchanges can encourage deeper climate disclosure in listings, and consultancies can work with accounting standards boards to translate climate disclosures into financial impacts. 

"If investors make the case that climate disclosure will be used to drive capital market decisions, companies will see that it's important," said TCFD expert Mike Krzus, a sustainability analyst and senior advisor to BrownFlynn.

For example, ShareAction, a U.K.-based NGO, and Boston Common Asset Management LLC organized a campaign representing $1 trillion in assets under management to implement TCFD recommendations at 60 of the world's largest banks. Also last month, insurer Axa said it's pulling $2.8 billion from coal interests, nixing investment in oil sands operations and ceasing to insure these projects. 

Breaking it down

The TCFD framework consists of three sections:

• Core recommendations

• Implementation guidance

• A technical annex on scenario analysis

The main objectives of the TCFD are to provide guidance on whether companies disclose information to investors about how their decisions impact their exposure to climate risk and how they are assessing and managing those risks; to complement existing disclosure frameworks without adding complexity; and to guide implementation.

This is relevant for companies in all sectors but particularly for those in the energy, transportation, materials and buildings, agriculture, forest products and the financial sectors. Financial sector companies could face added complexity in assessing risk and reporting, however, as they're exposed across their portfolios and potential holdings in thousands of companies, EY's Doherty said.

Executives should be aware of four branches of disclosure under the TCFD, according to the World Business Council for Sustainable Development: Governance; strategy; risk management; and metrics and targets.

• Under governance: Disclose the board's oversight of climate risks and describes management's role in assessing and managing risks and opportunities.

• Under strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on business and financial planning where the information is material.

• Under risk management: Disclose how the organization identifies, assesses and manages climate-related risks and how they are integrated into the organization's overall risk management.

• Under metrics and targets: Disclose data used to assess and manage climate-related risks and opportunities where the information is material, discuss the organization's Scope 1, 2 and 3 greenhouse-gas related emissions and targets to manage these risks.

The report also helps companies understand their specific climate-related risks and opportunities, whether physical or transition risks.

Transition risk, as defined by PwC, can be from litigation, emerging policy and legal regulation aimed at addressing climate change. For example, Canada will impose a carbon price by 2018, which will affect industries including mining, oil and gas and auto.

Transition risk also can touch upon the impact of emerging technologies that support the global low-carbon transition. For example, innovations in renewable energy and electric vehicles will affect the business models of companies in related sectors.

Market risk falls under the transition, too, as the cost of renewable energy drop and adoption is increased. Lastly, there is the risk of reputational damage as customer sentiment shifts towards climate change awareness or investors divert funds from fossil fuels.

Physical risks can be acute — from severe weather events — or chronic, from long-term changes in weather patterns. According to PwC, a British supermarket chain found that 95 percent of its supply chain is vulnerable to disruption from climate change.

"The TCFD wants companies to understand how these risks manifest and impact company's cash flows, balance sheet and income statement," Doherty said. "There are also opportunities for companies as the world transitions to renewable energy and technical innovation to reduce greenhouse gas emissions. Companies at the forefront can increase revenue to their strategic advantage, and that shouldn't be overlooked."

From idea to reality

Companies might at first face a disclosure learning curve.

Global 500 companies will lead the way, Krzus said, as they have the expertise and resources to conduct meaningful climate-related scenario analysis. Surprisingly, oil and gas majors are making some of the biggest strides towards disclosure, according to a research paper written by Krzus and Harvard Business School professor Robert Eccles and focused on the feasibility of scaling TCFD adoption.

Case in point? In December, Exxon Mobil said it would disclose details on how it will be affected by climate change due to shareholder pressure.

"The oil companies were making disclosures about long-term strategy even before the task force came out with recommendations," Krzus said. 

The writers chose the industry that seemed to be the most challenged by the recommendations, examining the disclosures of 15 of the largest oil and gas companies that had filed a 10-K or 20-F in 2016. They found that the sector led other industries in planning for a renewables future, followed by chemicals and transportation. Eni, Exxon Mobil and Statoil provided the most robust disclosures.

"I believe the oil and gas companies are making investments and exploring innovations around climate change because they see a potential end to their existing business model if they try to maintain the status quo," Krzus said. "Their motivation may be self-interest, but it is in their shareholders' best interest if these companies make investments today that will keep them profitable in 30 years."

As for how to start the enormous task of disclosure, there is the Climate Disclosure Standards Board (CDSB) Reporting Framework, which helps companies to implement TCFD recommendations by placing the information in the mainstream report.

The CDSB framework supports companies in their transition and allows them to share best practices, creating momentum for voluntary disclosure. Hannon Armstrong (HASI), an NYSE-traded real estate investor dedicated to sustainable infrastructure, was the first U.S. company to implement the CDSB's Task Force guidelines. Noted the company's president and CEO, Jeffrey Eckel: "In a world increasingly defined by carbon, superior risk-adjusted returns will be achieved by investing on the right side of the climate change line."