Climate Risk Disclosure

One of the most significant risks that businesses face today is climate change. Understanding and disclosing its impacts and risks throughout the value chain is an issue that has been rapidly rising in prominence in the global financial, political and corporate agenda.

A common misconception is that climate change only has long-term implications. As a result, companies can find it difficult to properly integrate climate issues on decisions made today, on a shorter business cycle.

It’s admittedly difficult to understand how to fix this problem. But Mark Carney, the Governor of the Bank of England, has emerged as an unlikely leading voice of reason thanks to his understanding of the financial risks of climate change and their potential impact on global markets. These could be shocks and losses from radical changes in energy use and the revaluation of carbon-intensive assets, or of those that depend on the extraction or use of fossil fuels.

The carbon budget

Carney has underlined the importance of understanding the ‘carbon budget’ which is the amount of carbon that the world can emit before failing to meet our global climate commitments.

If we are serious about keeping warming below 2oC, many fossil fuel reserves will be ‘stranded’: oil, gas, and coal will be unburnable without expensive carbon capture and storage technology

And the value of related stocks and companies and their shareholders – institutional investors, pension funds, mutual funds, etc. – will all be affected. That will in turn impact everybody.

To ensure that companies are taking carbon budgets and the risk of climate change seriously there have been many shareholder resolutions put forward to fossil fuel companies, asking them for greater reporting of how they plan to meet global climate commitments or even asking them to put climate experts on their Boards.

Risk disclosure

With such huge risks to the global economy, there is increasing pressure from investors and other stakeholders for businesses to understand and disclose the risks and opportunities of climate change for their business. The Financial Stability Board and the G20 have recently formed a Task Force on Climate-Related Financial Disclosures to develop recommendations for voluntary climate-related financial disclosures targeted at lenders, insurers, and investors.

The Task Force’s 32 international members, led by Michael Bloomberg (former Mayor of New York) and set up by Mark Carney, include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies.

The Task Force released initial findings in December 2016 which they believe, if adopted globally, could “promote more informed investment, credit, and insurance underwriting decisions” and, in turn, “would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.”

The Task Force released its final recommendations in June 2017 including four widely adoptable recommendations on climate-related financial disclosures, focusing on governance, strategy, risk management and metrics and targets.

Companies all around the world can also disclose their climate change risks and opportunities voluntarily through the CDP (formerly Climate Disclosure Project) and some will be mandated to report their greenhouse gas emissions to their governments (including in the UK).

Putting a price on carbon

A crucial mechanism for disclosing financial climate risks is for companies to account for the cost of carbon from their operations and products. People are starting to ask companies to be transparent about what their real costs are, including the external impacts they have on the world and climate around them.

Putting a price on carbon incorporates climate change impacts as a core metric into the business discussion in an unprecedented way.

Ensuring economic and financial stability is essential to facilitating a smooth transition to a lower-carbon economy. The first step towards this is the recognition that we manage what we measure – and thus of the critical importance of measuring, disclosing, and mitigating climate risk.

At Ecosphere+

We work with companies to mitigate their climate risk. Placing a price on trees, so that they are worth more alive than dead, accounts for their true value to society, health, sustainable development, biodiversity and, of course, climate change.

Read more about how buying forest carbon assets can help investors and industry mitigate their climate risk.