DRAFT – FOR DISCUSSION PURPOSES ONLY
Recommendations of the Task Force on Climate-related Financial Disclosures
i
Recommendations of
the Task Force
on Climate-related
Financial Disclosures
June 2017
Final Report
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Climate-Related Financial Disclosures: Task Force Recommendations, Papers of Financial Accounting
This report, prepared by the task force on climate-related financial disclosures, provides a comprehensive analysis of the financial implications of climate change. It highlights the need for transparent and consistent climate-related financial disclosures to support informed investment decisions. The report examines the risks and opportunities associated with climate change, emphasizing the importance of a transition to a lower-carbon economy. It also discusses the role of financial policymakers in mitigating financial dislocations and promoting a smooth transition. The report is a valuable resource for investors, lenders, and insurance underwriters seeking to understand the financial implications of climate change and make informed decisions.
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DRAFT – FOR DISCUSSION PURPOSES ONLY Recommendations of the Task Force on Climate-related Financial Disclosures i
Recommendations of
the Task Force
on Climate-related
Financial Disclosures
June 2017
Final Report
Recommendations of the Task Force on Climate-related Financial Disclosures i June 15, 2017
Letter from Michael R. Bloomberg
Mr. Mark Carney Chairman Financial Stability Board Bank for International Settlements Centralbahnplatz 2 CH-4002 Basel Switzerland Dear Chairman Carney, On behalf of the Task Force on Climate-related Financial Disclosures, I am pleased to present this final report setting out our recommendations for helping businesses disclose climate-related financial information. As you know, warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors. It is difficult for investors to know which companies are most at risk from climate change, which are best prepared, and which are taking action. The Task Force’s report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions. Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy. The industry Task Force spent 18 months consulting with a wide range of business and financial leaders to hone its recommendations and consider how to help companies better communicate key climate-related information. The feedback we received in response to the Task Force’s draft report confirmed broad support from industry and others, and involved productive dialogue among companies and banks, insurers, and investors. This was and remains a collaborative process, and as these recommendations are implemented, we hope that this dialogue and feedback continues. Since the Task Force began its work, we have also seen a significant increase in demand from investors for improved climate-related financial disclosures. This comes amid unprecedented support among companies for action to tackle climate change. I want to thank the Financial Stability Board for its leadership in promoting better disclosure of climate-related financial risks, and for its support of the Task Force’s work. I am also grateful to the Task Force members and Secretariat for their extensive contributions and dedication to this effort. The risk climate change poses to businesses and financial markets is real and already present. It is more important than ever that businesses lead in understanding and responding to these risks—and seizing the opportunities—to build a stronger, more resilient, and sustainable global economy. Sincerely, Michael R. Bloombergr from Michael R. Bloomberg
Recommendations of the Task Force on Climate-related Financial Disclosures iii ranging from $4.2 trillion to $4 3 trillion between now and the end of the century.^2 The study highlights that “much of the impact on future assets will come through weaker growth and lower asset returns across the board.” This suggests investors may not be able to avoid climate-related risks by moving out of certain asset classes as a wide range of asset types could be affected. Both investors and the organizations in which they invest, therefore, should consider their longer-term strategies and most efficient allocation of capital. Organizations that invest in activities that may not be viable in the longer term may be less resilient to the transition to a lower-carbon economy; and their investors will likely experience lower returns. Compounding the effect on longer-term returns is the risk that present valuations do not adequately factor in climate-related risks because of insufficient information. As such, long-term investors need adequate information on how organizations are preparing for a lower-carbon economy. Furthermore, because the transition to a lower-carbon economy requires significant and, in some cases, disruptive changes across economic sectors and industries in the near term, financial policymakers are interested in the implications for the global financial system, especially in terms of avoiding financial dislocations and sudden losses in asset values. Given such concerns and the potential impact on financial intermediaries and investors, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board to review how the financial sector can take account of climate-related issues. As part of its review, the Financial Stability Board identified the need for better information to support informed investment, lending, and insurance underwriting decisions and improve understanding and analysis of climate-related risks and opportunities. Better information will also help investors engage with companies on the resilience of their strategies and capital spending, which should help promote a smooth rather than an abrupt transition to a lower-carbon economy.
Task Force on Climate-related Financial Disclosures
To help identify the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities, the Financial Stability Board established an industry-led task force: the Task Force on Climate-related Financial Disclosures (Task Force). The Task Force was asked to develop voluntary, consistent climate- related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks. The 32-member Task Force is global; its members were selected by the Financial Stability Board and come from various organizations, including large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies. In its work, the Task Force drew on member expertise, stakeholder engagement, and existing climate-related disclosure regimes to develop a singular, accessible framework for climate-related financial disclosure. The Task Force developed four widely adoptable recommendations on climate- related financial disclosures that are applicable to organizations across sectors and jurisdictions (Figure 1). Importantly, the Task Force’s recommendations apply to financial-sector organizations, including banks, insurance companies, asset managers, and asset owners. Large asset owners and asset managers sit at the top of the investment chain and, therefore, have an (^2) The Economist Intelligence Unit, “The Cost of Inaction: Recognising the Value at Risk from Climate Change,” 2015. Value at risk measures the loss a portfolio may experience, within a given time horizon, at a particular probability, and the stock of manageable assets is defined as the total stock of assets held by non-bank financial institutions. Bank assets were excluded as they are largely managed by banks themselves. Figure 1
Key Features of Recommendations
Adoptable by all organizations Included in financial filings Designed to solicit decision-useful, forward- looking information on financial impacts Strong focus on risks and opportunities related to transition to lower-carbon economy
Recommendations of the Task Force on Climate-related Financial Disclosures iv important role to play in influencing the organizations in which they invest to provide better climate-related financial disclosures. In developing and finalizing its recommendations, the Task Force solicited input throughout the process.^3 First, in April 2016, the Task Force sought public comment on the scope and high-level objectives of its work. As the Task Force developed its disclosure recommendations, it continued to solicit feedback through hundreds of industry interviews, meetings, and other touchpoints. Then, in December 2016, the Task Force issued its draft recommendations and sought public comment on the recommendations as well as certain key issues, receiving over 300 responses. This final report reflects the Task Force’s consideration of industry and other public feedback received throughout 2016 and 2017. Section E contains a summary of key issues raised by the industry as well as substantive changes to the report since December. Disclosure in Mainstream Financial Filings The Task Force recommends that preparers of climate-related financial disclosures provide such disclosures in their mainstream (i.e., public) annual financial filings. In most G20 jurisdictions, companies with public debt or equity have a legal obligation to disclose material information in their financial filings—including material climate-related information. The Task Force believes climate-related issues are or could be material for many organizations, and its recommendations should be useful to organizations in complying more effectively with existing disclosure obligations.^4 In addition, disclosure in mainstream financial filings should foster shareholder engagement and broader use of climate-related financial disclosures, thus promoting a more informed understanding of climate-related risks and opportunities by investors and others. The Task Force also believes that publication of climate-related financial information in mainstream annual financial filings will help ensure that appropriate controls govern the production and disclosure of the required information. More specifically, the Task Force expects the governance processes for these disclosures would be similar to those used for existing public financial disclosures and would likely involve review by the chief financial officer and audit committee, as appropriate. Importantly, organizations should make financial disclosures in accordance with their national disclosure requirements. If certain elements of the recommendations are incompatible with national disclosure requirements for financial filings, the Task Force encourages organizations to disclose those elements in other official company reports that are issued at least annually, widely distributed and available to investors and others, and subject to internal governance processes that are the same or substantially similar to those used for financial reporting. Core Elements of Climate-Related Financial Disclosures The Task Force structured its recommendations around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets (Figure 2 , p. v). The four overarching recommendations are supported by recommended disclosures that build out the framework with information that will help investors and others understand how reporting organizations assess climate-related risks and opportunities.^5 In addition, there is guidance to support all organizations in developing climate-related financial disclosures consistent with the recommendations and recommended disclosures. The guidance assists preparers by providing context and suggestions for implementing the recommended disclosures. For the financial sector and certain non-financial sectors, supplemental guidance was developed to highlight important sector-specific considerations and provide a fuller picture of potential climate-related financial impacts in those sectors.
Appendix 2: Task Force Objectives and Approach
(^4) The Task Force encourages organizations where climate-related issues could be material in the future to begin disclosing climate-related financial information outside financial filings to facilitate the incorporation of such information into financial filings once climate-related issues are determined to be material. (^5) See Figure 4 on p. 14 for the Task Force's recommendations and recommended disclosures.
Recommendations of the Task Force on Climate-related Financial Disclosures vi
Contents
Letter from Michael R. Bloomberg ................................................................................................................... i
- A Introduction.................................................................................................................................................... Executive Summary ii
- Background
- The Task Force’s Remit
- B Climate-Related Risks, Opportunities, and Financial Impacts
- Climate-Related Risks
- Climate-Related Opportunities
- Financial Impacts
- C Recommendations and Guidance
- Overview of Recommendations and Guidance
- Implementing the Recommendations
- Guidance for All Sectors
- D Scenario Analysis and Climate-Related Issues
- Overview of Scenario Analysis
- Exposure to Climate-Related Risks
- Recommended Approach to Scenario Analysis
- Applying Scenario Analysis
- Challenges and Benefits of Conducting Scenario Analysis
- E Key Issues Considered and Areas for Further Work
- Relationship to Other Reporting Initiatives
- Location of Disclosures and Materiality
- Scenario Analysis
- Data Availability and Quality and Financial Impact
- GHG Emissions Associated with Investments
- Remuneration
- Accounting Considerations
- Time Frames for Short, Medium, and Long Term
- Scope of Coverage
- Organizational Ownership
- F Conclusion
- Appendix 1: Task Force Members
- Appendix 2: Task Force Objectives and Approach
- Appendix 3: Fundamental Principles for Effective Disclosure
- Appendix 4: Select Disclosure Frameworks
- Appendix 5: Glossary and Abbreviations
- Appendix 6: References
Recommendations of the Task Force on Climate-related Financial Disclosure 7 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C
C Recommendations and Guidance
Guidance D
D Scenario Analysis and Climate-Related Issues
Climate-Related Issues E Key Issues Considered and Areas for Further Work
F Conclusion
Conclusion Appendices
A Introduction
Recommendations of the Task Force on Climate-related Financial Disclosures 2 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices areas for possible further work, and the possible roles the FSB and others could play in taking that work forward. The discussions continually returned to a common theme: the need for better information.”^14 In most G20 jurisdictions, companies with public debt or equity have a legal obligation to disclose material risks in their financial reports—including material climate-related risks. However, the absence of a standardized framework for disclosing climate-related financial risks makes it difficult for organizations to determine what information should be included in their filings and how it should be presented. Even when reporting similar climate-related information, disclosures are often difficult to compare due to variances in mandatory and voluntary frameworks. The resulting fragmentation in reporting practices and lack of focus on financial impacts have prevented investors, lenders, insurance underwriters, and other users of disclosures from accessing complete information that can inform their economic decisions. Furthermore, because financial-sector organizations’ disclosures depend, in part, on those from the companies in which they invest or lend, regulators face challenges in using financial-sector organizations’ existing disclosures to determine system-wide exposures to climate-related risks. In response, the FSB established the industry-led Task Force on Climate-related Financial Disclosures (TCFD or Task Force) in December 2015 to design a set of recommendations for consistent “disclosures that will help financial market participants understand their climate- related risks.”^15 See Box 1 (p. 3 ) for more information on the Task Force.
2. The Task Force’s Remit
The FSB called on the Task Force to develop climate-related disclosures that “could promote more informed investment, credit [or lending], 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.”^16 ,^17 The FSB noted that disclosures by the financial sector in particular would “foster an early assessment of these risks” and “facilitate market discipline.” Such disclosures would also “provide a source of data that can be analyzed at a systemic level, to facilitate authorities’ assessments of the materiality of any risks posed by climate change to the financial sector, and the channels through which this is most likely to be transmitted.”^18 The FSB also emphasized that “any disclosure recommendations by the Task Force would be voluntary, would need to incorporate the principle of materiality and would need to weigh the balance of costs and benefits.”^19 As a result, in devising a principle-based framework for voluntary disclosure, the Task Force sought to balance the needs of the users of disclosures with the challenges faced by the preparers. The FSB further stated that the Task Force’s climate-related financial disclosure recommendations should not “add to the already well developed body of existing disclosure schemes.”^20 In response, the Task Force drew from existing disclosure frameworks where possible and appropriate. The FSB also noted the Task Force should determine whether the target audience of users of climate-related financial disclosures should extend beyond investors, lenders, and insurance underwriters. Investors, lenders, and insurance underwriters (“primary users”) are the appropriate target audience. These primary users assume the financial risk and reward of the (^14) FSB, “FSB to establish Task Force on Climate-related Financial Disclosures,” December 4, 2015. (^15) Ibid. (^16) FSB, “Proposal for a Disclosure Task Force on Climate-Related Risks,” November 9, 2015. (^17) The term carbon-related assets is not well defined, but is generally considered to refer to assets or organizations with relatively high direct or indirect GHG emissions. The Task Force believes further work is needed on defining carbon-related assets and potential financial impacts. (^18) FSB, “Proposal for a Disclosure Task Force on Climate-Related Risks,” November 9, 2015. (^19) Ibid. (^20) Ibid.
Recommendations of the Task Force on Climate-related Financial Disclosures 3 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices decisions they make. The Task Force recognizes that many other organizations, including credit rating agencies, equity analysts, stock exchanges, investment consultants, and proxy advisors also use climate-related financial disclosures, allowing them to push information through the credit and investment chain and contribute to the better pricing of risks by investors, lenders, and insurance underwriters. These organizations, in principle, depend on the same types of information as primary users. This report presents the Task Force’s recommendations for climate-related financial disclosures and includes supporting information on climate-related risks and opportunities, scenario analysis, and industry feedback that the Task Force considered in developing and then finalizing its recommendations. In addition, the Task Force developed a “stand-alone" document— Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (Annex)—for organizations to use when preparing disclosures consistent with the recommendations. The Annex provides supplemental guidance for the financial sector as well as for non-financial groups potentially most affected by climate change and the transition to a lower- carbon economy. The supplemental guidance assists preparers by providing additional context and suggestions for implementing the recommended disclosures. The Task Force’s recommendations provide a foundation for climate-related financial disclosures and aim to be ambitious, but also practical for near-term adoption. The Task Force expects that reporting of climate-related risks and opportunities will evolve over time as organizations, investors, and others contribute to the quality and consistency of the information disclosed. Box 1
Task Force on Climate-related Financial Disclosures
The Task Force membership, first announced on January 21, 2016, has international representation and spans various types of organizations, including banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies—a unique collaborative partnership between the users and preparers of financial reports. In its work, the Task Force drew on its members’ expertise, stakeholder engagement, and existing climate- related disclosure regimes to develop a singular, accessible framework for climate-related financial disclosure. See Appendix 1 for a list of the Task Force members and Appendix 2 for more information on the Task Force’s approach. The Task Force is comprised of 32 global members representing a broad range of economic sectors and financial markets and a careful balance of users and preparers of climate-related financial disclosures. 16 Experts from the Financial Sector 8 Experts from Non-Financial Sectors 8 Other Experts
Recommendations of the Task Force on Climate-related Financial Disclosures 5 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices B Climate-Related Risks, Opportunities, and Financial Impacts Through its work, the Task Force identified a growing demand by investors, lenders, insurance underwriters, and other stakeholders for decision-useful, climate-related financial information. Improved disclosure of climate-related risks and opportunities will provide investors, lenders, insurance underwriters, and other stakeholders with the metrics and information needed to undertake robust and consistent analyses of the potential financial impacts of climate change. The Task Force found that while several climate-related disclosure frameworks have emerged across different jurisdictions in an effort to meet the growing demand for such information, there is a need for a standardized framework to promote alignment across existing regimes and G jurisdictions and to provide a common framework for climate-related financial disclosures. An important element of such a framework is the consistent categorization of climate-related risks and opportunities. As a result, the Task Force defined categories for climate-related risks and climate-related opportunities. The Task Force’s recommendations serve to encourage organizations to evaluate and disclose, as part of their annual financial filing preparation and reporting processes, the climate-related risks and opportunities that are most pertinent to their business activities. The main climate-related risks and opportunities that organizations should consider are described below and in Tables 1 and 2 (pp. 10 - 11 ).
1. Climate-Related Risks
The Task Force divided climate-related risks into two major categories: (1) risks related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of climate change. a. Transition Risks Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations. Policy and Legal Risks Policy actions around climate change continue to evolve. Their objectives generally fall into two categories—policy actions that attempt to constrain actions that contribute to the adverse effects of climate change or policy actions that seek to promote adaptation to climate change. Some examples include implementing carbon-pricing mechanisms to reduce GHG emissions, shifting energy use toward lower emission sources, adopting energy-efficiency solutions, encouraging greater water efficiency measures, and promoting more sustainable land-use practices. The risk associated with and financial impact of policy changes depend on the nature and timing of the policy change.^21 Another important risk is litigation or legal risk. Recent years have seen an increase in climate- related litigation claims being brought before the courts by property owners, municipalities, states, insurers, shareholders, and public interest organizations.^22 Reasons for such litigation include the failure of organizations to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks. As the value of loss and damage arising from climate change grows, litigation risk is also likely to increase. (^21) Organizations should assess not only the potential direct effects of policy actions on their operations, but also the potential second and third order effects on their supply and distribution chains. (^22) Peter Seley, “Emerging Trends in Climate Change Litigation,” Law 360, March 7, 2016.
Recommendations of the Task Force on Climate-related Financial Disclosures 6 A Introduction
B Climate-Related Risks, Opportunities, and Financial Impacts
C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices Technology Risk Technological improvements or innovations that support the transition to a lower-carbon, energy- efficient economic system can have a significant impact on organizations. For example, the development and use of emerging technologies such as renewable energy, battery storage, energy efficiency, and carbon capture and storage will affect the competitiveness of certain organizations, their production and distribution costs, and ultimately the demand for their products and services from end users. To the extent that new technology displaces old systems and disrupts some parts of the existing economic system, winners and losers will emerge from this “creative destruction” process. The timing of technology development and deployment, however, is a key uncertainty in assessing technology risk. Market Risk While the ways in which markets could be affected by climate change are varied and complex, one of the major ways is through shifts in supply and demand for certain commodities, products, and services as climate-related risks and opportunities are increasingly taken into account. Reputation Risk Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy. b. Physical Risks Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations’ premises, operations, supply chain, transport needs, and employee safety. Acute Risk Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes, or floods. Chronic Risk Chronic physical risks refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heat waves.
2. Climate-Related Opportunities
Efforts to mitigate and adapt to climate change also produce opportunities for organizations, for example, through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market, and industry in which an organization operates. The Task Force identified several areas of opportunity as described below. a. Resource Efficiency There is growing evidence and examples of organizations that have successfully reduced operating costs by improving efficiency across their production and distribution processes, buildings, machinery/appliances, and transport/mobility—in particular in relation to energy efficiency but also including broader materials, water, and waste management.^23 Such actions can (^23) UNEP and Copenhagen Centre for Energy Efficiency, Best Practices and Case Studies for Industrial Energy Efficiency Improvement , February 16,
Recommendations of the Task Force on Climate-related Financial Disclosures 8 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices
3. Financial Impacts
Better disclosure of the financial impacts of climate-related risks and opportunities on an organization is a key goal of the Task Force’s work. In order to make more informed financial decisions, investors, lenders, and insurance underwriters need to understand how climate-related risks and opportunities are likely to impact an organization’s future financial position as reflected in its income statement, cash flow statement, and balance sheet as outlined in Figure 1. While climate change affects nearly all economic sectors, the level and type of exposure and the impact of climate-related risks differs by sector, industry, geography, and organization.^30 Fundamentally, the financial impacts of climate-related issues on an organization are driven by the specific climate-related risks and opportunities to which the organization is exposed and its strategic and risk management decisions on managing those risks (i.e., mitigate, transfer, accept, or control) and seizing those opportunities. The Task Force has identified four major categories, described in Figure 2 (p. 9 ), through which climate-related risks and opportunities may affect an organization’s current and future financial positions. The financial impacts of climate-related issues on organizations are not always clear or direct, and, for many organizations, identifying the issues, assessing potential impacts, and ensuring material issues are reflected in financial filings may be challenging. Key reasons for this are likely because of (1) limited knowledge of climate-related issues within organizations; (2) the tendency to focus mainly on near-term risks without paying adequate attention to risks that may arise in the longer term; and (3) the difficulty in quantifying the financial effects of climate-related issues.^31 To assist organizations in identifying climate-related issues and their impacts, the Task Force developed Table 1 (p. 10 ), which provides examples of climate-related risks and their potential financial impacts, and Table 2 (p. 11 ), which provides examples of climate-related opportunities and their potential financial impacts. In addition, Section A.4 in the Annex provides more information on the major categories of financial impacts—revenues, expenditures, assets and liabilities, and capital and financing—that are likely to be most relevant for specific industries. (^30) SASB research demonstrates that 72 out of 79 Sustainable Industry Classification System (SICS™) industries are significantly affected in some way by climate-related risk. (^31) World Business Council for Sustainable Development, “Sustainability and enterprise risk management: The first step towards integration.” January 18, 2017. Figure 1
Climate-Related Risks, Opportunities, and Financial Impact
Opportunities Transition Risks Physical Risks Chronic Acute Policy and Legal Technology Market Reputation Resource Efficiency Energy Source Products/Services Markets Resilience Financial Impact Strategic Planning Risk Management Risks Opportunities Revenues Expenditures (^) Capital & Financing Balance^ Assets & Liabilities Sheet Cash Flow Statement Income Statement
Recommendations of the Task Force on Climate-related Financial Disclosures 9 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices Figure 2
Major Categories of Financial Impact
The Task Force encourages organizations to undertake both historical and forward-looking analyses when considering the potential financial impacts of climate change, with greater focus on forward-looking analyses as the efforts to mitigate and adapt to climate change are without historical precedent. This is one of the reasons the Task Force believes scenario analysis is important for organizations to consider incorporating into their strategic planning or risk management practices. Income Statement Balance Sheet Revenues. Transition and physical risks may affect demand for products and services. Organizations should consider the potential impact on revenues and identify potential opportunities for enhancing or developing new revenues. In particular, given the emergence and likely growth of carbon pricing as a mechanism to regulate emissions, it is important for affected industries to consider the potential impacts of such pricing on business revenues. Expenditures. An organization’s response to climate-related risks and opportunities may depend, in part, on the organization’s cost structure. Lower- cost suppliers may be more resilient to changes in cost resulting from climate-related issues and more flexible in their ability to address such issues. By providing an indication of their cost structure and flexibility to adapt, organizations can better inform investors about their investment potential. It is also helpful for investors to understand capital expenditure plans and the level of debt or equity needed to fund these plans. The resilience of such plans should be considered bearing in mind organizations’ flexibility to shift capital and the willingness of capital markets to fund organizations exposed to significant levels of climate-related risks. Transparency of these plans may provide greater access to capital markets or improved financing terms. Assets and Liabilities. Supply and demand changes from changes in policies, technology, and market dynamics related to climate change could affect the valuation of organizations’ assets and liabilities. Use of long-lived assets and, where relevant, reserves may be particularly affected by climate-related issues. It is important for organizations to provide an indication of the potential climate-related impact on their assets and liabilities, particularly long-lived assets. This should focus on existing and committed future activities and decisions requiring new investment, restructuring, write- downs, or impairment. Capital and Financing. Climate-related risks and opportunities may change the profile of an organization's debt and equity structure, either by increasing debt levels to compensate for reduced operating cash flows or for new capital expenditures or R&D. It may also affect the ability to raise new debt or refinance existing debt, or reduce the tenor of borrowing available to the organization. There could also be changes to capital and reserves from operating losses, asset write-downs, or the need to raise new equity to meet investment.
Recommendations of the Task Force on Climate-related Financial Disclosures 11 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices Table 2
Examples of Climate-Related Opportunities and Potential Financial Impacts
Type Climate-Related Opportunities^33 Potential Financial Impacts Resource Efficiency ‒^ Use of more efficient modes of transport ‒ Use of more efficient production and distribution processes ‒ Use of recycling ‒ Move to more efficient buildings ‒ Reduced water usage and consumption ‒ Reduced operating costs (e.g., through efficiency gains and cost reductions) ‒ Increased production capacity, resulting in increased revenues ‒ Increased value of fixed assets (e.g., highly rated energy- efficient buildings) ‒ Benefits to workforce management and planning (e.g., improved health and safety, employee satisfaction) resulting in lower costs Energy Source ‒ Use of lower-emission sources of energy ‒ Use of supportive policy incentives ‒ Use of new technologies ‒ Participation in carbon market ‒ Shift toward decentralized energy generation ‒ Reduced operational costs (e.g., through use of lowest cost abatement) ‒ Reduced exposure to future fossil fuel price increases ‒ Reduced exposure to GHG emissions and therefore less sensitivity to changes in cost of carbon ‒ Returns on investment in low-emission technology ‒ Increased capital availability (e.g., as more investors favor lower-emissions producers) ‒ Reputational benefits resulting in increased demand for goods/services Products and Services (^) ‒ Development and/or expansion of low emission goods and services ‒ Development of climate adaptation and insurance risk solutions ‒ Development of new products or services through R&D and innovation ‒ Ability to diversify business activities ‒ Shift in consumer preferences ‒ Increased revenue through demand for lower emissions products and services ‒ Increased revenue through new solutions to adaptation needs (e.g., insurance risk transfer products and services) ‒ Better competitive position to reflect shifting consumer preferences, resulting in increased revenues Markets ‒^ Access to new markets ‒ Use of public-sector incentives ‒ Access to new assets and locations needing insurance coverage ‒ Increased revenues through access to new and emerging markets (e.g., partnerships with governments, development banks) ‒ Increased diversification of financial assets (e.g., green bonds and infrastructure) Resilience ‒ Participation in renewable energy programs and adoption of energy- efficiency measures ‒ Resource substitutes/diversification ‒ Increased market valuation through resilience planning (e.g., infrastructure, land, buildings) ‒ Increased reliability of supply chain and ability to operate under various conditions ‒ Increased revenue through new products and services related to ensuring resiliency (^33) The opportunity categories are not mutually exclusive, and some overlap exists.
Recommendations of the Task Force on Climate-related Financial Disclosures 12 A Introduction B Climate-Related Risks, Opportunities, and Financial Impacts C Recommendations and Guidance D Scenario Analysis and Climate-Related Issues E Key Issues Considered and Areas for Further Work F Conclusion Appendices