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ARE YOU READY FOR CLIMATE-RELATED FINANCIAL DISCLOSURES?

ARE YOU READY FOR CLIMATE-RELATED FINANCIAL DISCLOSURES?

17.05.2018

We increasingly feel the impacts of Paris Agreement, the global framework of climate action, on every aspect of the economy since the agreement has come into force. One recent –and critically important- example to such impacts is the set of recommendations suggested by G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). Driven by the momentum this roadmap triggered, disclosing information regarding how climate risks affect companies as well as how companies affect climate change and how they manage these risks is becoming a norm. To put in a nutshell: in parallel with the changing climate and economic system a new era of disclosure focusing on financial stability and sustainability of companies is on our doorsteps, and we should get ready for it. 
 
What are TCFD Recommendations and What Change They Bring?

Adoption of the Paris Agreement signalled the dawn of transition to a low (and ultimately zero) carbon economy. The agreement’s ultimate targets (limiting the temperature increase at 2oC, and if possible as close as to 1.5oC) require an unprecedented transformation of the current socio-economic system and its actors at a minimum speed of human-induced climate change. Meanwhile, the management of climate-related risks and unavoidable adverse impacts has utmost importance. TCFD provides a solid framework and set of recommendations, which we can utilize at the post-Paris world where business-as-usual is no longer acceptable and sustainable. In this new era, physical risks (such as hydro-meteorological extreme events) and transitional risks (such as regulatory changes) associated with climate change as well as the issue of how these risks are managed are on the radar of investors, regulators, and decision-makers. From now and on, such information is in demand and in some cases (like France’s Article 173) related disclosure is a must. TCFD recommendations bridge this perspective gap and propose layers and actions (Figure 1). 

Figure 1. Summary of TCFD recommendations (TCFD, 2017)

According to the TCFD, understanding the governance and risk management context, which brings about the achievement of good financial results, has been turning out to be critical. As the climate-related risks and transition to a lower carbon economy affect almost all sectors and industries both investors and institutions should consider longer-term strategies in the light of science-based and Paris Agreement-aligned climate, energy and economy scenarios. In order 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 of G20 established an industry-led task force, and after 18 months of intensive consultations, final set of recommendations become public. The recommendations and framework of disclosure primarily focus on the resilience of an organization’s strategy, taking into consideration different climate-related scenarios. The new disclosure perspective does not replicate current reporting practices such as CDP, GRI, integrated reporting; rather, enhances their scope. These reporting frameworks already aligned their question sets with TCFD recommendations. The ultimate aim is to integrate financial reporting practices with climate-related disclosures and provide a quantitative reflection supported by new metrics.

Recommendations Diffuse Around the World

As of April 2018, more than 250 institutions around the globe back TCFD recommendations and pledge to implement them. Among these supporters, there are investors, banks, insurance underwriters and companies from all sections of the global economy. The overarching patronage of global structures and platforms also exists. For instance, G20 Climate and Energy Action Plan and European Commission High-Level Expert Group on Sustainable Finance report on “Financing a Sustainable European Economy” give explicit reference to TCFD recommendations. Some G20 countries (like France) adopted regulations that require companies to conduct climate stress test and disclose their findings. Existing non-financial reporting schemes (such as GRI and CDP) are being aligned with the TCFD recommendations.  

Where are We in Turkey and How Can We Prepare? 

A recent report published by Carbon Disclosure Project examines 1681 companies’ (51 of which are from Turkey) readiness to TCFD recommendations. According to the study, 83% of these companies are aware of climate-related physical risks and 88% of them are aware of transitional risks that a lower carbon economy brings but this awareness level does not reflect on ambitious climate-related action. When it comes to climate-related risks and company’s impacts on climate change, most companies solely focus on past and present rather than future. Therefore, this half picture largely ignores the assessment of climate impacts on assets and investments as well as climate impacts of them. A wider perspective is needed in the post-Paris era (Figure 2).  

 Figure 2. A new perspective in the light of TCFD recommendations (France Sustainable Investment Forum, 2016)

Insomuch as companies own TCFD recommendations and implement them, it will become more viable for companies to mitigate climate-related risks, minimize the negative impacts on financial stability and take advantage of opportunities associated with the low carbon global economy. In this sense, Turkey based companies are in no different position than the others in the world. So, what companies can do at the very first stage? Familiarizing with the TCFD recommendations, embracing them and embedding relevant information into the existing reporting practices could be a no-regret start. In order to advance, companies should practice linking qualitative and non-financial information with quantitative and financial data. To do this, new technical muscles need to be developed such as applying scenario based climate risk assessment, developing new metrics and KPIs, assessing climate value-at-risk, conducting climate stress test on current asset and future investment portfolios.

In short, a new era harmonious with Paris Agreement but challenged by climate risks knocks the door and early adopters will benefit the most from it. Therefore, it is wise to develop capacity, start disclosing with available information and cooperate with experienced institutions along the way.