Is your company disclosing its climate risk?

We discuss below the final report of the Financial Stability Board’s taskforce on climate related financial disclosures.

This report is not binding on any company, as it has not yet been translated into a formal accounting standard. But it is an authoritative report produced under the auspices of a weighty G20 institution. As such we would anticipate the auditing and accounting standards industry to give it some weight.

In the meantime institutional investors could reasonably use this report in meetings with company management to ask why it is or isn’t being followed.

Once public companies start making, and auditors start requiring these disclosures we expect public companies management of climate risk to improve.

We note that the CEO for Boral, a building materials company, made a point of talking about the company’s reducing GHG emissions at this week’s AGM. To us this is a straw in an increasing wind.

The AGL management team recently won an award for climate risk related disclosures

Bank lending to business exposed to climate risk and insurance company risks are something that clearly should concern investors in those businesses and which the organisations could these days be reasonably expected to disclose.

Even if the risks are only realized some years in the future, failure to disclose today could be seen adversely by impacted shareholders in the future. The risk can be mitigated by disclosure.

FSB – Task force on climate related financial dislcosures

In 2009 the Financial Stability Board [FSB]  was established by the Heads of State of the G20 to replace the Financial Stability Forum in 2009. Hosted in Switzerland by the BIS , the FSB’s mission is to promote financial stability.

G20 reserve banks or equivalent are members as is the BIS, the IMF, the OECED and the Basel Committee on Bankins Supervision . The current Chair is  Mark Carney, Governor, Bank of England.

In 2015 the FSB established a task force, chaired by Michael Bloomberg to deal to “Climate-related Financial Disclosures”. This task force produced its Final report in June 2017.

As the foreword states:

“The Task Force’s report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. …..

Since the Task Force began its work, we have also seen a significant increase in demand from investors for improved climate-related financial disclosures. “

The report states that globally the expected transiton to a lower-carbon economy is estimated to require around $1 trillion per year of investments.

Comment

ITK observes its obvious that the entire value of the global coal, oil and gas industry is at risk from climate change, never mind the insurance industry and no doubt many others that may be less obvious. To anyone who studies the utilities industry or the car industry the risks and opportunities of climate change are obvious today.

The European utility industry has already seen enormous value shifts from the moves towards renewables and the penalties on coal. The entire global auto industry is on the point of pivoting away from petrol.

It’s not just industries the relative power of entire economies can be effected. Russia is heavily oil dependent for instance. So to us the need for companies to make  disclosures is becoming obvious.

Back to the report….

Key features of recommendations

• Adoptable by all organisation
• Included in financial filings
• Designed to solicit decision-useful forward looking information on financial impacts
• Focus on risks and opportunities related to the transition to lower carbon.

Obligation to disclose material information

“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 “

Three figures from the report that summarise the approach

We present three figures that summarise the main points of the task force.  These deal with

• Risks & Opportunities and the flow to financial statements
• Disclosure headings and recommendations
• Supplemental guidance for financial sector and GHG heavy industry. A large part of the ASX 100 would fall within the financial sector and GHG heavy sector.

The good thing about this report is that the principles are straightforward. The detail is clearly difficult and complex, but hey, that’s why you have senior management and accounting teams at public companies.

Risks and opportunities

Disclosure headings and disclosures

Industry specifics

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.