Renewable company climate risk financial reporting management
Globally, there have been many rising concerns from various governments and regulators about the impacts of various serious climate risks on leading companies
Renewable finance and investment management 151 globally plus how well prepared they are able to handle these. Many stock markets globally have implemented “Environment, Social and Governance (ESG)” reporting requirements on their listed companies. Good examples of actions by leading stock market regulators included the Hong Kong Stock Exchange and the Philippine Security Exchange Commission. Both the Hong Kong Stock Exchange and the Philippine Security Exchange Commission have stipulated new ESG reporting requirements for their listed companies. However, financial experts have advised that in addition to ESG reporting there should be climate risk reporting as these could poise serious environmental and reputational impacts that could seriously affect the sustainability of various businesses plus their future financial performances and results.
In the G20 Finance Ministers meeting in 2015, it was generally agreed that the first step towards better management of climate change and climate risks by business would be to improve the accurate measurement and reporting of these important areas. Hence, Mark Carney, the International Financial Stability Board (FSB) Chair, was asked to create the G20 Task Force on Climate-Related Financial Disclosures (TCFD) in December 2015. The G20 TCFD was chaired by Michael Bloomberg and composed of 32 industry leaders across the world. They have undertaken extensive engagements, surveys and reviews with over 30 countries across the world in developing their recommendations and report over a two-year period.
In the April 2017 meeting of the G20 Finance Ministers and Central Bank Governors, they generally accepted the TCFD recommendations and supported their voluntary adoption by companies and banks globally. As it is a private sector report, the G20 Ministers did not have to approve the report. However, it is worth noting that the April 2017 meeting of the G20 Finance Ministers and Central Bank Governors generally accepted the TCFD recommendations and supported their voluntary adoption by companies and banks globally. Looking ahead, it is likely that some key countries will be leaning towards introducing new regulations in future to enforce the TCFD recommendations. Some other countries might prefer softer approaches such as recommended guidances for voluntary adoption. Looking ahead, it is generally believed that these new TCFD recommendations will become important new international requirements, which leading companies and banks globally will have to meet and comply with in future. Otherwise, they could face serious challenges and even lawsuits from the regulators, media, investors, shareholders and stakeholders.
In June 2017, the G20s Financial Stability Board’s “Task Force on Climate-Related Financial Disclosures” (TCFD) published its final report and recommendations which contained detailed recommendations on voluntary climate-related financial disclosures. The Task Force on Climate-Related Financial Disclosures (TCFD) Report recommended that leading banks and companies should make their future climate disclosures in line with a new framework underpinned by seven key principles. Their recommendations sought to balance the global need to raise the bar for existing climate financial disclosure standards, together with the desire to achieve widespread adoption by leading banks and companiesglobally. They have provided new guidelines on how leading banks and companies globally should use their mainstream, and publicly available, financial reporting instruments to report on their climate change risks and opportunities which they would face in the short, medium and long term. In general, the TCFD recommendations represented very carefully considered, open and transparent new approaches for climate-related financial disclosures by leading banks and companies. The TCFD team has also identified some key industrial sectors globally that could suffer higher climate risk internationally. These sectors included the energy, transportation, construction, agriculture, food and forestry sectors (G20, TCFD Report, 2017).
Recognising that these new approaches would evolve over time, the Task Force has developed a set of seven key principles to underpin the new disclosures that companies should prepare. The TCFD Report recommended leading companies and banks globally to report on four key corporate areas covering climate governance, climate strategy, climate risks and management targets.
On climate governance, it has been recommended that the boards of leading banks and companies should disclose details of their new governance processes and systems for assessing and managing climate change-related risks and opportunities. These should include the governance systems via which the boards would be overseeing climate governance plus the associated governance processes. These should include how frequently would the board be informed on progress and how they would review these with their top management. In addition, the boards should disclose how they would be assessing the actual governance outcomes against major business plans or risks. In addition, the boards should define what would be the top management’s roles and accountabilities in addressing these climate-related risks and opportunities.
On climate strategy, the company boards and senior management would be required to report on various climate strategies and scenarios that they have considered. These should include what would be the actual and potential impacts of climate changes on the business and performances of leading banks and companies. They should also consider climate impacts on their business organisation, strategy and financial planning.
On climate risks, the senior management of leading banks and companies should give details on their climate risk assessments and risk management systems. These should include how do they will actually evaluate, identify, assess and manage climate risks plus opportunities. In addition, they should disclose their risk management systems and action plans, which they have put in place to mitigate the serious climate risks and their potential impacts on their businesses.
On climate metrics and targets, the board and senior management should give details of the appropriate climate metrics, KPIs and targets that have been established for their management and businesses to achieve. These new metrics and targets should ensure that management would be undertaking its tasks in assessing and managing climate change risks and opportunities effectively.
It is important for international banks and companies globally to recognise that climate change impacts and climate risks on their businesses could also be heavily influenced by new government policies and changes in the law. A good example is the changes in the new energy policies for fossil fuel and renewable energies that are being introduced by various key countries globally as part of their Paris Agreement commitments. There are also ever rising risks of litigation by regulators, stakeholders and shareholders globally.
In the face of all these intense international, government and shareholder pressures, leading banks and companies globally have to take these new requirements on climate-related financial disclosures very seriously. The corporate boards and top management have to put in place the necessary new systems and processes to compile with the new disclosure and reporting requirements. They will need to try their best to prepare the required corporate disclosure reports on their climate strategies and climate risks. Otherwise, they may be opening themselves to serious challenges and even lawsuits from the regulators, investors, shareholders and media.