As the FSB climate reporting task force continues its deliberations, CDP's Jane Stevensen sets out the principles that should underpin effective disclosure
The potential engagement of G20 finance ministries and central banks could transform how companies disclose climate-related information – and how investors consume and understand that information. Given the high profile of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), its recommendations, due in November, will help shape the evolution of climate risk disclosure globally.
At the Carbon Disclosure Project (CDP) and our sister organisation, the Climate Disclosure Standards Board (CDSB), we have been engaging with and supporting the TCFD as it develops its thinking, sharing our 15 years of experience in promoting investor-relevant corporate climate disclosure. At this point in the task force's deliberations, we felt it would be timely to set out how we see corporate climate disclosure evolving.
Investors and other users of climate information, such as regulators, want to have a more complete picture of a company's ability to transition to a low-carbon economy than is currently the case. In a recent white paper, entitled From Data to De-risking, we suggest five principles that should underpin the future of disclosure with this goal in mind.
Key principles
First, climate disclosure guidance should be 'regulatory ready'. The TCFD recommendations will be voluntary and, as voluntary organisations ourselves, we understand the need for regulatory 'gaps' to be filled by voluntary practice. But voluntary recommendations need to be drafted with regulatory frameworks in mind: robust enough to allow for legal enforceability; able to be consistently adopted across jurisdictions; and prepared with the compatibility with existing models of mainstream reporting in mind.
Second, disclosure should also be to the benefit of disclosers. If environmental disclosure frameworks are properly constructed, disclosing companies can derive real benefits from them. Disclosure can help to highlight exposures and opportunities for companies, while setting targets can help integrate sustainability objectives into corporate strategies. If companies can see the benefits of disclosing, disclosure rates rise, and opposition to mandatory disclosure requirements is reduced.
Third, existing financial and non-financial disclosures typically focus on past performance. Such backward-looking snapshots will not provide an adequate guide to climate risk, given the magnitude of changes expected to our climate, to economies, to regulations and to markets. There is a role here for accounting standard-setters and regulators, to help companies overcome challenges they face in making forward-looking statements.
Fourth, given that climate risk is a fast-changing field, guidance, recommendations and policy must allow for new types of climate-related information to be incorporated. Regulators, investors and companies themselves need to be mindful of the ultimate objective – economy-wide decarbonisation leading to a well below 2°C pathway – rather than focusing on narrower targets.
Finally, climate-related disclosure needs to help investors influence corporate behaviour towards minimising climate risk. Disclosure should help investors understand if they need to engage with companies to help them better contribute to the well below 2°C goal, shift investment away from risky stocks, or increase investments in companies developing solutions-orientated services and business models.
Practical processes
These five principles will, we believe, help make climate disclosure fit for purpose, enabling investors to de-risk portfolios and regulators to effectively guard against systemic exposures. But, as our experience has also taught us, there are important practical steps to be taken to ensure that adequate infrastructure exists to help companies to disclose efficiently, and ensure that investors and other stakeholders can easily access and analyse the information.
The process of disclosure is made considerably more straightforward if a common global platform is in place through which organisations can disclose, and if a common reporting language is adopted, alongside structured digital reporting using a standard such as XBRL. There is also a need, especially with voluntary disclosures, for quality control mechanisms, to guard against boilerplate declarations, or inaccurate or misleading reporting, which can quickly undermine the credibility of entire reporting programmes.
CDP and CDSB are hugely supportive of the work of the TCFD, and we are excited about the potential it offers to promote disclosure directly, and to encourage wider initiatives, guidance and regulation. We stand ready to help build the global infrastructure to support more material, insightful and actionable climate disclosure.
Jane Stevensen is engagement director to the Task Force for Climate-related Financial Disclosures at CDP and CDSB
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