Eighteen years ago, a small group of climate enthusiasts from the worlds of finance and investment formed the Carbon Disclosure Project, now known as CDP, from a windowless basement in London. Their hugely ambitious aim was to encourage every business worldwide to report climate change-related data, such as their greenhouse-gas emissions, to investors.
Fast forward to last June and the release by financial leaders Mark Carney and Michael Bloomberg of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, and one can see how CDP’s ambitious dream is now being realised.
The TCFD recommends that all companies and investors disclose climate-related information alongside their mainstream financial filings. It consolidates climate risk as a key boardroom topic, and its progress in its first year has been impressive. Already, more than 250 companies, with a total market cap of over $6.6 trillion (including more than 160 financial firms responsible for assets of over $86.2 trillion) have publicly expressed support for the initiative.
How TCFD makes a difference
So how has the TCFD changed things for investors? Most already use and benefit from a wealth of environmental and climate-change investment research, with giants MSCI, Bloomberg and Sustainalytics all providing CDP and other ESG data to mainstream investors around the world.
As every investor knows, the more comprehensive and consistent the information, the better one’s ability to make informed decisions when building a portfolio. This is certainly the case when it comes to measuring companies’ exposure to climate change effectively and managing the resulting challenges and opportunities.
The TCFD helps consolidate CDP’s work over the last 18 years with companies and investors, recommending four categories of climate-related financial disclosures (that are applicable across sectors and jurisdictions). By standardising the type of content disclosed across key areas – governance, strategy, risk management, and metrics and targets – TCFD enables investors to make more and more decisions that integrate climate risk into them.
It also enables more informed engagement activity – critical at a time when shareholders are pushing companies to analyse and report on climate risk, especially in the fossil fuel industry. Last year, shareholders of ExxonMobil, Occidental Petroleum and PPL, Pennsylvania’s largest utility, all voted for climate-related disclosure.
What’s more, the integration of TCFD within CDP’s annual climate-change questionnaire (sent to companies worldwide) has made data disclosure a straightforward procedure for businesses.
As a result, we will probably see more than 6000 companies, representing over 50 per cent of global market capitalisation, report on their climate risk in a standardised way this year.
Investors need to report, too
The investment community is not immune from the need to disclose climate data. Among financial firms, there are 160 – responsible for assets worth over $86.2 trillion – that support TCFD, including Amundi, BlackRock and Citigroup. They, like the companies in their portfolio, will be reporting on how they deal with climate-related governance, strategy and risk management, all of which are of increasing concern to pension funds and other asset owners, and feature ever more heavily in requests for proposal.
Investors who are not yet engaged need to get on the bandwagon quickly – or risk getting left behind in mandate selection and portfolio analysis.
A look ahead
TCFD has made great waves over the last year, going beyond corporations and investors to empower cities, governments and regulators to increase the quality and quantity of climate-related financial disclosures. The European Commission, and the governments of Canada, China, France, Sweden and the UK have all made public statements of support and are beginning to explore implementing the TCFD’s recommendations.
There is still some way to go, however, before we reach the tipping point, where all investors, businesses, nations and jurisdictions are using TCFD as a standard tool. In April, Carney announced that the work of the TCFD would continue into the Japanese G20 presidency in 2019, backed by two new initiatives to measure progress on company and investor support.
With the disclosure of climate impact, risk and opportunity increasingly the foundation of both investment accountability and decision-making, initiatives like the TCFD are ever more important. It may take considerably less than another 18 years for CDP’s windowless basement dream to become reality.