INVESTMENT COMMUNITY PERSPECTIVE

It’s been nearly four years since the Paris Agreement brought 196 nations and countries together around a central mission: limit greenhouse gas emissions and keep temperatures from rising more than two degrees Celsius above preindustrial levels. Since then, a remarkable thing has happened in the investor community. More shareholders, and more companies, began to look closely at the risks and opportunities of climate change. For investors and Boards, the primary question has become: Just how resilient are our assets in the face of climate change?

Finding a way to answer this question fell to the Task Force on Climate-related Financial Disclosure (TCFD), established in late 2015 by the Financial Stability Board, the organization responsible for monitoring the welfare of the global financial system. Chaired by New York Mayor Michael Bloomberg and drawing a wide range of members from various industries and backgrounds, the TCFD was charged with creating a framework companies could use for disclosing their approach and exposure to climate-related risks and opportunities to investors and other stakeholders.

For both shareholders and the companies they invest in, it was about addressing questions on exposure, adaption and mitigation. For example, understanding how extreme storms, droughts and floods were taking a toll on the overall economy, and not just in higher insurance premiums and lower real estate values. What’s more, with renewable energy on the rise, companies that relied on fossil fuels needed to address the existential risk of diminished demand.

Much has happened since those early days of the TCFD. In 2017, the Task Force finalized its recommendations for creating consistent, comparable and reliable climate-related disclosures. That same year, U.S. President Donald Trump pulled the world’s largest economy out of the Paris Agreement – the very accord that gave rise to the TCFD in the first place. Yet public, local government and institutional support for the task force, its guidelines and for sustainable finance in general has only heightened.

In September 2018, the TCFD published a survey of more than 1,700 companies from around the world. The results showed that climate-related disclosure had reached the mainstream. “Over 500 companies are now supporters of the TCFD, including the world’s largest banks, asset managers and pension funds, responsible for assets of nearly $100 trillion,” Mark Carney, Chair of the Financial Stability Board, said at the time.

At Jarislowsky Fraser (JFL), we value TCFD-aligned corporate reporting as part of our investment process. JFL has been a trusted institutional investor for many decades, and we believe our fiduciary duty is to consider all the material risks associated with investments that we make on behalf of clients – and climate change brings with it the gamut of risks and opportunities affecting the strategy and resilience of a business. A ‘finance-only’ perspective in corporate reporting is, therefore, too narrow in scope and depth. As long-term stewards of our clients’ capital, JFL believes in understanding how companies are managing their exposure to climate change risks and opportunities. We also recently published our inaugural report on how we’re monitoring and managing climate risk on behalf of our clients.

What the TCFD brings is not just a long-term focus, but also a common framework to drive comparability and consistency. It’s a language for companies to discuss climate change, to weigh risks and to explore opportunities. It involves a number of ways to evaluate governance, business strategy, risk management, metrics and targets. It allows us to be better informed and equipped to engage with companies as well as investors, who are increasingly keen to understand how their capital is exposed to climate change.  

It’s also important to note that the TCFD considers the impact of climate change on a company’s performance rather than a company’s impact on the climate, making it a framework that is relevant across sectors. Of course, resource-based companies are among those on the front lines here. But we are also looking at sea changes in our society that could have a systemic impact on the broader economy, and society. To make better informed investing decisions, we need complete and robust performance data across all industries that measure how well businesses are adapting their technologies, practices and strategies to these new realities.

The TCFD guidelines are voluntary, and Boards should take a pragmatic approach, disclosing what they feel is relevant to their business and their investors. That said, the end goal for all companies should be the same: to put a clear lens on their organizational exposure and capacity to innovate, adapt and mitigate. There’s no single prescribed method for disclosure. Instead, companies should adopt the means that make the most sense for them with a focus on timeliness and the robust quality of the disclosure. From a user standpoint, many investors may start by looking to the Carbon Disclosure Project (CDP),the not-for-profit, as a one-stop, global, TCFD-aligned database for assessing environmental impact.

TCFD is gaining traction as the global standard. Here at home, CPA Canada is encouraging members of the accounting profession to familiarize themselves with the recommendations. The Government of Canada also signalled support for the TCFD in its 2019 budget, and the Bank of Canada included climate change risk for the first time in its 2019 Financial System Review, specifically pointing to the TCFD and its merits. It’s still early days for the framework, and there’s room for refinement. At JFL, we see this as a journey, but one that we must start. We encourage companies to do the same, as progress is more important than perfection.