FINANCIAL REPORTING & IR

Climate change is dominating the world’s agenda, with global warming and extraordinary weather events having devastating human effects, and increasingly material financial implications. Businesses are recognizing the potential risks and, in some cases, opportunities that the implications of climate change represent for many.

Investors and regulators are calling for more disclosure to help markets better understand the impact of climate-related risks on companies, and what their related business strategies are. However, while many leading companies are working diligently to provide relevant information to their markets, the lack of a common framework for clear and relevant disclosures is impeding insightful and comparable disclosures that investors can use to inform their investment decisions. A number of global and national initiatives have been launched in an effort to address this need, but in the absence of an agreed common set of disclosure requirements, many of the largest institutional investors have developed their own climate surveys. This leaves companies and their IR professionals scrambling to address alternative disclosure recommendations and shareholder requests.

Investors’ Concerns over Climate-related Disclosures

One of the early and widely recognized advocates for improved disclosure by financial institutions in particular was Mark Carney, former Bank of England Governor and Chairman of the Financial Stability Board (FSB). The global Task Force on Climate-related Financial Disclosures (TCFD), set up in December 2015 by the FSB, was tasked with monitoring and making recommendations on risks to the global financial system. The TCFD has developed recommendations on voluntary, consistent climate-related financial disclosures that will be useful in understanding companies’ material risks related to climate change. Nearly 1,000 public- and private-sector organizations have announced their support for the TCFD and its work, including global financial firms responsible for assets in excess of US$118 trillion.

The TCFD disclosures are intended in part for use by companies in providing information to investors, lenders, insurers, and other stakeholders. The work and recommendations of the Task Force are intended to help companies understand what financial markets need in order to monitor and respond to climate change risks.

The latest status report[1], dated June 2019, presented the following key findings based on a TCFD survey:

• Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors. The TCFD sees progress being made to improve the availability and quality of climate-related financial information. However, given the speed at which changes are needed to limit the rise in the global average temperature – across a wide range of sectors – they note that more companies need to consider the potential impact of climate change and disclose material findings.
• More clarity is needed on the potential financial impact of climate-related issues on companies. The top area identified by users of climate-related financial disclosures as needing improvement is for companies to provide more clarity on the potential financial impact of climate-related issues on their businesses. Without such information, users may not have the information they need to make informed financial decisions.
• The majority of companies using scenario analysis do not disclose information on the resilience of their strategies. Among companies responding to the TCFD survey, three in five that view climate-related risk as material, and use scenario analysis, do not disclose information on the resulting assessment of the resilience of those strategies. This is consistent with the TCFD’s understanding (from initial discussions with various companies, industry associations, and other groups) that companies will need time to develop climate-related scenario analysis capabilities, evolve their approaches and learn how to integrate scenarios into the corporate strategy formulation process.
• Mainstreaming climate-related issues requires the involvement of multiple functions. While sustainability and corporate responsibility functions were often the early drivers of TCFD implementation efforts, risk management, finance and executive management are increasingly involved as well. The TCFD believes involvement of multiple functions, especially risk management and finance, is critical to mainstreaming the response to climate-related issues.

Other Global Initiatives

The International Accounting Standards Board’s (IASB) IFRS Standards don’t address climate change explicitly. However, IFRS does address related issues, as explained in a 2019 IASB release discussing how existing requirements within IFRS Standards relate to climate-change risks and other emerging risks.

The IASB is expected to publish an Exposure Draft with updates to the 2010 IFRS Practice Statement 1: Management Commentary. The IASB noted that the revision of the Practice Statement is intended to promote preparation of management commentaries (e.g. Management Discussions & Analysis, or MD&A) that better meet the information needs of the primary users of financial reports.

Enhanced EU and National Requirements and Guidance

The EU and some national financial services and securities regulators (for example, in Australia, the U.K., China and Canada) are also taking action. In addition to reporting requirements, listing rules and stewardship codes are being enhanced with explicit references to climate-related financial disclosures. Additional recommendations have been made to regulated companies in these jurisdictions to consider when providing disclosures.

CPA Canada recently released a publication titled Disclosing the Impacts of Climate Change: A Process for Assessing Materiality, which gives step-by-step guidance for Canadian public companies to providing material information related to climate-related risks in regulatory filings, such as MD&A, Annual Information Filing (AIF) and others.

In summary, institutional lenders, insurers and investors have increasing interest in understanding the effects of climate change on the businesses to which they provide capital. Although existing IFRS Standards do address some related issues, in the absence of a universal disclosure framework, IR professionals are experiencing significantly growing pressure to understand the climate-related needs of their investor community, study what others in their sector are disclosing and help ensure the legitimate information requirements of their investor community are met.

Terry Liu, CPA, CA is a Senior Manager, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.