Coming Soon: A Global Roadmap for Climate Risk Disclosures

These efforts are coming none too soon, as natural catastrophes as a result of global warming have caused billions of losses to financial institutions over the past decade. 

A common standard has long been lacking in the field of climate risk reporting. 

Although understandable as climate risk disclosure is a fairly new comer to the financial reporting stage, the lack of consistency has led to misreporting, misunderstandings, and missed opportunities in terms of promoting sustainability. 

This lack of uniformity has also led to greenwashing — a practice where companies exaggerate their responses to climate change or underplay how global warming is likely to affect their business. 

Disclosure of climate-related financial information is a prerequisite for financial firms for two reasons: 

1. To manage and price climate risks appropriately 
2. Make lending, investment or insurance underwriting decisions based on their view of transition scenarios

The Foundation: TCFD 

Both the EC and FSB are building on requirements already established in the Task Force on Climate-related Financial Disclosures (TCFD). 

The FSB originally created TCFD in 2015 to develop a set of voluntary disclosure recommendations for use by companies to provide such decision-based information to investors, lenders and insurance underwriters. 

The TCFD published its disclosure recommendations in 2017, which set out a comprehensive framework that has been developed by, and is directly responsive to the needs of, users and preparers of financial filings across a range of financial and non-financial sectors around the world. 

But adherence to the TCFD has been strictly voluntary and adoption has been patchy at best. 

With these new programs, the EC and the FSB hope to change this to a more universal acceptance, implemented by all members in the private and public sector. 

What to Expect 

In her article from Forbes, “Climate Change Is A Key Priority To The G20 And Financial Stability Board,” Mayra Rodriguez Valladares, Senior Contributor, explains, “…the FSB roadmap is likely to cover key areas such as identifying and filling remaining data gaps in assessing financial risks, promoting consistent high-quality corporate disclosures, monitoring vulnerabilities, and encouraging consistent supervisory and regulatory frameworks.” 

Consistency is only one aspect of the EC’s directive. The European Commission package consists of three parts: 

• The EU Taxonomy Climate Delegated Act, which aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU’s environmental objectives. 
• A proposal for a Corporate Sustainability Reporting Directive (CSRD), which aims to improve the flow of sustainability information by making it more consistent, so that financial firms, investors and the broader public can use comparable information. 
• Finally, there are six amending Delegated Acts on fiduciary duties, so that financial firms, advisers, asset managers, or insurers will include sustainability in their procedures and their investment advice to clients. 

While companies will have to wait until July for the FSB, the EC hopes to have a common language proposal by the end of May. Stay tuned for more specifics on both programs as they become available.