Conversations around climate change most often focus on how populations and companies are affecting the planet. It’s a driving force behind the rise in responsible investment on both the institutional and retail fronts.
However, investors must also understand how climate change is affecting company growth, which will also impact portfolios.
That’s the concept behind the Task Force on Climate-Related Financial Disclosures’ (TCFD) final financial reporting recommendations released last year. The Financial Stability Board created the industry-led TCFD to help identify the information that investors, lenders and insurance underwriters need in order to identify climate-related risks and opportunities. The TCFD developed voluntary financial disclosures so companies can describe how they’re measuring and responding to climate-related risks.
An expert panel discussed the disclosures at Bloomberg’s Sustainable Business Summit in Toronto last month, and how investors can use them.
“Better disclosure is really about providing all available information to the market, so the market can allocate capital efficiently,” said panel moderator Curtis Ravenel, global head of sustainable business and finance at Bloomberg, and secretariat for the TCFD.
Many companies already include climate-related information in reports, he said. So, the TCFD recommendations are seen as “a push toward more forward-looking information,” he said, and the support of large-scale investors, insurers and companies is crucial.
The task force’s recommendations are different from other initiatives because they ask companies to include climate-related information within financial filings, rather than as additional investor materials or separate reports.
The fact that companies still report on environmental and social issues separately from other financial reporting creates a challenge, said Gord Beal, vice-president of research, guidance and support at CPA Canada, during the panel. Often, “accountants are not involved in that process.”
That will change as businesses incorporate TCFD’s recommendations, he said. Adopting them represents an opportunity “for an organization to tell its story; to tell the outside world what it’s doing.” This includes illustrating how decisions around capital investment are made with climate change-related risks in mind.
In one of the four categories, the recommendations suggest that companies describe how they’re performing against targets they’ve set to manage climate-related risks. An example of what this might look like came from Walmart Canada president and CEO Lee Tappenden in a separate session during the Bloomberg summit: he cited the company’s recent investment in 30 additional Tesla Semis, all-electric trucks that will help Walmart Canada lower its greenhouse gas emissions and make its truck fleet 20% electric by 2022.
During the following TCFD session, Beal said that if climate change conversations include accountants and senior executives at major companies, the right questions will start to arise. Those include: “How are we actually operating? […] How do we manage risk? How do we fundamentally reshape our business model to address these issues?” Executives will also say, “If we have to start disclosing this information, we’d better be living up to [our targets],” he added.
The process requires “capacity, capability [and] training” around ESG disclosure, he said, but would lead to healthier businesses—benefiting investors, markets and the economy.
Samantha Hill, principal for sustainable investing at the Canada Pension Plan Investment Board (CPPIB), said during the TCFD discussion that she expects the reporting recommendations will lead to more information for investors over time, a boon for both the institutional and retail space.
“Organizations that manage ESG matters effectively are more likely to endure and to create sustainable value over the long term,” she said.
In the meantime, the pension plan has developed internal, proprietary ESG tools and a steering committee to help “identify, assess, [and] manage climate change-related risks and opportunities,” she said.
The pension plan typically looks out 60 to 80 years when measuring long-term risks, she said, with one tool measuring greenhouse gas emissions exposures in portfolios.
Along with reviewing companies’ improving disclosures when managing its pension plan investments and portfolio, the CPPIB will use the TCFD’s recommendations to communicate with Canadian investors about its own initiatives. It plans to implement the recommendations by 2021 in its own reporting.
For instance, the pension plan board seeks to “actively engage with companies to promote improved management of ESG,” particularly through voting on shareholder proposals, the CPPIB says on its website.
What insurers are doing
Other financial institutions are also keenly interested in climate issues. Property insurance policies are designed based on the potential for damage, so insurers see the impact of climate change first-hand with floods and other weather events, said Karen Higgins, executive vice-president and CFO at Guelph, Ont.-based The Co-operators Group.
“We see what [that] does to our clients and to the communities that we operate in and, frankly, we see it through our financial results,” she said. “The risks and challenges of climate change are continuing to increase.” In its 2017 annual report, the co-op wrote that climate change is leading to more severe weather events, which is why it has focused on steadily reducing its carbon emissions since 2010. Those have fallen from 23,353 tonnes of CO2 equivalent in 2010 to less than 15,000 tonnes.
Last year, the company also completed a gap analysis to see how its reporting compared to the TCFD recommendations. “We had some areas that we felt pretty good about, and some areas that we knew we needed to focus on,” Higgins said. “From that, we developed a three-year road map.”
Part of that was creating a team of experts from across its finance, strategy, risk management, actuarial, legal, investments and sustainability channels.
While improving disclosure isn’t easy, she said, “it’s going to create transparency [and will address] what we believe are real risks,” specifically on the life policy side of the business and in relation to its investment arm, Addenda Capital.
The co-operative is focusing on how to measure the effects of climate change and set related targets, which will lead to meaningful disclosure, Higgins said.
Ravenel said the important step is for companies to just get started on following the disclosures.
“I’ve heard some companies say, ‘We’re going to wait until we figure it all out.’ And I say, ‘You’re never going to figure it all out; you’ve just got to get going.’ The recommendations are really 1.0; we expect industry to deliver 2.0,” Ravenel said, meaning many companies will follow the recommendations and investors will be able to more easily identify long-term, environmental portfolio risks across industries, sectors and markets.