Whether or not you believe that global warming is a real phenomenon, and whether you support the current administration’s decision to pull the United States out of the Paris Climate Agreement, you have to admit that climate change is a hot topic (pun intended) right now. Even in the financial community.
In June, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures issued its final report of recommendations for a body of voluntary climate-related financial disclosures for lenders, insurance underwriters, and investors.
The task force presented a set of recommendations for financial companies to include disclosures of climate-related risks related to their business activities in their annual financial filings.
The Task Force was chaired by Michael R. Bloomberg—former mayor of New York City—and was made up of 32 members chosen by the Financial Stability Board representing the G-20 countries. The members cover a broad range of financial sectors and economic markets, including the U.S., Singapore, Canada, and Germany. (FSB is an international body that monitors and makes recommendations about the global financial system. Current U.S. members of the parent group include senior representatives of the Federal Reserve, Treasury, and the Securities and Exchange Commission.)
The Task Force also consulted with a wide range of business leaders and issued a draft report in December 2016, which elicited feedback prior to issuing the final report of recommendations.
Public companies already have a legal obligation to disclose material risks in their financial reports. Climate-related financial risk is arguably one of those risks, or body of risks, that should be disclosed.
Looking at climate risks
The Task Force placed climate-related financial risks into two major groups:
• Risks related to transition to a lower-carbon economy.
• Risks related to the physical impacts of climate change.
The risks related to the transition to a lower-carbon economy may impact the competitiveness of certain industries and, thereby the banks that do business with them.
Reputational risk tied to changing customer or community expectations of a bank’s contribution or impediment to the environment is an area to be considered.
Physical climate-related risks can be both short-term, such as event-driven (a natural disaster that impacts physical buildings and communities), or long-term, such as chronic drought and water shortages that impact supplies and climate patterns.
What the task force is up to
The purpose of the Task Force’s recommendations is to develop a standardized framework for disclosing climate-related financial risks. The recommendations are directed at all publicly-held organizations that file annual reports.
Specifically, organizations are encouraged to:
• Identification. Describe in their annual filings the identified short-, medium-, and long-term climate-related risks and opportunities and the impact of those risks and opportunities on the organization’s businesses, strategy and financial planning.
• Strategic response. Describe how resilient their strategies are to climate-related risks, using different scenarios, including a scenario that assumes a plus 2° C change in average global temperature.
• Environmental oversight. Describe the board’s oversight of climate-related issues and management’s role in assessing and managing the risks and opportunities.
• Risk management response. Describe the processes for identifying and managing climate-related risks and how those processes are integrated into the overall risk management process of the organization.
A personal angle
Why am I interested?
I don’t live on the East or West Coast, where I’m threatened—according to climate change advocates—by the rising sea due to melting of the polar ice caps.
However, I’m based in Colorado. I have noticed that over that past 37 years I have had to run my air conditioner more and more in the summer. I’m pretty sure we have more hot days in the summer than we use to.
I also have a brother who is an environmental lawyer who periodically asks me what banks are doing in response to climate change.
The environment and the climate affect us and affect institutions within our economy. Climate change may be so gradual that it is hardly noticeable to most of us. But, it is a set of risks like any other that should be considered and managed.
Is your bank looking at climate-change risk? Opportunities?