Climate change risk disclosure

Increasingly, action around climate change has moved from the realm of activists to the mainstream, and is now viewed by regulators, financial institutions, and the market as a business issue with material financial impacts. Recently, the Government made it clear it wished to mandate reporting of climate change related risks for listed New Zealand companies. For mandated reporting to happen, there needs to be clear guidelines around how climate change risks are classified and reported. Without a solid framework to guide this, the Government risks inconsistencies in reporting that will not generate the transparency and action around climate change risk it desires. 

The Task Force on Climate-related Financial Disclosures (TCFD) was created by the G20 to develop a set of recommendations for climate-change related financial disclosures that are “voluntary and consistent” and “useful to investors, lenders and insurance underwriters in understanding material risks”. The recommendations were developed by a large, global group with extensive stakeholder engagement and member expertise. Now considered international best practice in this space, the TCFD recommendations are supported by almost 900 companies, organisations and governments worldwide. 

It’s important to know about two key areas of the TCFD recommendations. First, it provides detail on what businesses across all industries should disclose with respect to climate change across four main areas: governance, strategy, risk management and metrics & targets. Second, it acts as a framework for identifying climate change related risks and opportunities that can then be mapped to the financial impact on the business. The TCFD recommendations therefore provide a useful, tried-and-tested tool for New Zealand businesses to first identify their risks and then understand how best to disclose them. Adopting these recommendations for mandatory climate change risk reporting would allow the Government to ensure consistent disclosures aligned with international best practice. 

Asking for climate-related disclosures is the easy part, implementing them is the hard part. Depending on how mature a business’s risk identification and management procedures are, full implementation of the TCFD recommendations is a journey that may take up to 2 years. The recommendations are also a high-level guide and specific implementation of recommendations within a business will require strategic thinking at a governance, executive and management level. For this reason the TCFD recommendations are best seen as the parameters within which climate change risk, identification, management and reporting can be shaped, but they do not provide an explicit guide on how to get there. 

The recommendations are a huge step forward in valuing the financial impact of climate change. Providing consistency and structure, the recommendations guide businesses as they report on climate change risk disclosures. They also help show businesses a path forward that will enable them to develop and maintain appropriate and enduring business models for a low carbon future.

Want to see more? Watch NBR Journalist Brent Edwards and Annabell Chartres in the recorded interview available here.