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FSB TCFD Recommendations Preview special

by Joel Kenrick

Tomorrow at 12 noon GMT the FSB Task Force on Climate-related Financial Disclosures (to give the FSB TCFD it’s full title!) recommendations will be published.

Ahead of this today The Chronicle looks at what to expect 1) Expectations of FSB TCFD based on recent news stories, 2) History of the Task Force, 3) Other background reports and analysisAlso in 4) Recent non-TCFD news and reports, new report shows over $5 trillion of assets now pledged to divest from fossil fuels, IEA cuts coal demand forecast for fifth year in a row, Bill Gates to lead $1 billion new investment fund on climate change and New York State double low carbon index strategy to $4bn. 

I’ll do a further round up later in the week with responses to the FSB TCFD launch – if you’ve any comments or analysis please do send to me and I’ll aim to include. 

1. Expectations of FSB TCFD based on recent news stories

According to news coverage over the last few weeks the report is likely to:

Make recommendations "to significantly improve the narrative and quantitative climate-risk disclosures that need to be made right across the investment chain” responding to “a lot of interest” in scenario analysis from investors - “this concept of getting companies to describe their thinking about what the 2-degree pathway might mean for their business model

(Source: Russell Picot speech to IPE annual conference: FSB taskforce to recommend climate disclosure ‘right across’ investment chain, Investors & Pensions Europe, 6 Dec)

Focus on ‘having more information about the longer-term assumptions being used. Scenario analysis is the most interesting and forward-thinking aspect of the recommendations

(Source: S&P and PwC interviews: Carney Panel Set to Demand Climate-Risk Scenarios From Companies, Bloomberg, 10 Dec)

Include recommendations in four key areas: governance, strategy, risk management and metrics.

(Source: Russel Picot in IPE, and PwC in, TCFD's four major disclosure recommendations revealed, Environmental Finance ($), 9 Dec)

Include examples ‘of disclosure reports prepared in line with recommended best practice, as well as sector-specific guidance for energy, transportation, buildings and material, insurance, agriculture and forestry, banking, asset managers and asset owners.’

(Source: PwC in TCFD's four major disclosure recommendations revealed, Environmental Finance ($), 9 Dec)

Aim to ‘see more companies systematically publishing this information in their 10K and annual reports, with a dedicated section on climate risks.’

(Source: AXA in FSB climate task force special: Interview with Christian Thimann, TCFD vice chair, Responsible Investor ($), 12 Dec)

Aim to move beyond CO2 data disclosure to give forward information on We’ve put a lot of emphasis in the TCFD on how companies should think about reporting: 'CO2 emissions levels today are ‘pictures’, and investors are investing in a company based on what it will be worth in the future. So, ideally you need to see a ‘film’ of the company developing going forward. For this we are suggesting a lot of information about the strategy i.e. how do climate initiatives affect the short, medium and long term strategy goal of the firm, what would be in the financial plan, can you give us scenarios, etc. 

(Source: AXA in FSB climate task force special: Interview with Christian Thimann, TCFD vice chair, Responsible Investor ($), 12 Dec)

2. History of the Task Force

Mark Carney, Chairman of the international Financial Stability Board, and Governor of the Bank of England, established the FSB TCFD Task Force on 4th December 2015. 

On 29 September 2015 Governor Carney gave the speech ‘Breaking the tragedy of the horizon – climate change and financial stability’ at Lloyd’s of London, and the UK Prudential Regulation Authority (PRA) became the first regulator to identify the financial stability risks of climate change and published ‘The impact of climate change on the UK insurance sector’

This report from the PRA was in response to an invitation by Defra in December 2013 to submit a climate change adaptation report under the UK Climate Change Act 2008, which was formally accepted by the PRA in April 2014. Full history, including the initial letter from investors, NGOs and universities in January 2012, is on the Bank of England summary. 

On 9 November 2015 Mark Carney announced he would be proposing a disclosure task force to the Financial Stability Board, and the task force was established as an industry-led body during COP21 in Paris on 4 December 2015 with Michael Bloomberg as Chair. 
The membership was announced during the World Economic Forum in Davos in January 2016. During 2016 central bankers and national regulators continued to add their voices to the financial stability risks of climate change and stranded assets, including the Dutch Central BankSwedish Financial Supervisory Authority, and the European Systemic Risk Board. Additional members of the Task Force were announced on 20 May, bringing number of members to 31. 
The Phase 1 report of the Task Force was published on 31 March 2016, outlining the remit, scope, high level objectives for the proposed work, together with a set of fundamental principles for disclosure. 

On 27 July 2016 the Task Force published the key findings of the public consultation on the Phase 1 report. This showed that the majority of respondents wanted disclosures to be ‘forward-looking, considering short-, medium- and long-term horizons’ to ‘address an organization’s ability to set/achieve targets, with strategies for achievement’ and ‘align with material risks’. 96% of respondents saw scenario analysis as a key component of disclosure’ (p. 8)

The FSB TCFD Recommendations report will be published on 14th December 2016, and will be under a 60 day public consultation. 

3. Other background reports and analysis 

HSBC: Soaring appetite for green investments hindered by low disclosure, according to HSBC survey (pdf) published on 8 Dec. The 'survey of some of the world's biggest investors and firms revealing a growing willingness amongst top investors to engage with climate risks’ according to Business Green. The survey found that 49% of firms and 59% of investors have a strategy for reducing environmental impact. "European companies and investors were far more likely to have an environmental strategy in place than their counterparts in other regions of the world, with 76 per cent and 81 per cent respectively reporting they already used measures to reduce their environmental impact. Meanwhile, the figures sat at 53 per cent and 57 per cent for the Americas and just 27 per cent and 32 per cent for the Middle East.” Even among those who have a strategy only half disclose it, and "European investors see tightening regulation as the most likely driver, with over 95 per cent saying they expected new rules to boost the amount of disclosure.” By contrast in the Americas "95 per cent of investors in the Americas said they thought the risk of negative publicity would be the biggest driver of disclosure.” (Is a lack of disclosure holding back green investment?Business Green ($), 12 Dec)

Aviva: in November 2016 published ‘Seeing Beyond the Tragedy of Horizons’ (pdf), setting out their proposals for six key elements to drive success for the uptake of the TCFD recommendations and ‘contribute to the management of a rapid yet stable transition to a lower carbon economy’. The report makes regulatory and ‘civil regulatory' proposals including public league tables of corporate climate risk disclosure and using global accounting regulations and global credit rating agencies. (See last summary in my last Chronicle for more)

Blackrock in September 2016 report 'Adapting portfolios to climate change’ have said that 'Investors can no longer ignore climate change. Some may question the science, but all are faced with a swelling tide of climate-related regulations and technological disruption.'

Mark Carney in his Tragedy of the horizons speech in September 2015 highlighted three risks to finance and insurance sectors: 

  • Physical risks from climate change - 'there are some estimates that currently modelled losses could be undervalued by as much as 50% if recent weather trends were to prove representative of the new normal. In addition, climate change could prompt increased morbidity and mortality from disease or pandemics.' 
  • Claims on third-party liability insurance ­in classes like public liability, directors¹ and officers¹ and professional indemnity - could be brought if those who have suffered losses show that insured parties have failed to mitigate risks to the climate; failed to account for the damage they cause to the environment; or failed to comply with regulations.
  • Stranded Assets / transition risks: If that estimate is even approximately correct it would render the vast majority of reserves 'stranded' ­ oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. The exposure of UK investors, including insurance companies, to these shifts is potentially huge.

The Economist Intelligence Unit in July 2015, in "The Cost of Inaction: Measuring Value at Risk from Climate Change" report commissioned by Aviva, reported that the expected losses to the global stock of manageable assets, in discounted present value terms, are valued at US$4.2 trillion - roughly on par with the total value of the world's listed oil and gas companies. Despite this, carbon is still largely an un-priced externality in the vast majority of investment portfolios. 

Mercer in June 2015 published Investing in a Time of Climate Change report, which unreservedly concludes that climate-related risk factors should be standard considerations for investors because climate change "will inevitably have an impact on investment returns'. Mercer states, depending on the climate scenario which plays out, the average annual returns from the coal sub-sector could fall by anywhere between 18% and 74% over the next 35 years, with the effects being more pronounced over the next decade (eroding between 26% and 138% of average annual returns).

4. Recent non-TCFD news and reports

Fossil fuel divestment tops $5 trillion: The value of investment funds committed to selling off fossil fuel assets has jumped to $5.2tr, doubling in just over a year” report the Guardian (Fossil fuel divestment funds double to $5tn in a year, 12 Dec). The new total, published on Monday, was welcomed by the UN secretary general, Ban Ki-moon, who said: “It’s clear the transition to a clean energy future is inevitable, beneficial and well underway, and that investors have a key role to play.” The New York Times calls the figure "a remarkable rise for a movement that began on American college campuses in 2011. Since then, divestment has expanded to the business world and institutional world, and includes large pension funds, insurers, financial institutions and religious organizations. It has also spread around the world, with 688 institutions and nearly 60,000 individuals in 76 countries divesting themselves of shares in at least some kinds of oil, gas and coal companies." (Investment Funds Worth Trillions Are Dropping Fossil Fuel StocksNYT, 12 Dec). AFP report that “Pension funds and insurance companies now represent the largest sectors committing to divestment, reflecting increased financial and fiduciary risks of holding fossil fuels” according to the report authors, legal group Arabella Advisors (Finance sector warms to fossil fuel divestments: studyAFP, 12 Dec). Huffington PostMashable and Business Green ($) also cover it. 

IEA cuts coal demand forecast for fifth year in a row: with the “influential think-tank expects demand to plateau until 2021, but not fall fast enough to align with the international goal of holding global warming below 2C”. Global coal use fell for second year running in 2015 (IEA cuts coal demand forecast for fifth year in a rowClimate Home, 12 Dec).'China already has enough coal-fired power stations, says the International Energy Agency (IEA) and there is “no real economic sense in building more”' according to Carbon Brief (IEA: China’s new coal plants make ‘no economic sense’Carbon Brief, 12 Dec). Reuters say that IEA’s medium-term coal market report says "In China, coal demand is in structural and slow decline driven by a new economic growth model and diversification of coal”. (Growth in global coal demand to slow over next five years: IEAReuters, 12 Dec)

Last month the IEA said coal supply would have to fall in USA and China to avoid slumping prices: CNBC focussed on the divergence between Trump and the IEA saying "Over the next five years, the agency projects U.S. coal companies will continue to cut capacity to battle falling demand, a global oversupply and slumping prices.” According to the IEA "With no global upturn in demand in sight for coal, the search for market equilibrium depends on cuts to supply capacity, mainly in China and the United States." (Trump promises a US coal revival, but the world's energy authority begs to differ, CNBC, 16 Nov). Chinese state newswire Xinhua say that 'the popularity of coal as a fuel will be eclipsed by liquid natural gas and renewables’ over the coming decades, while growth in oil consumption will slow but continue to grow. (Oil demand to continue to rise as LNG and renewables eclipse coal as fuel: IEA report, Xinhua, 16 Nov)

Transition Risk Toolbox launched: The Energy Transition Risk and Opportunity consortium, have published a toolkit with tools – scenarios, data needs and models – required for quantifying transition risk in financial markets. The consortium is funded by the European Commission and includes 2 degrees investing, Carbon Tracker, The CO Firm, S&P Global and others. (Transition Risk Toolbox, Scenarios, Data, and Models (pdf), 2 degrees investing, Nov 2016)

New York State double low carbon index strategy to $4bn: 'The $185bn New York State Common Retirement Fund, the third largest pension fund in the US, is planning to double its exposure to $4bn in a low carbon index strategy that it kicked off with Goldman Sachs Asset Management (GSAM) just prior to the Paris COP21 conference in 2015’ according to Responsible Investor (RI Americas 2016: $185bn New York State fund planning to double low carbon index strategy to $4bnRI ($), 12 Dec). The fund "would also re-file a high profile shareholder resolution for the 2017 proxy season at Exxon Mobil, the oil major, which it co-filed in 2016 with the UK’s Church of England Investor’s Group.”

Trillion Dollar Transformation launched to educate pension trustees on fiduciary duty and climate risk: The new collaborative initiative is between Mercer Investment Consulting and the Center for International Environmental Law (CIEL), the US public interest law firm, reported RI. 'The initiative was created to educate pension fund fiduciaries on the “financial and legal challenges climate change presents, and equip them with the information and tools to respond”. For the launch, the two prepared collaborative reports, A Guide to Climate Change Investment Risk Management for US Public Defined Benefit Plan Trustees and Fiduciary Duty, Divestment, and Fossil Fuels in an Era of Climate Risk.’ A two page summary is available here.  (Mercer teams up with US law firm to assess financial risk and fiduciary duty in context of climate changeResponsible Investor ($), 7 Dec)

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