Finance… Ready for the Next Wave of Climate Action?

Vincent Manier, Chief Financial Officer at ENGIE Insight

Earlier this year I wrote about the transformative role of finance in the green revolution—calling out the Task Force on Climate-Related Disclosures (TCFD) initiative that could have major implications for corporations, and particularly for their finance departments. The ExxonMobil’s shocking shareholder resolution against board recommendations on climate-related risk only further illustrates the need for corporations to be proactive in their adoption of carbon reporting. With the G20 Summit only a few weeks away, let’s explore the potential impact of the TCFD report’s current recommendations:

  • More quantitative financial disclosures: TCFD recommends not only the disclosure of climate-related risks (both transition and physical risks) but also opportunities for resource efficiency, energy source, products and services, markets and resilience. Finance leaders should take note that, per this recommendation, “the task force expects the governance processes for these disclosures would be similar to those used for existing public financial disclosures and would likely involve review of the chief financial officer and audit committee, as appropriate.”
  • Introduction of forward-looking information through scenario analysis (including the 2°C climate change scenario) is recommended in order to assess each scenario’s potential impact on businesses, strategy, and financial planning. Even if scenario analysis is familiar to corporations, this is a new concept for public financial disclosures, which may create—at least in the early adoption phases—some discomfort among finance teams.
  • Accounting considerations: Whether under IASB[1] or FASB[1] standards, these additional disclosures will inform deeper analyses of how climate-related risks will affect an organization. This may help identify potential impacts on accounting, such as in assets valuation (e.g., impairment test) or additional liabilities. The report notes that “Therefore, financial executives (e.g., chief financial officers, chief accounting officers, and controllers) will need to be involved in the organization’s evaluation of climate-related risks and opportunities and the efforts undertaken to manage the risks and maximize the opportunities.”
  • Framework harmonization: Today, depending on the country and sector, corporations are using diverse reporting standards and frameworks, and lack common methodologies. The TCFD initiative seeks to improve consistency and transparency through harmonization of these frameworks (e.g., SASB, GRI, IIRC and CDP[2]). Four recommendations, applicable to all organizations across sectors and jurisdictions and to be included in financial filings, are structured around the themes of Governance, Strategy, Risk Management and Metrics and Targets.
  • Framework conflicts: In the United States, SEC is also addressing climate risks through disclosures using the key concept of “materiality” (Regulation S-K, Interpretive guidance related to climate change disclosures). The challenge for regulatory bodies and corporations is the absence of a unique methodology or customization for defining climate risks’ sector- or company-specific materiality. Using the definition of “materiality” under the U.S. securities laws, the SASB (Sustainability Accounting Standards Board) issued a mapping of materiality but recognizes that each company remains responsible for determining what information should be in SEC filings and how SEC and TCFD frameworks will co-exist.

What to Expect in the Near-Term?

In the coming days, the TCFD will issue its final report and present it to the G20 summit in July 2017. This report is expected to include a precise timeline for implementation for corporation (likely 3-5 years, even if regulated entities and early adopters could comply by 2018-2019).

Regardless of G20 support, our industry will likely continue to see additional pressures either from national regulation (e.g. art. 173 of France’s climate risk reporting law) or various groups of stakeholders, especially investors, to enhance climate-related financial disclosures. I’ll keep you posted.

[1] IASB (International Accounting Standard Board) and FASB (Financial Accounting Standard Board) are the 2 main accounting frameworks used by corporations.

[2] Appendix 3 of TCFD report outlines the main disclosure frameworks used by corporations, such as SASB (Sustainability Accounting Standards Board), GRI (Global Reporting Initiative), CDP (Carbon Disclosure Project) or IIRC (International Integrated Reporting Council)

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