Coming Soon: A Global Roadmap for Climate Risk Disclosures

Global Warming
May 06, 2021

The European Union is again leading the way for environmental accountability.

On April 21, the European Commission (EC) published a legislative proposal for a Corporate Sustainability Reporting Directive, in the hopes to enable “investors to re-orient investments towards more sustainable technologies and businesses.” The efforts are meant to make Europe climate neutral by 2050.

This proposal revises the 2014 Non-Financial Reporting Directive (NFRD), and establishes a set of mandatory European sustainability reporting standards applicable to all large companies and all companies listed on EU-regulated markets.

On a global scale, the Financial Stability Board (FSB) plans to implement a roadmap of common disclosure requirements for G20 companies by July 2021.

In a letter to G20 Finance Ministers and Central Bank Governors ahead of their virtual April meeting, FSB Chair, Randal K. Quarles, wrote: “It has never been more important to speak with one voice on a forward direction…To this end, the FSB will develop a roadmap that will identify where climate-related work on financial risk is underway, what work is needed, and how the different workstreams fit together.”

Fulfilling a Need

These efforts are coming none too soon, as natural catastrophes as a result of global warming have caused billions of losses to financial institutions over the past decade.

A common standard has long been lacking in the field of climate risk reporting.

Although understandable as climate risk disclosure is a fairly new comer to the financial reporting stage, the lack of consistency has led to misreporting, misunderstandings, and missed opportunities in terms of promoting sustainability.

This lack of uniformity has also led to greenwashing — a practice where companies exaggerate their responses to climate change or underplay how global warming is likely to affect their business.

Disclosure of climate-related financial information is a prerequisite for financial firms for two reasons:

  1. To manage and price climate risks appropriately
  2. Make lending, investment or insurance underwriting decisions based on their view of transition scenarios

The Foundation: TCFD

Both the EC and FSB are building on requirements already established in the Task Force on Climate-related Financial Disclosures (TCFD).

The FSB originally created TCFD in 2015 to develop a set of voluntary disclosure recommendations for use by companies to provide such decision-based information to investors, lenders and insurance underwriters.

The TCFD published its disclosure recommendations in 2017, which set out a comprehensive framework that has been developed by, and is directly responsive to the needs of, users and preparers of financial filings across a range of financial and non-financial sectors around the world.

But adherence to the TCFD has been strictly voluntary and adoption has been patchy at best.

With these new programs, the EC and the FSB hope to change this to a more universal acceptance, implemented by all members in the private and public sector.

What to Expect

In her article from Forbes, “Climate Change Is A Key Priority To The G20 And Financial Stability Board,” Mayra Rodriguez Valladares, Senior Contributor, explains, “…the FSB roadmap is likely to cover key areas such as identifying and filling remaining data gaps in assessing financial risks, promoting consistent high-quality corporate disclosures, monitoring vulnerabilities, and encouraging consistent supervisory and regulatory frameworks.”

Consistency is only one aspect of the EC’s directive. The European Commission package consists of three parts:

  • The EU Taxonomy Climate Delegated Act, which aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU’s environmental objectives.
  • A proposal for a Corporate Sustainability Reporting Directive (CSRD), which aims to improve the flow of sustainability information by making it more consistent, so that financial firms, investors and the broader public can use comparable information.
  • Finally, there are six amending Delegated Acts on fiduciary duties, so that financial firms, advisers, asset managers, or insurers will include sustainability in their procedures and their investment advice to clients.

While companies will have to wait until July for the FSB, the EC hopes to have a common language proposal by the end of May. Stay tuned for more specifics on both programs as they become available.

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Laurie Toupin