Task Force on Climate-related Financial Disclosures Overview of TCFD Recommendations TCFD Scenario Analysis Conference May 1, 2018
B ACKGROUND G20 Finance Ministers and Central Bank Industry Ind ry Le Led an and Geo Geographicall lly Div Diverse Governors asked the Financial Stability Tas ask For orce Board (FSB) to review how the financial The Task Force’s 32 international members, led by sector can take account of climate-related Michael Bloomberg, include providers of capital, issues. insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies. The FSB established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations for more effective climate-related disclosures that: ‒ could “ promote more informed investment, credit, and insurance underwriting decisions ” and, ‒ in turn, “would enable stakeholders to 14 9 9 understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks .” Final report published in June 2017. 2
D ISCLOSURE : R ECOMMENDATIONS The Task Force developed four widely-adoptable recommendations on climate- related financial disclosures that are applicable to organizations across sectors and jurisdictions. The recommendations are structured around four thematic areas that represent core elements of how organizations operate: Governance Governance Go The organization’s governance around climate -related risks and opportunities Strategy Str Strategy The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and Risk Ri financial planning Management Man Risk Management The processes used by the organization to identify, assess, and Me Metric ics manage climate-related risks and and Tar argets Metrics and Targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities 3
F OCUS ON F INANCIAL I MPACT RISKS OPPORTUNITIES Policy and Legal Resource ‒ Use of more efficient modes of transport Transition ‒ Carbon pricing and reporting obligations and production and distribution processes Efficiency ‒ Mandates on and regulation of existing ‒ Use of recycling products and services ‒ Move to more efficient buildings ‒ Exposure to litigation ‒ Reduced water usage and consumption Technology ‒ Use of lower-emission sources of energy Energy ‒ Substitution of existing products and ‒ Use of supportive policy incentives Source services with lower emissions options ‒ Use of new technologies ‒ Unsuccessful investment in new ‒ Participation in carbon market technologies ‒ Development and/or expansion of low Products Market emission goods and services & Services ‒ Changing customer behavior ‒ Development of climate adaptation and ‒ Uncertainty in market signals insurance risk solutions ‒ Increased cost of raw materials ‒ Development of new products or services through R&D and innovation Reputation ‒ Shift in consumer preferences Markets ‒ Access to new markets ‒ Increased stakeholder concern/negative ‒ Use of public-sector incentives feedback Strategic Planning ‒ Access to new assets and locations needing ‒ Stigmatization of sector insurance coverage Risk Management ‒ Acute: Extreme weather events Physical Resilience ‒ Participation in renewable energy programs ‒ Chronic: Changing weather patterns and and adoption of energy-efficiency measures rising mean temperature and sea levels ‒ Resource substitutes/diversification Financial Impact Revenues Assets & Liabilities Income Cash Flow Balance Statement Statement Sheet Expenditures Capital & Financing 4
TCFD R ECOMMENDATIONS The four recommendations are supported by specific disclosures organizations should include in financial filings or other reports to provide decision-useful information to investors and others. Governance Strategy St Risk Mana Ris anagement Metrics and and Tar argets Disclose the organization’s Disclose the actual and potential Disclose how the organization Disclose the metrics and targets governance around climate-related impacts of climate-related risks and identifies, assesses, and manages used to assess and manage relevant risks and opportunities. opportunities on the organization’s climate-related risks. climate-related risks and businesses, strategy, and financial opportunities where such planning where such information is information is material. material. Recommended Disclosures Recommended Disclosures Recommended Disclosures Recommended Disclosures a) Describe the board’s oversight of a) Describe the climate-related risks a) Describe the organization’s a) Disclose the metrics used by the climate-related risks and and opportunities the processes for identifying and organization to assess climate- opportunities. organization has identified over assessing climate-related risks. related risks and opportunities in the short, medium, and long line with its strategy and risk term. management process. b) Describe management’s role in b) Describe the impact of climate- b) Describe the organization’s b) Disclose Scope 1, Scope 2, and, if assessing and managing climate- related risks and opportunities on processes for managing climate- appropriate, Scope 3 greenhouse related risks and opportunities. the organization’s businesses, related risks. gas (GHG) emissions, and the strategy, and financial planning. related risks. c) Describe the resilience of the c) Describe how processes for c) Describe the targets used by the organization’s strategy, taking identifying, assessing, and organization to manage climate- into consideration different managing climate-related risks related risks and opportunities climate-related scenarios, are integrated into the and performance against targets. including a 2 ° C or lower scenario. organization’s overall risk management. 5
K EY E LEMENTS : L OCATION OF D ISCLOSURE – The Task Force recommends that organizations provide climate-related financial disclosures in their mainstream (i.e., public) annual financial filings . – The recommendations were developed to apply Financial Filings broadly across sectors and jurisdictions and do not Required annual reporting supersede national disclosure requirements for packages in which organizations financial filings. deliver their audited financial results under the laws of the – If certain elements are incompatible with national jurisdictions in which they operate. disclosure requirements, the Task Force encourages organizations to disclose those elements in other Other Official Company Reports official company reports . Should be issued at least annually, – Organizations in the four non-financial groups that widely distributed and available to investors and others, and subject to have more than one billion U.S. dollar equivalent internal governance processes that (USDE) in annual revenue should consider disclosing are the same or substantially strategy and metrics and targets information in other similar to those used for financial reporting. reports when the information is not deemed material and not included in financial filings. 6
K EY E LEMENTS : P RINCIPLE OF M ATERIALITY – The disclosures related to the Strategy and Metrics and Targets recommendations are subject to an assessment of materiality. – The disclosures related to the Governance and Risk Management recommendations are not subject to an assessment of materiality and should be provided because many investors want insight into the governance and risk management context in which organizations’ financial and operating results are achieved. 7
K EY E LEMENT : S CENARIO A NALYSIS Scenario Analysis – Under the Strategy Recommendation, the Task Force encourages the disclosure of forward- looking information through the use of scenario analysis — a useful tool for considering and enhancing resiliency and flexibility of strategic plans. – In particular, organizations are asked to describe the resilience of their strategies, taking into consideration different climate-related scenarios, including a 2 ° C or lower scenario . 2 ° C Scenario – Many investors want to understand how resilient Provides a common reference point organizations’ strategies are to climate -related risks and how that is generally aligned with the flexible toward climate-related opportunities . objectives of the Paris Agreement. – Organizations should consider discussing in their disclosures: It is important, however, to use more than one scenario. Selected scenarios – where they believe their strategies may be affected by should span the plausible range of climate-related risks and opportunities; future states. Typically 3-4 scenarios are the norm. – how their strategies might change to address such potential risks and opportunities; and Larger organizations (more than 1B USDE in annual revenue) should – the climate-related scenarios and associated time consider conducting more robust horizon(s) considered. scenario analyses. 8
K EY E LEMENT : S CENARIO A NALYSIS Scenario Analysis is NOT a forecast or prediction Scenarios Plausible Current Historical Probable Time Source: http://scenariohub.net/about 9
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