Ecology and financial report: soon these two notions can become inseparable
Company corporate reports have long included references to environmental risks. They usually include the number and type of emissions and other negative factors caused by the company economic activity.
Still, there is something in this documentation that is not given a sufficient attention to. Namely, the calculation of financial implications from climate pollution, both existing and potential ones. Without it, investors cannot fully understand and assess the company’s real impact on the environment, the risks involved and the efficiency of corporate strategy to reduce them.
According to the recent survey conducted by HSBC, a finance company, 56% of investors consider the modern environmental risk management systems used in companies to be “highly unacceptable”. We would like to clarify that 475 investors from over the world participated in the survey.
A little earlier, OECD and CDSB also conducted a study in 2015. Analysts tried to compare approaches to assessment of the performance causing environmental pollution in the G20. It was established that 15 of them use standard methods, i.e. simply documenting the kind, type and amount of repugnant substances in the atmosphere over a period of time. And only 9 countries encourage indication of the secondary data in reports, such as a description of measures aimed at reducing the emissions, etc.
All this coupled with a continuing deterioration of the climate gave the wealthy something to reflect on.
Thus, the Paris agreement was signed in that same 2015 to create a “low-carbon economy”. At that same time, the Financial Stability Board (FSB) formed the Task Force on Climate-related Financial Disclosures (TCFD) to develop a reporting system for companies that would reflect the extent of their negative impact on climate clearly, as well as the measures taken to eliminate its impact and the consequences of their implementation in financial terms.
All best practices on this subject were published a year later in 2016. The document was titled “Recommendations of the Task Force on Climate-related Financial Disclosures”. It provides for disclosure of the “climatic” information on four key categories: management, strategy, risk management and statistics. However, it is recommended that the clauses “strategy” and “statistics” be given special consideration, while the data on other clauses are considered less relevant.
The TCFD implies dividing the risk assessment into two categories:
• Transitional risks (risks connected with the implementation of measures for transition to a low-carbon economy, such as investments in new technologies, procurement of new equipment, etc.);
• Physical risks (risks resulting from extreme weather events or climate change).
Finally, the document proposes to include the information, to the extent possible, regarding the impact on climate to all key financial documents of the company.
Needless to say that such measures will not solve the climatic issues. That is clearly spelled out in the document. This will allow controlling the negative impact on the environment and is a way to solve the problem through a method designed primarily to change the mindset of companies who are not used to take account of climatic changes and their role in them.
It should be mentioned that all guidelines above are solely informational, not regulatory.
That is, they will not be enforced to implement them for now.
Which brings us to a question:
will that be enough?
Can the companies volunteer to meet the challenge before them? So far, about 100 companies have agreed with the guidelines proposed and expressed readiness to implement them. And 10 of them even promised to complete a transition to a new documentation type in three years rather than five as the TCFD report required.
This post is also available in: Russian