The effect of climate-related financial disclosures on investment

The effect of climate-related financial disclosures on investment

Last week, Robin Cohen and CDP’s Jane Stevensen co-hosted a seminar on the effect of climate-related financial disclosures on investment. This followed last summer’s publication of the final report of the Task Force on Climate-related Financial Disclosures (TCFD). Global business leaders representing companies with US$4.9 trillion in assets under management and US$700 billion in revenue have joined together to urge G20 governments to formally accept and act on the recommendations of the TCFD.

The CRA/CDP seminar started with presentations from a highly experienced panel:

  • Dominic Emery, Vice President, Group Strategic Planning, BP
  • Michael Wilkins, Managing Director, Sustainable Finance, Corporate & Infrastructure Ratings, S&P Global Ratings
  • James Bevan, CIO, CCLA
  • Rhodri Evans, Associate, Eversheds Sutherland

The CRA/CDP seminar started with presentations from a highly experienced panel:

Some of the key messages and themes from the speakers and the ensuing discussion are summarised below.

The use of long-term scenarios and key metrics

Scenario analysis is the best way to explore longer-term climate risks. The focus should be on a limited number of key metrics and clearly delineated scenario drivers. This approach helps to identify long-term impacts on asset values and the risk of asset stranding.

The impact of climate risk on the long-term value of companies

If a company’s exposure to climate risks is less/more than that perceived by the market, disclosure may improve/worsen a company’s value. But the process of identifying the risks and developing a plan to address them should, in the long term, improve value.

The impact of climate disclosure on credit ratings

There is an increasing tendency for climate risk to impact credit ratings. Environmental and climate risk have impacted a substantial share of changes in corporate ratings, either negatively or positively. Corporate actions to mitigate climate exposure, such as Vattenfall’s sale of its lignite power stations, can have an immediate impact on ratings.

The drivers of enhanced reporting and the trade-off between voluntary and mandatory reporting requirements

There are multiple drivers behind increased reporting of climate-related financial risks. These include: corporations aiming to meet the rising standards of corporate social responsibility policies, investors pressing for more relevant information to assess investment, the threat of litigation by investor groups where there appears to have been insufficient disclosure of investment risks ex post and, more generally, pressure from environmental lobbyists and opinion formers.

France has made the reporting obligation on climate contribution binding on the majority of economic and financial stakeholders (Article 173 of the Energy Transition for Green Growth Act 5 of 17 August 2015). This requires investors to disclose how they factor Environmental, Social, and Governance (ESG) criteria and carbon-related aspects into their investment policies. The EU is considering embedding the TCFD recommendations into regulation across Europe. The panel ended with a discussion on how, while some level of standardisation might be required in the future, any mandatory requirements would benefit from the experience of companies’ voluntary disclosure.