The FSB’s Task Force on Climate-Related Financial Disclosure (Task Force) released on Wednesday its Recommendations Report for voluntary climate change disclosure. The Task Force is an industry-led group formed in 2015 by the FSB at the request of the G20. Its goal is to ensure sufficient climate risk disclosure is available to enable informed financial decisions to help avert climate change-based financial market disruption.
The Task Force recommendations, based in part on certain existing disclosure frameworks, call for four categories of disclosure: (i) governance of climate risk; (ii) climate risk management; (iii) climate risk metrics and targets; and (iv) impacts of climate risk on business strategy and planning (strategy). The first three are reminiscent of similar categories contained in the Global Reporting Initiative’s (GRI) disclosure framework. The last, strategy, is the most complicated, potentially controversial, and ultimately represents the real focus of these recommendations. Strategy means “scenario analysis” disclosure, or the method of developing forward-looking strategic plans that address a range of future states. While admitting that scenario analysis is not currently widely used for climate-related risks, the Task Force recommends that organizations begin, at a minimum, to disclose against a “2 degree Celsius scenario,” which is the global warming reduction target cited in the Paris Agreement under the UN Framework Convention on Climate Change.
The recommendations apply to all industries, and of especial importance to the Task Force, to the financial sector as “influencers” of the organizations in which they invest. In its belief that climate-related risks are “material” and that disclosure in public filings is subject to more rigor and review than disclosure in separate voluntary reports, the Task Force recommends that this disclosure be provided in public filings. However, the recommendations do not explicitly define what “materiality” means in this context.
Practical Implications? It remains to be seen whether these recommendations will gain significant traction. Organizations may choose to follow these disclosure recommendations given the sheer authority of the FSB, or they may ultimately find these recommendations to be the most user-friendly or otherwise best standards among the available options. It is also possible that the members of the FSB, which include central banks, the International Accounting Standards Board and the U.S. Securities Exchange Commission, among others, will commit to implement these recommendations at the national level. As Germany has taken over as head of the G20 for 2017, it has included climate-change as a key agenda item and may encourage further adoption of the recommendations. Recent history shows that there could be significant voluntary uptake. As an example, the Task Force’s predecessor, the FSB’s 2012 Enhanced Disclosure Task Force (EDTF), which developed voluntary disclosure recommendations for financial institutions post-financial crisis, reported high rates of compliance in its 2015 annual progress report.
On the other hand, because climate risk is not perfectly analogous to the financial risks addressed by the EDTF, in light of the various mandatory and voluntary disclosure regimes already in existence and the complex, novel, time-consuming scenario analyses recommended, organizations may not find the recommendations sufficiently practical for near-term adoption for their voluntary filings, let alone for mandatory disclosure.
The recommendations now enter a 60-day public consultation period, during which organizations can voice their approvals and concerns on the recommendations.