The Financial Stability Board (FSB) recognised that failure to quantify the financial risks arising from climate change could negatively impact financial stability due to ‘mispricing of assets and misallocation of capital’. Whilst in most G20 countries, companies with public debt or equity are required to disclose material risks, including climate change related ones, there is no standard framework for doing so. Clearly, this means it is difficult to assess the exposure of companies in relative terms and aggregate exposures.
Consequently, the FSB set up the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to develop a set of recommendations for a standard approach towards making financial disclosures. The task force produced its final report in June 2017 and it is this framework which will form the basis for the disclosure regulation being introduced by G20 countries.
The TCFD looks at:
- Climate related risks: policy, technology, market / reputational / physical risks
- Climate related opportunities: resources efficiency, energy source, products & services, markets and resilience
- Financial impacts: income and balance sheet
The EU gave a high priority to implement the TCFD recommendations and in 2019 provided a useful summary of progress and next steps.
On 10 March 2021 the new EU rules requiring funds to disclose details on how their funds meet ESG-related characteristics and objectives under The Sustainable Finance Disclosure Regulation (SFDR) will come into effect. Here in-scope firms must publish on their website a statement confirming whether they consider “principal adverse impacts on sustainability factors” and their due diligence policies with respect to those impacts, or clear reasons why adverse impacts are not considered
Only recently The Joint Committee of the three European Supervisory Authorities delivered to the European Commission (EC) the Final Report, including the draft RTS, on the content, methodologies and presentation of disclosures under the EU Regulation on SFDR.