FSB Climate Disclosure Framework Poised For 2020 Traction

On Sept. 23, the Climate Disclosure Standards Board and the Sustainability Accounting Standards Board launched a handbook aimed at providing techniques to enhance companies' climate-related financial disclosures. The handbook represents a next step in advancing implementation of the Task Force on Climate-related Financial Disclosures framework, an effort launched by the G-20’s Financial Stability Board and chaired by former New York City Mayor Michael Bloomberg.

Despite remaining a voluntary framework, the TCFD has already attracted robust adoption. But the TCFD is positioned for significant additional traction very soon. Starting January 2020, signatories to the United Nations Principles for Responsible Investments, or UNPRI, will be mandated to implement aspects of the TCFD.

Altogether, the nearly 2,500 signatories of the UNPRI represent almost $90 trillion in assets under management. By joining the UNPRI, each of these members signed onto six principles:

1. Incorporating environmental, social and governance, or ESG, into investment processes;

2. Advancing ESG performance during ownership;

3. Seeking ESG disclosure for assets owned;

4. Promoting the UNPRI across the investment industry;

5. Working with other members on implementation; and

6. Reporting on activities and progress.

The UNPRI is about the advancement of ESG, and in many ways it deserves credit for the broad traction ESG now enjoys in the market. The elevation of climate-related risk — and the TCFD — within the UNPRI represents their elevation within the universe of ESG, and portends a trajectory for the TCFD that is as remarkable as what the market has witnessed with ESG over the past several years. In short: The new year will strap a jet pack on to TCFD adoption. It is about to take off.

To be sure, the UNPRI’s TCFD mandate is circumscribed in two key ways. First, although members will have to collect the relevant climate-related risk data and report that data to the UNPRI on an annual basis, members will not be required to publicly disclose that data. Second, the UNPRI is focused on a few key TCFD-aligned indicators, rather than the entire framework. Specifically, the UNPRI has introduced the following areas for reporting:

Climate-related policy and coverage: SG 01 CC focuses on (1) how a company integrates climate change and related issues into its investment policy, and (2) whether the company’s core products or investment strategy might be impacted by the transition to a lower-carbon economy. This thrust is really about understanding how much, and how climate impacts the company’s strategic and financial planning.

Climate-related roles and responsibilities: SG 07 CC focuses on board-level and management-level roles as they relate to the management of climate-related financial risk. This thrust is really about deciphering how much organizational capacity is actually dedicated to concentrating on the climate, and how that attention is organized within the company’s highest levels of leadership.

Climate in asset allocation: SG 13 CC focuses on scenario analysis designed to surface the risk exposure of a company from the transition to a lower-carbon economy. This thrust is really about identifying how the assets and operations of a company would fare in a world where the goals of the Paris climate agreement are met, and how the company’s strategy reflects an understanding of that risk exposure.

Given the broad reach of the UNPRI across the liquidity spectrum, the new TCFD mandate within the UNPRI is likely to drive significant transformation in the market for both public and private companies. For many, this will spur a first look at governance practices related to climate change and demand significant attention to existing policies and practices, as well as development of new approaches.

Even for investors not signed on to UNPRI, the ascendance of the TCFD is likely meaningful and potentially material. Not only are a growing number of potential buyers and sellers — parties on the other side of the deal — increasingly interested in this data, regulators too have shown an increasing inclination to drive TCFD adoption. Internationally, European and Japanese regulators, for example, have started to nudge in this direction.

In the United States, proposed legislation, the Climate Risk Disclosure Act of 2019 seeks to take on the issue of climate change disclosure and includes TCFD adoption as a default measure if the U.S. Securities and Exchange Commission does not act quickly to establish climate-related risk disclosure standards of its own.

A combination of regulatory and quasi-regulatory forces — and, perhaps more importantly, market appetite itself — seem to be responsible for an ascendance of climate-related concern within the ESG universe. And with ESG reaching an increasing amount of the capital flow both domestically and internationally, that ascendance is an important trend for investors across all sectors.

Ali Zaidi is of counsel, and Alexandra Farmer and Paul Tanaka are partners at Kirkland & Ellis LLP.