Leading institutional investors are already using available company-produced and third-party information, in some cases along with sophisticated advanced analytics and artificial intelligence (AI), to assess climate risk.
Investors would like to see more disclosure in the future from all kinds of companies, even those that ultimately have limited climate-related financial risk exposure. If necessary, they’d like to see mandatory reporting requirements be considered.
Of more than 50 participants in our sessions who were planning to report on climate-related risks in the upcoming cycle, most (95%) still planned to do so in their sustainability, carbon or responsible investment disclosures, which receive comparatively lower scrutiny than financial filings and where translation to financial terms is often not a primary focus. 25% planned to report within their MD&A and only one company planned to do so in their financial statements.
Despite these and other challenges, Canadian companies and investors are forging ahead. 50% of participants polled indicated they had committed to implementing the recommendations (even though 18% had not yet made that commitment public).
All good in theory — what about in practice?
According to EY’s 2019 Proxy Season Preview for the US, company-relevant environmental and social risks are in the top three areas where investors want boards to focus. More than a third of these investors are specifically focused on climate change, which is up 23% from three years ago.
Close to half (46%) of the investors citing climate risk raised the TCFD as a reporting framework they support. These investors noted the importance of such reporting for companies’ strategic planning and risk management.
While many Canadian companies are willing to adopt the TCFD recommendations at an aspirational level, the leaders who are tasked with implementing the work find it challenging. Effectively translating climate risks into quantified financial impacts is the hardest part. Attempts at climate scenario analysis to inform the quantification of the potential financial impacts are challenged by a lack of localized climate impact data, and there are few agreed-upon methods and tools to aggregate impacts at the corporate and/or investment portfolio level.
Companies are also finding it difficult to secure the necessary resources and support, and are frustrated by a lack of regulatory action. Many simply don’t know where to start.
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Participants on our panels underscored that the recommendations were a useful tool for convening cross-departmental engagement, in particular between finance, risk and sustainability/environment departments.
Participants also observed that the required cross-functional teaming helped open the door to greater resources. As a result, the TCFD considerations allowed for the development of more comprehensive climate risk assessment programs that are integrated with the organization’s broader risk management objectives and procedures.
