Recognition of climate change risks has propelled global warming to the top of many corporate agendas and forced companies to face many connected climate-related risks and opportunities. These include policy shifts, technological advancement and a high probability of extreme weather.
This past June, the Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, submitted its final recommendations for voluntary climate-related financial disclosures to Mark Carney, chair of the Financial Stability Board. The objective of the TCFD recommendations is to help companies around the world understand the information investors need to better measure and respond to climate change risks.
Leading up these recommendations, in December 2015, the 21st annual Conference of the Parties (COP 21) reached an rise to well below 2°C over this century.
Managing climate risks means ensuring the resilience of your operations. This requires an assessment of the impact of climate change-related policies and laws, technology, consumer preferences, changing weather and business innovation.
Addressing the impact Research suggests that opportunities arising from the energy transition will outweigh climate-related risks. The lower-carbon transition can be linked to other global trends which could indicate one future economic scenario over another (Figure 1). As we become more comfortable with managing the risks associated with this transition, and more accepting of their inevitability, we can start to answer the question: How do you seize the upside of climate-related disruption.?.
The TCFD is balancing investors
In the process of developing their recommendations, the TCFD realized that they required equal parts information demand from investors and information supply from mining operators for this type of disclosure to be successful.
This balanced ledger resulted in the first guidance on climate change disclosure to apply to both issuers and investors.
Other sustainability reporting frameworks, including CDP (formerly the Carbon Disclosure Project), GRI (Global Reporting Initiative) and PRI (Principles for Responsible Investment), have agreed to align their own disclosure guidance with the recommendations.
The TCFD recommendations are structured
around four core themes: governance, risk management, strategy, and metrics and targets. It states that all organizations should describe their governance around climate-related risks and opportunities, including the structure for board oversight and management’s role in addressing climate-related risks and opportunities.
Companies should also disclose the process by which climate-related risks are identified, assessed, managed and integrated into overall risk management.
The most challenging aspect in the TCFD’s recommendations is in the area of performing scenario analyses for realize a 4°C world, or higher. Such scenario analyses are relatively new concepts, and involve varying assumptions that may or may not be useful to the users of this information.
The most contentious aspect of the recommendations is the reporting of carbon released per unit of product produced.
Many issuers and investors don’t agree that this is a useful metric to inform investment decision making.
The TCFD climate-related financial disclosures recommendation report is one new disclosure standard among many.
Climate risks are not mutually exclusive, thereby making it difficult to isolate a specific issue on climate change. Mining companies’ audit committees should form a view as to where (and if) climate-related risks are discussed in corporate reports.
In general, mining companies are still at the early stages of responding to climate-related risks. Some lack the in-house expertise to develop an informed view about climate change scenarios, and many still find it difficult to incorporate climate risks into investment strategies while meeting near term performance metrics.
Companies can begin their journey with a robust assessment of their exposure to climate change. This assessment should include consideration of upside opportunities such as an increased demand for minerals to support a global clean energy transition.
On the risk side, specific weather data around the world is much more reliable and accessible, including weather projections to 2100 based on different carbon scenarios. Your assessment should also take into account rapid technological advancements, policy trends, capital flows and shifting social licence to operate.
A key objective of the work performed by the TCFD was for executives and boards to increase the current financial planning period from one to five years. Early support for these recommendations from the finance community and securities regulators indicate that companies will be under increasing pressure to address climate risks. It’s up to companies to see the challenge of transitioning to a lower-carbon economy as an opportunity.
__________________________________________________________DIANE LARSEN is a partner, Assurance Services, with EY’s Global Professional Practice and SUSAN McGEACHIE is a market leader with EY’s Climate Change and Sustainability Services.