by Alisa Dolgova
The Financial Stability Board’s Task Force for Climate-related Financial Disclosure (or TCFD as it has thankfully been shortened to) is an industry-led initiative, which promotes voluntary climate-related financial disclosures that are consistent, comparable and provide decision-useful information. Since the publication of the recommendations in mid-2017, the TCFD is fast becoming the de-facto standard and the PRA’s recent guidance encourages firms to adopt it.
The Government has gone a step further with yesterday’s Green Finance Strategy by outlining its expectation that publicly listed and financial services firms should be disclosing their climate exposure from 2022, with a review of progress made as early as next year. The message is clear: firms have a short amount of time to get this right on a voluntary basis before facing the prospect of mandatory disclosure requirements.
In this context, it is all the more timely that the ABI can announce it has become an official supporter of the TCFD – this blog explains why.
It is becoming increasingly apparent that the impacts of climate change will have serious consequences for the way we do business. This will materialise in two ways – physical risk and transition risk. Physical risk refers to the risk of increased frequency and severity of extreme weather events, and the impact that will have on what we insure – for example, at what point does it become too costly to provide cover to high-risk areas of the East coast of America? Transition risk refers to the impact a transition to a zero-carbon economy will have on the assets in which we invest – what would a sudden change in policy do to the value of our fossil fuel holdings? With public opinion on the need for meaningful solutions shifting fast, this is something institutional investors will need to be on top of.
To get to grips with both physical and transition risk, you need a lot of data – much of which has historically been unavailable, let alone disclosed. This is where the TCFD comes in, by providing a framework for asset owners and asset managers to routinely seek the information they need to allow for a more meaningful assessment of climate exposure.
This is useful for insurers in two ways. As producers of data, insurers are facing increasing pressure to show their investors that they have given serious consideration to their exposure to climate change. However, to do this successfully, insurers will equally need this information from the companies in which they invest or provide cover for. The more companies start to make available information using the TCFD framework, the higher the quality of the data and the more useful it becomes. While not a solution in itself, assessing and articulating a firm’s exposure to climate risk is an important step towards being able to ask the hard questions of how these risks can then be reduced.
The ABI encourages all members to consider supporting TCFD recommendations. As an industry, the earlier we get ahead of the challenges arising from climate change, the better placed we will be to mitigate the risks involved and make the most of the opportunities transitioning to a green economy presents.
TCFD FAQs can be found here.