Courage & Climate Change Action

We need more leaders with the courage to ensure that every financial decision takes climate change into account

An important part of empowering decision makers will be to provide them with more comprehensive data. This can only happen when more companies are consistently reporting on their climate-related risks, opportunities and actions.

Peter Drucker, the world-renowned management consultant once said: “whenever you see a successful business, someone once made a courageous decision.”

Successful businesses of the future will be those that make the courageous decision to play a leading role in the transition to a net-zero emissions economy.  

Ultimately, this will require that every business decision takes climate change into account. This simple goal forms the basis of the COP 26 Private Finance Agenda, recently launched by the Bank of England, which is designed to help private finance support the whole economy transition to net-zero emissions. 

This ambition should excite sustainable finance leaders who have advanced the debate on climate change. However, achieving this goal will require advancements in the widespread availability of high-quality climate-related data to inform the decisions that will be taken by investors, lenders, and insurers. This has highlighted the need for enhanced reporting, at an unprecedented scale and pace, of climate-related data by organisations across all sectors.

Taskforce on Climate-related Financial Disclosures

A leading initiative in this space has been the adoption of the recommendations put forward by the Taskforce on Climate-related Financial Disclosures (TCFD). The Financial Stability Board (FSB) established the TCFD to “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.“

The TCFD recommendations urge organisations to:

  • achieve board-level governance of climate risk and opportunity assessments;
  • develop strategies aligned with global climate targets;
  • disclose risk management processes and metrics
  • report annually on greenhouse gas emissions.

There has been a significant and growing adoption of the recommendations and they are now supported by more than 1,000 organisations globally, with nine organisations in Ireland expressing their support for the TCFD. The recommendations have become a core component of corporate reporting and are here to stay

However, the recommendations themselves are not perfect, the number of companies adopting them is not enough, and even when adopted the quality of reporting is not always sufficient to truly support financial decision making.

This lack of high-quality data presents challenges to the mainstreaming of climate change in financial decisions. For example, a survey of the market by BNP Paribas Securities Services shows that two-thirds of respondents cited problems with data as a significant barrier to greater adoption of ESG across their investment portfolio.

What are the main factors responsible for these issues?

Firstly, adoption of the recommendations in reporting is voluntary. The TCFD has itself acknowledged that it will take five years for full adoption, but whether voluntary recommendations will ever be enough to drive widespread adoption is up for debate. Secondly, many organisations are only at the beginning of understanding how to assess, measure and manage climate risk. This results in information failures that restrain understanding of the financial risks and opportunities due to climate change.

The importance of meaningful reporting cannot be underestimated. it is one of the five strategic areas identified in the COP 26 Private Finance Agenda, and a key aspect of this will be agreeing on potential paths to mandatory reporting of climate-related financial risk disclosures at  a domestic and international level.

On the path to mandatory disclosure

Unsurprisingly, central to this growing discussion is the role of government and regulators and whether these actors can and should drive mandatory climate-related reporting. Mark Carney, Governor of the Bank of England, certainly believes so, The well-respected central banker recently took a firm position, stating: “in the future, to achieve a carbon-neutral economy, disclosure must clearly become mandatory”.

In part 2 of this article, I will investigate what regulatory requirements are being introduced or investigated globally, whether this is too much or too little, and ultimately how companies can start planning now to better prepare for the coming tide of mandatory climate disclosure.

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Christopher Dixon O Mara

Christopher Dixon O Mara is a climate and energy professional whose work focusses on energy and climate policy, sustainability reporting and sustainable finance. Over the past five years he has worked in both the private and public sector on climate issues in Europe, the United States and is currently based in the United Kingdom. Christopher received his MSc. Environmental Policy from University College Dublin and his BSc. Renewable Energy from Limerick Institute of Technology. The views expressed here do not necessarily reflect the official policy or position of any other agency, organisation, employer or company.