Climate change: a material business risk
While climate change is widely recognized as a material risk to society, the environment, and financial stability, business leaders have yet to understand how businesses might be affected.
In view of that, the Financial Stability Board (FSB), one of the most influential international agencies responsible for addressing weaknesses in the financial system, developing and applying regulatory, supervisory and other policies to guarantee financial stability globally, set up a new initiative, the Task Force on Climate-related Financial Disclosures (TCFD).
The Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD is aimed to develop and provide a set of recommendations helping companies recognize and disclose climate-related risks material to their operations, also reporting this information to their investors.
After consulting with companies, investors and key financial players across the globe, the TCFD produced three reports describing how, why and where companies should report “climate-related financial information”, encouraging businesses to realize the financial risks (and opportunities) brought about by climate change.
Defining material climate risks
How should materiality be applied as regards climate-related issues? According to an analysis by the Climate Disclosure Standards Board (CDSB), 44% of companies not disclosing information on climate risks – considering climate risks as not material or not knowing how to apply materiality to climate-relate issues – cited materiality as the main reason.
As clarity on this issue is key, the TCFD is striving, along with a number of NGOs, academics and others, to help businesses understand how to identify, prioritize and manage material climate risks, providing guidance.
Making materiality a board, not a management issue
Materiality needs to be treated as a board issue Tweet This! and not a management issue, as happens today, since defining material issues – including climate-related risks – is, as a matter of fact, a responsibility of the board of directors.
Climate change will, however, be considered a material risk only by boards that consider long-term shareholders and future generations of employees as a significant audience, in contrast to boards focused on short-term shareholders as the only significant audience. Boards taking the former approach may, moreover, as recommended by the TCFD, benefit from scenario analysis, exploring various scenarios affecting their business, evaluating opportunities and risks, and acting accordingly.
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