From theory to action:
TCFD asked to aim higher
Bank of England Governor Mark Carney’s effort to increase the transparency—and therefore the safety—of securities markets produced a 66-page document that opened for consultation two months ago. The consultation closed this week, by which time dozens of organisations, including Preventable Surprises, made a range of suggestions.
The core product of the Task Force on Climate-Related Financial Disclosure’s efforts is a framework that “will help investors and others understand how reporting organisations think about and assess climate-related risks and opportunities.” The task force recommends disclosure of climate risk grouped into four areas: governance, strategy, risk management, and metrics and targets.
Like many respondents, Preventable Surprises thought the report’s recommendations should be mandatory, not voluntary. We also believe using average global warming of 1.5°C for scenario analyses (in addition to 2°C) would result in the type of radical thinking needed if the Paris Agreement is to have a chance of forestalling the worst effects of global warming. “In a world of uncertainty, scenarios are intended to explore alternatives that may significantly alter the basis for ‘business-as-usual’ assumptions,” we noted in our response.
Our remaining feedback followed two threads: transition planning and voting integrity. We called for a shift in focus from scenario analyses to actionable transition plans that will move us quickly toward a low-carbon economy:
"In our view, investors do not have a complete picture of risk unless they understand the company’s contribution, positive or negative, to the systemic risks of climate change, and therefore its contribution to the likelihood of a smooth transition or a disastrously delayed transition. This requires the company to go beyond scenario analysis. … This shifts the company’s disclosure from one that is passive and hypothetical, to one that is active and real world. Investors can then monitor what is done against this plan, not only as a recipient of the risks and opportunities relating to climate change, but also as a contributor to those risks and opportunities. … Only with a specific transition plan in place can investors extend their scrutiny of governance to include the extent to which remuneration is aligned with progress on the transition plan, as well as whether public policy positions are consistent with the transition plan."
Secondly, we noted the involvement of several large asset managers in the TCFD process. We believe these managers—and all institutional investors—have a fiduciary duty to demand that companies publish 2°C stress tests/scenario/transition plans. Such action by investor members of TCFD is particularly important if the task force is to have credibility with other market participants. We suggested the following wording in our response:
"Investors should therefore have a default position of voting in favour of all reasonably worded 2°C AGM resolutions, regardless of the position of corporate management and whether or not there has been any private engagement."
TCFD was created to address the systemic risks caused by climate change. To advance its goal of promoting a smooth transition to a low-carbon economy we hope the task force will seriously consider the feedback it has received before finalising its recommendations.