Focus on climate risk management

At the end of September 2018, the Task Force on Climate-related Financial Disclosures (hereinafter “TCFD”) established by the Financial Stability Board, issued its latest status report on how companies strategize for climate risk. The core of this report is the follow-up on TCFD recommendations released in 2017 aiming to enhance the financial disclosure covering climate related topics. The recommendations provided were centered on four categories : Governance, Strategy, Risk Management and Metrics and Targets, applicable to both financial and non-financial companies across sectors and jurisdictions.

The results were overall satisfactory if we take into consideration the short timing between the release of these recommendations and the follow-up made by the TCFD, as proven by the fact that most of the 11 questions listed by the TCFD for this follow-up were overall answered by the main market players included in the sample.

However, it is worth saying that, even if this exercise raised the awareness in the market about the importance of these disclosures towards investors, some more critical questions were barely answered. This shows that the topic is already taken seriously by control functions, but is not yet embedded in the overall culture / strategy of the company. In particular, only a few companies actually disclosed the strategic scenarios foreseen according to an external impact coming from climate change (the now popular “+/- 2⁰C scenario”).

Overall, the TCFD realized that the first step to create awareness among the market players on this topic was almost accomplished (i.e. the TCFD has now more than 500 supporters while only 17 months ago was able to count on just over 100 supporters).

For the TCFD it is now time to focus its efforts in designing / supporting the implementation of a common regulatory framework to align the quality / quantity of the information to be disclosed in order to enhance the transparency in the market about these financial disclosures.

We should then expect that the European / national legislators will move their attention to environmental topics by starting to (pro)-actively introduce some climate related disclosure requirements.

The most interesting part is that the compliance with these new disclosure requirements will be achieved by the actors in market, only following a deep reorganization of the business culture driven by strategic / tangible investments and effort on climate identified key action points. This reorganization of business culture shall then be determined by the four widely adopted recommendations contained in 2017 report and previously mentioned.

Find more about the TCFD and how it will support companies in managing non-financial risk in the report

By Deloitte Luxembourg
Written by Julie Castiaux, Senior Manager et Gianfranco Mei, Senior Manager Deloitte Luxembourg