As heads of state of the world's 20 leading economies meet in Hamburg, Germany, they will consider several issues of global significance, including combatting climate change. In particular, G20 leaders will have the opportunity to endorse a series of voluntary guidelines to help companies around the world disclose the risks that climate change poses to their bottom lines.
Last month, the Task Force on Climate-Related Financial Disclosures (TCFD) published its final report detailing this voluntary guidance for businesses' disclosure on climate-related risks. American companies and investors support the guidelines, and some even participated in the task force, which was commissioned by the Financial Stability Board (FSB), an international body comprised of the G20's financial regulatory authorities. Among its major tasks, the FSB seeks "robust arrangements for dealing with stress in the financial system." One such stressor is climate change.
The U.S. government should support the TCFD guidelines and endorse them at the G20 meeting. The guidelines were developed with the input and support of the U.S. private sector, and endorsement will help create broad acceptance of disclosure practices that can make U.S. businesses more competitive and American investors more secure.
Climate Risk Is Already Here, and It Needs To Be Managed
A changing climate is already evident, leading investors to conclude that its effects are material and should be accounted for in financial decisions.
A recent study, which builds on years of data on the relationship between economic growth and temperatures, suggests that for every degree rise in mean temperatures, the U.S. economy could lose as much as 1.2 percent of its GDP per year. From declining agricultural productivity, to damage to coastal infrastructure, the physical impacts from climate change have a direct impact on business operations and profitability. For example, WRI found that 60 percent of U.S. shale gas plants are in arid or extremely water stressed regions, and in 2013 a Cargill beef processing plant was forced to shut down, with the loss of over 2,000 jobs, as a result of drought.
It is no wonder, then, that shareholders are beginning to demand better and enhanced climate risk disclosure. As seen in recent shareholder-led decisions by Exxonand Occidental, the financial community wants better information on the risks and opportunities related to climate change.
Why the TCFD Guidelines Matter
Disclosure rules are meant to protect investors and maintain market stability. The TCFD offers a clear, consistent reporting framework to encourage comparable, transparent disclosure of company data, such as assets committed in water stressed regions. Better disclosure will protect investors, such as pension funds, by providing them with the information they need to avoid capital losses and to prevent disorderly changes in asset prices.
One key aspect of the TCFD recommendations is that they encourage scenario planning. Companies and investors are advised to consider various policy and climate scenarios, and in the process, to think about longer time horizons than is typically the case given the short-term mindset of financial markets. More effective, long-term thinking could in turn help prevent large shocks stemming from different types of climate risk. If companies and investors in other countries are able to anticipate such shocks because of better disclosure and risk management, and United States is not then it will be at a disadvantage.
However, the TCFD recommendations are no silver bullet; increased quantification of risk as well as assessing which scenarios can be used still need to be worked out. Nevertheless, the TCFD recommendations do present a solid starting point for actors to improve climate-risk disclosure.
U.S. Businesses have an Opportunity to Shape the Future
U.S. businesses have an opportunity to help shape the future of the climate risk disclosure regime.A number of U.S. companies, including Bank of America, CitiGroup, Dow, Dupont, JetBlue, and PepsiCo, as well as major institutional investors such as Blackrock and CalSTRS, have come out in direct support of the recommendations. Additionally, the We Mean Business coalition, a group of 582 companies, which includes Coca-Cola, Google, GM, Microsoft, and Walmart, indicated their support for the TCFD recommendations. Separately, in a letter urging G20 members to support the Paris Agreement, 380 investors with $22 trillion in assets, including WRI, also emphasized adoption of the TCFD recommendations.
If, along with the rest of the G20, U.S. regulators endorse the TCFD's guidelines, they will strengthen a regime that is voluntary, private-sector led, and focused on materiality. U.S. regulators have long championed this approach, which is consistent with how disclosure requirements have evolved in the United States. In addition, the flexibility this approach provides may be appropriate, as climate-related disclosure is still an emerging field and much experimentation will be needed before companies and investors get it right. Furthermore, the flexibility of this approach should allow U.S. companies that want to lead in this area to do so, without being held back by laggards. However, if the United States fails to endorse these recommendations and if U.S. regulators don't stay actively engaged in this process, others will shape the disclosure regime. U.S. companies may be pushed to disclose according to rules shaped by other countries, by foreign mandates, or in response to stakeholder demand, and this may not always be consistent with U.S. regulatory approaches.
The G20 countries, like the United States, have many reasons to endorse the recommendations. Even if they don't, the recommendations are likely to be adopted by multiple companies, as evidenced by the wave of support in the investor and corporate community. Regardless, climate risk disclosure is gaining momentum, and the United States can either be a pioneer in this area, or it can stand aside and allow others to shape this space.