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Taking climate into account: Disclosing your strategy for a changing climate

As Mark Carney and Michael Bloomberg's Task Force on climate-related financial disclosures nears, FDs hoping to stay competitive will need to take their recommendations on board - here's what CFOs need to consider

This is the second in a series of articles from Carbon Disclosure Project‘s CEO, Paul Simpson, addressing what FDs need to know after Mark Carney and Michael Bloomberg’s climate Task Force reports to the G20 in July

From the time when international trade meant sailing wooden ships across the oceans, companies have required a strategy to manage the unpredictable nature of the weather. And so that remains today with climate change meaning global temperature rises, an increased likelihood of extreme weather events and emerging regulatory, environmental and consumer pressures – all requiring a corporate climate strategy.

As discussed in the first article of this series  – one of the most important developments for FDs in this area may prove to be the Task Force on Climate-related Financial Disclosures (TCFD), led by Mark Carney and Michael Bloomberg, which this July will set out a suggested framework for companies to report how they are managing climate risk. This article elaborates on the second of the TCFD’s four key areas: strategy.

Developing a corporate strategy

Under ‘strategy’, the TCFD suggests that companies disclose: “The actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning”.
In practice this means that FDs and their companies will be expected to explain what climate related risks the company has identified as a threat to the business, the extent to which they are likely to impact revenue, and their plans for continuing to thrive in that scenario.

According to the TCFD, this will entail:

  1. Detailing the climate-related risks and opportunities the organisation has identified over the short, medium and long term. For example, price volatility, changing government policies or shifts in consumer product preferences.
  2. Communicating the impact of these climate-related risks and opportunities on the organisation’s business, strategy and financial planning.
  3. Describing the potential impact of different scenarios, including a 2°C scenario on the business.

It is the last of these three disclosures that has attracted the most attention. Especially relevant as we go into AGM season at the oil majors is the idea of running scenario analyses for different global temperature rises. In practice, it means companies will need to show how different degrees of warming, and the more stringent climate regulation associated with each rise, will affect revenue and operations. For example it may include:

  • Examining Nationally Determined Contribution (NDC) commitments set out by each country in the Paris Agreement, and understanding how the business would fare if all countries stuck to those plans.
  • Analysing the impact of complying with science based targets, which are decarbonisation targets aligned with keeping a global temperature rise well below 2°C. Science based targets can help develop a roadmap for companies to reduce emissions and inform a strategy on the basis of the material risks they are running.

These scenarios should be contrasted with business-as-usual temperature projections, i.e. the baseline that would occur with no climate action. This is indeed the focus of the Exxon AGM on the 31 May.

Climate change must be factored into budgets

The ground-breaking recommendations by the TCFD recognise that climate change already significantly affects business operations and that this will only be exacerbated in the future. Cargill, one of the world’s largest food and agricultural companies posted its worst quarterly earnings in two decades following the US drought in 2012. While it is impossible to attribute a single event to climate change, this exemplifies the material risks presented by extreme weather events. In emissions-intensive industries – such as coal – regulation and the plunging cost of renewable technologies look set to make coal uncompetitive in many markets – something that will have ripple effects across the industry value chain.

Companies are already responding to these challenges. For example, the global mining giant BHP Billiton has published a climate change portfolio analysis examining demand for the company’s commodities in a 2°C world.

FDs hoping to ensure that their company remains competitive should take the Task Force’s recommendations on board. While climate change poses significant risks, in the years to come businesses that best articulate their strategy to manage those risks will be ahead of the game.


Paul Simpson is the CEO at CDP.

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