Weighing ESG Disclosures–Climate Risks Going “Financial”


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ESG disclosures are disclosures related to environmental, social, and governance risks. They are factors considered when analyzing the sustainability and ethical impact of a company’s operations. In recent years, investors have shown a greater interest in these disclosures. This heightened interest is likely due to an increased awareness of how disclosing this information can impact the financial sustainability of companies.  

ESG issues, ranging from climate change to diversity to board effectiveness, can show investors how forces outside of normal market variables can affect a company’s operations and revenues.  

This blog examines issues related to climate risk disclosures. 

Climate-Related Risks--Why Do Investors Care?

In a black and white world there were once economic issues and environmental issues, separate and distinct. The figurative wall fell long ago. A report released by Citigroup in 2015 estimated that not acting on the effects of climate change could cost the US economy $44 trillion dollars in terms of lost gross domestic product (GDP) by 2060.The question that persists is how companies disclose these risks to their investors 

Investors are focusing more on long-term economic returns on their investments. Climate-related risks can disrupt a company’s operations, pose threats to its economic well-being, and have real financial impacts on a company’s long term performance. “The longer an asset owner’s time horizon, the more climate-related risks compound,” said BlackRock, the world’s largest asset manager, in its strategic advice for its investors.

There has also been an increase in public demand for more corporate responsibility with respect to climate change. This has led investors to push companies for greater transparency on information related to their climate risk disclosures. 

In addition, compliance with new climate policies, laws, and regulations can be expensive. Investors have started to ask companies to report regularly on what kind of impact climate-related regulations would have on their operations. At Exxon Mobil’s annual shareholder meeting in May, the company’s majority shareholders, including BlackRock, Inc., demanded the company disclose details about the risks posed to its business due to climate change policies. BlackRock also listed “disclosure of climate risks” as one of its engagement priorities for the next year. The firm has also said that it “will remove specific companies or industries” from its investment portfolio if they are not aligned with investors’ values or mission.

Climate-Risk Disclosures--Moving from Non-Financial to Financial

Public companies are required by the Securities and Exchange Commission to disclose risk factors in their financial filings. Traditionally, companies have included possible negative operational outcomes that could affect their risk targets--such as capital resources, net sales, revenues, and future financial conditions. However, climate change can have possible negative outcomes affecting any or all of these risk targets. Our special report,Environmental Sustainability Disclosures: SEC Faces Its Regulation S-K Requirements, provides more insight on the SEC filing rules.

The industry-led Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), whose purpose is to ensure “more methodical, comparable and consistent disclosure on climate-related risks and opportunities,” recommended in its June report that preparers of climate-related financial disclosures provide such disclosures in their mainstream financial filings.

Michael Bloomberg, founder of Bloomberg BNA's parent company Bloomberg L.P., is chairman of the Financial Stability Board's TCFD.

The Task Force believes climate-related risks are often material and “disclosure in mainstream financial filings should foster shareholder engagement and broader use of climate-related financial disclosures, thus promoting a more informed understanding of climate-related risks and opportunities by investors and others.” 

“Publication of climate-related financial information in mainstream financial filings will help ensure that appropriate controls govern the production and disclosure of the required information,” the Task Force also stated. 

Climate-risks disclosures matter. They are viewed less by the public as companies taking advantages of PR opportunities and more as a source of information to help investors focus earn ethical and sustainable returns.

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