FSB launches Task Force on Climate-related Financial Disclosures

Mark Carney, Chair of the Financial Stability Board (FSB), has just announced the establishment of an industry-led disclosure focused task force on climate-related financial risks, aiming to encourage companies to be more transparent on physical, liability and transition risks of climate change.

We’ve written about the discussions on disclosure of disaster risks before, with the 1-in-100 Initiative looking at how companies can disclose their exposure to climate and weather disasters. This Task Force on Climate-related Financial Disclosures (TCFD) takes this initiative to the next level, as we wrote on the FSB’s proposal a couple of weeks ago, bringing global financial oversight backing and is likely to help accelerate these goals.

Any move on disclosure of climate or weather risks, due to climate change or otherwise, could increase demand for insurance, reinsurance and capital markets risk transfer through insurance-linked securities (ILS). As such this initiative is important to the industries we cover.

The Task Force on Climate-related Financial Disclosures (TCFD) will seek to develop “voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders,” according to the FSB.

The announcement has been made at the COP21 climate change negotiations and conference in Paris today.

Mark Carney, FSB Chair, explained; “The FSB is asking the Task Force on Climate-related Financial Disclosures to make recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks. Access to high quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time. Michael’s experience working on climate change issues, his unparalleled track record of execution in a broad range of fields and his lifelong commitment to open and transparent financial markets make him the ideal leader for the Task Force.”

Michael R. Bloomberg will act as chairman of the Task Force. Explaining his role, Bloomberg said; “It’s critical that industries and investors understand the risks posed by climate change, but currently there is too little transparency about those risks. When Governor Carney laid out the idea for a Task Force on Climate-related Financial Disclosures, I offered him my full support to help make it a success. While the business and finance communities are already playing a leading role on climate change, through investments in technological innovation and clean energy, this Task Force will accelerate that activity by increasing transparency. And in doing so, it will help make markets more efficient, and economies more stable and resilient.”

The Task Force will look consider physical, liability and transition risks associated with climate change, as well as what kind of financial disclosure could be effective. It will develop a set of recommendations for “consistent, comparable, reliable, clear and efficient climate-related disclosures,” as the FSB explained in the proposal in November.

The FSB says that there is “a need for companies and relevant stakeholders to reach a consensus on the characteristics of effective disclosures and examples of good practices.” The Task Force will look at disclosures already in place, or proposed, and seek to pull them together with insight and best-practice to develop a set of disclosures that can work.

Two stages of work will be undertaken, with the first scheduled for completion by the end of March 2016. For this first stage the Task Force will consist of about 10 individuals, who will look to determine scope and objectives. In the second stage the Task Force will likely grow to include up to 30 individuals, who will be focused on delivering specific recommendations for voluntary disclosure principles and leading practices. The Task Force will aim to complete its work by the end of 2016. The work will include public outreach.

The Task Force is expected to comprise senior technical experts from sectors and companies who are “the preparers and users of company risk disclosures, as well as risk analysts.” They will be private-sector individuals, coming from financial and non-financial companies, from the FSB’s membership countries around the world.

The FSB defines the physical, liability and transition risk groupings as:

• Physical risks: the impacts on insurance liabilities and the value of financial assets that may arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade. In the financial sector, these losses have consequences most immediately for the insurance sector, but also extend more widely;
• Liability risks: the impacts that could arise if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, creating liabilities for carbon extractors and emitters and their insurers;
• Transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent. The abruptness with which such re-pricing occurs could influence financial stability.

The disclosure of physical risks, as described above, is very relevant to the insurance, reinsurance and also insurance-linked securities (ILS) sector. Should the Task Force develop recommendations that companies around the world disclose their exposure to severe climate and weather related events, the potential increase in demand for insurance protection could be significant.

Once disclosure occurs it tends to stimulate action, in any context. If companies disclose their exposure to climate and weather, their stakeholders, shareholders and investors are likely to require these risks to be managed and in many cases protected against, financed in advance or transferred altogether.

That could require significant capacity to be brought to bear on the world’s climate and weather risks.

If companies adopt disclosure practices on climate related exposures and risks, it will likely result in greater protection of both lives and livelihoods, while also increasing insurance uptake and likely contributing to the narrowing of the insurance protection gap as well.

Any disclosure of climate risk in an official, regulator approved format, has to result in companies being pressured to then manage the disclosed risks. That’s a very important step in helping the world to become more resilient to climate risks.

Also read:

– Companies called on to disclose natural disaster risks.

– Push for natural disaster stress-tests and disclosure of risks gains pace.

– Climate change a trillion-dollar threat. Re/insurance & ILS can help.

– Re/insurance industry calls for action on disaster risk at Sendai meeting.

– Financial Stability Board progresses climate risk disclosure work.

Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.