Companies’ carbon emissions hamper portfolio performance

The global Task Force on Climate-related Financial Disclosures (TCFD) published its final set of voluntary recommendations on Thursday, which cover four basic areas of financial disclosure to investors, lenders and insurers: the metrics and targets used to assess and manage climate-related risks and opportunities; the possible impacts of these risks on businesses, strategy and financial planning; risk-management processes; and governance.

“Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important,” says Michael Bloomberg, chairman of the TCFD, in a statement. “The task force brings that framework to the table, helping investors evaluate the potential risks and rewards of a transition to a lower carbon economy.”

The TCFD reports that more than 100 firms with a combined market capitalization of more US$3.3 trillion, and financial firms responsible for assets of more than US$24 trillion, have expressed support for the recommendations. The task force calls on other firms to adopt the recommendations.

“The task force’s recommendations have been developed by the market for the market. They set out the disclosures that a wide range of users and preparers of financial filings have said are essential to understanding a company’s climate-related risks and opportunities,” says Mark Carney, chairman of the Financial Stability Board (FSB) and governor of the Bank of England, in a statement. “Widespread adoption will provide investors, banks and insurers with that information, helping minimize the risk that market adjustments to climate change will be incomplete, late and potentially destabilizing.”

Commenting on the recommendations, Moody’s Investors Service Inc. says that widespread adoption of the task force’s standards “will enhance the ability to integrate the impact of climate-related issues into credit analysis.”

In particular, the credit-rating agency says that the use of common metrics and targets would enable “a better understanding of an issuer’s ability to meet its long-term financial obligations and its progress in managing and adapting to climate issues. It would also allow for cross-comparisons of the relative impact and performance of organizations in a given sector.”

However, Moody’s notes that implementation of the recommendations will likely be gradual, given that they are voluntary.

That said, Moody’s also says that it expects significant momentum from both government and regulatory policy, and from the private sector, to support the adoption of the recommendations over time.

“The recommendations are likely to receive considerable backing from large investors, asset managers and asset owners, on the back of increasing demand for information and tools to assess the climate exposure of investment portfolios,” Moody’s says.

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