The 2020 edition of the World Economic Forum (WEF) annual Global Risks Report found “failure of climate-change mitigation and adaption” as its top risk in terms of impact. Additionally, for the first time the top five risks in terms of likelihood were all related to climate change and related environmental issues. Climate change clearly poses a significant risk to the world economy. Ultimately, if not addressed climate-related risks will impact the financial position, performance and prospects of all businesses. Article 2.1(c) of the Paris agreement commits to “[m]aking finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. An estimated US$6.9 trillion a year is required to achieve the Paris Agreement goals by 2030. In response, investors, as the primary users of mainstream annual reports, are asking for greater clarity and transparency on the impacts of climate-related matters on businesses. The Taskforce on Climate-related Financial Disclosure (TCFD) recommendations have been a key driver for the inclusion of material climate-related information and potential effects on companies’ future operations in mainstream narrative reporting (the so called ‘front-half’ of annual reports) in recent years. Although, disclosure of climate-related financial information by companies has increased per the most recent TCFD Status Report, continuing progress is needed, particularly quantifying the potential financial impacts of climate change on their businesses and strategies. Figure 1 of the 2017 TCFD Final Report summarises how climate-related risks and opportunities may have a financial impact on a company. Investors also require disclosure of the current financial effects of material climate-related issues on a company’s financial statements. Disclosure of the financial effects of climate- related matters provides these users with better quality information and thus allows for more efficient and effective engagement, valuation, voting and capital allocation decisions. Disclosure of climate-related matters also enables markets to more effectively price the potential future financial impacts of climate change, which in turn supports the reallocation of capital resources necessary to transition to a low carbon economy. However, the inclusion of material climate- related information within financial reporting (the ‘back-half’) could also be improved, particularly in comparison to the narrative disclosures in the front half of annual reports.
https://www.cdsb.net/sites/default/fil/cdsb_climateaccountingguidance_s_110121.pdf
