Climate change – the next hot frontier for disclosure?

The topic of climate change disclosures recently received some attention in Canada, by virtue of a speech by Bank of England governor Mark Carney.

As reported in the Globe and Mail:

  • “In a discussion with Canadian Environment Minister Catherine McKenna before a large audience at a Toronto Region Board of Trade event, Mr. Carney pointed to the “considerable” opportunities for the financial sector to profit from global efforts to reduce carbon emissions over the next two decades, as countries work to meet their commitments under last fall’s Paris climate agreement.
  • He estimated that global carbon reduction needs imply “somewhere in the order of $5- to $7-trillion a year” in clean-infrastructure investments. “The question is, how much of that is going to be financed through capital markets?”
  • He said that if there is a “global standard” established for green-infrastructure bonds – something the G20 is working on – it would create “a core mainstream fixed-income opportunity.” He noted that China, in particular, has large needs for such infrastructure that could generate relatively high-yielding investment products.
  • He also argued that a “a consistent, comparable, reliable” global system for corporate disclosure on carbon emissions would better allow equity markets to price in relative risk into company valuations. Mr. Carney has been championing such a system for much of the past year, in his dual roles as the head of the Bank of England and the chairman of the international Financial Stability Board.”

Of course, there’s another way of looking at this. A National Post commentary titled “Hail to the Alarmist in Chief: the World turns to Mark Carney for Climate Change Salvation,” concluded disapprovingly: “As the world turns through the current economic and political crises, it is hard to imagine that the top agenda item will be preparing corporations to disclose their plans for time horizons that stretch to 2030 and 2050. Short-termism may or may not have been a problem in the past, but extreme long-termism — hardly seems like a valid alternative.”  But of course, companies are presumably capable of doing more than one thing at once, and should be able to satisfy legitimate, well-defined investor interests without necessarily making it the “top agenda item.”

Anyway, as alluded to above, the current object of focus in this area is the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, which aspires to “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.” The Task Force has so far delivered a “Phase One report”, setting out “the scope and high-level objectives for the proposed work, together with a set of fundamental principles of disclosure, to provide an enduring disclosure framework and guide the Task Force’s Phase II recommendations.” It plans to deliver a final report by the end of the year, setting out more detailed recommendations.

Among other things, the Phase One report sets out seven fundamental principles for effective disclosures in this area. These won’t seem too surprising to those of us in the financial reporting environment:

  1. Present relevant information
  2. Be specific and complete
  3. Be clear, balanced, and understandable
  4. Be consistent over time
  5. Be comparable among companies within a sector, industry, or portfolio
  6. Be reliable, verifiable, and objective
  7. Be provided on a timely basis

But obviously the good stuff is yet to come, and we’ll certainly return to the subject in this space. As for IFRS, the main focus of this blog, the report only makes a single passing mention of it:

  • “The Task Force will also consider the appropriate level of discretion for management in determining relevance and materiality and the balance of qualitative and quantitative disclosures. We plan to develop our recommendations with an eye to flexibility and minimizing burden, provided they meet the Task Force’s high-level objectives and are consistent with our principles. This approach is intended to facilitate disclosures that focus on the issues that matter to boards of directors and would be consistent with the paradigm of “through the eyes of management,” which governs segmental reporting under International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S. GAAP).”

Of course, such flexibility involves an inherent trade-off against the comparability and objectivity sought by principles 5 and 6…

The report appears to envision recommending quantitative as well as qualitative disclosures, but provides little hint on what these might be. It’s fair to assume that any thought of aligning these quantitative disclosures with IFRS, let alone of incorporating them into financial statements, lies far down the road. Still, it may one day stand as a bizarre historical anomaly that there was ever a time when financial statements included detailed information on such esoterica as (say) the calculation of stock-based compensation expense, while not even addressing what the report calls “one of the most complex issues facing business, governments, and society at large”…

The opinions expressed are solely those of the author

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