Climate Risk Disclosures

If you ask a US CEO or board director whether their company is exposed to climate risk, chances are they’ll say no. Most assume it’s an issue for oil producers or airlines – companies that spew lots of carbon into the air. A recent study from Standard & Poor’s shows just how wrong such thinking is.

According to the report, nearly 60% of companies in the S&P 500 hold assets that are at high risk of physical climate change impacts, such as wildfires, heatwaves and flooding.  That’s a lot of factories, office buildings, pipelines and other physical infrastructure exposed to the effects of climate change, and reason enough for companies to look more closely at their own exposures.

From our own client work, we are starting to see US companies wake up to their climate risks. Many are forming Board Committees to assess materiality and recommend areas that should be measured and monitored. And most are disclosing timeframes for recommendations and implementation of climate-risk assessment programs. Specific disclosures about material risks are likely to increase as companies complete their reviews.

That was one of the main findings of our report on the state of climate risk disclosure (“The State of Climate Risk Disclosure: A Survey of US Companies”). It included results from a survey of members of the Society for Corporate Governance, the leading association dedicated to advancing corporate governance practices among US companies.

The survey asked about efforts to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), whose landmark 2017 report provided detailed guidance on assessing and disclosing material financial risks arising from climate change. A 2019 update by the TCFD found some signs of adoption but expressed concern that “not enough companies are disclosing decision-useful climate-related financial information.”

Our survey found that:

• US companies are at varying stages in their implementation of the TCFD recommendations. One-third of respondents said their companies have begun the risk assessment process and are at least a year from making disclosures, a finding that underscores the complexity of the task.
• Companies are beginning to use advanced analytic tools to assess their climate risks and opportunities, with 44% of respondents saying they use scenario modeling or stress testing. A recent update from the TCFD noted that scenario modeling is a challenge for many companies and few have used it in their climate disclosures so far.
• Board engagement – a key recommendation of the TCFD report – is crucial for identifying and managing climate risks. The survey indicated that boards mainly review climate risks on an as-needed basis. About 24% review the issues on a quarterly or annual basis, while a fifth of respondents said their board never discusses climate issues.
• The impediments to TCFD implementation include a lack of measurement tools for assessing climate risks and opportunities and difficulty integrating climate risk with the financial reporting process.

Despite these challenges, we believe disclosures about climate risks and opportunities will rise in the year ahead. There is a growing awareness that climate risk affects companies in many industries, not simply those in energy-intensive sectors. Investors will continue to press companies for greater disclosure of climate-related risks and clarity about how the board exercises oversight of them.

The next data set will arrive with annual company proxy filings, starting in just a few months. Like many investors, we will be watching for them with keen interest.