The Effects of Climate Change on Corporate Reporting

Corporate reporting must progressively take into account the significant effects that climate change is having on the economy. How climate change might be included in corporate reporting and how this can boost investor confidence is described in a "practical framework idea."

The Task Force on Financial Disclosures Related to Climate Change (TCFD)

A generally acknowledged voluntary framework for standardized and consistent reporting of climate-related information has been developed by the Task Force on Climate-related Financial Disclosures (TCFD or the Task Force). The Financial Stability Board created the Task Force in 2015. The Task Force's goal is to recommend disclosures that investors, lenders, insurers, and other global stakeholders can rely on to accurately assess the risks and possibilities associated with climate change.

Climate Change: Opportunities and Risks

The Task Force approach suggests classifying the risks into the following two groups:

• Physical Risks: are the dangers of a business being disrupted as a result of climate change. These risks could be sudden, event-driven concerns like sporadic disruptions brought on by extreme weather. They might also be connected to recurring, long-term trends like increased global temperatures and increasing sea levels.
• Transition Risk:The transition to a low-carbon economy and the global commitment to preventing global temperature rise risks including:

•  Political and legal risks,for instance, the possibility that governments may impose new restrictions on the use of specific resources or raise taxes on CO2 emissions, both of which would raise operational expenses. 
• Technological dangers, for instance, the demand for current goods and services may decline as a result of new technologies. The process of creating new technology is frequently expensive.
• Risks to the market include, for instance, a shift in consumer behavior that would increase demand for goods and services with low emissions. 

The Task Force model, however, acknowledges both the opportunities and the challenges connected with the shift to a low-carbon economy:

• increased resource efficiency, such as through the development of machinery that is affordable.
• Less expensive operation due to the usage of renewable energy
• Early conversion of the company's product or service portfolio to low-carbon alternatives may give it a competitive edge.
• New markets and opportunities for collaboration may result from entering new markets.
• created a supply chain that uses sustainable resources, which increases resilience to changes in the business environment.

SUMMARY

The disclosure guidelines are thorough and ought to be regarded as best practice. It is anticipated that reporting on climate-related risks and opportunities will change over time, and the Task Force model will adjust to these changes as well. Keep in mind that specific items in the annual financial statements can potentially be directly impacted.

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