IHS report questions climate-related financial risk disclosure idea

Encouraging countries to make publicly traded companies disclose climate-related financial risks, as proposed by a Financial Stability Board (FSB) taskforce in December, could distort markets and confuse investors instead, an IHS Markit report warned. The consequences could be especially troublesome for oil and gas producers, speakers agreed during a May 16 discussion of the issue at the US Chamber of Commerce.

“Some parts of this could help investors comprehend risk related to climate change. Others would create confusion. The proposal’s materiality recommendations could start to turn an important financial regulation aspect into climate management,” said IHS Markit Vice-Chairman Daniel Yergin, one of the report’s co-authors.

Capital and assets could be misallocated if countries adopt FSB’s proposals, said a second co-author, IHS Markit Vice-Pres. Andrea Bullard. “It’s up to managements and boards to determine what information is material. The FSB proposal assigns a special status to climate-related risk and recommends making it a financial disclosure requirement,” she said.

FSB was established in April 2009 by the G20 Countries, a group of 20 nations representing about two thirds of the world’s population, 85% of the global gross domestic product, and more than 75% of total global trade. It launched an industry-led Task Force on Climate-Related Financial Disclosures in December 2015 to develop recommendations for consistent, comparable, reliable, clear, and efficient climate-related disclosures by publicly traded companies.

In its Dec. 14, 2016, proposal, the taskforce recommended that climate-related financial disclosures be included in companies’ primary financial filings. “The Task Force believes climate-related risks are material risks for many organizations, and this framework should be useful to organizations in complying more effectively with existing disclosure obligations,” it said. It released results of a 60-day public consultation about the recommendations on Apr. 18, and intends to make final recommendations at July’s G20 Leaders Summit in Hamburg.

Ignores US standard

But Brian O’Shea, senior director at the US Chamber’s Center for Capital Markets Competitiveness, said the proposal actually recommends moves to accelerate a global transition to a low-carbon economy instead of providing material information to investors. This does not recognize the US standard for doing this, which has existed for 4 decades, he noted during the May 6 discussion. “Without this, investors could be inundated with excess information,” O’Shea said.

He said FSB’s recommendations also underestimate voluntary climate reporting by 80% of US publicly traded companies, which publish such information separately from their financial results. “Requiring this to be in their filings with the Securities and Exchange Commission could open the door to class action suits,” O’Shea warned.

A fourth speaker, J.W. Verret, an assistant professor at George Mason University’s Antonin Scalia Law School, said FSB proposed climate-related financial risk disclosure requirements that are based on future possibilities that cannot be grafted onto US securities laws that are based on past experience.

“US accountability principles are incompatible with what the FSB is considering,” Verret said. “Litigation risk would be a serious problem. Companies would be caught between a rock and a hard place, trying to predict weather 5 decades into the future.” US companies now make safe-harbor statements acknowledging that climate change and other nonfinancial factors can affect future financial results, but the potential impacts cannot be reasonably calculated now, Verret said.

“The energy industry makes up one third of this country’s total capital investments,” said Karen A. Harbert, president of the US Chamber’s Institute for 21st Century Energy, who moderated the discussion. “Any changes in US disclosure requirements would have a real impact.”

The IHS Markit report found that the taskforce’s recommendation would undermine FSB’s goal of improving capital allocation decisions and market functions. “The linkages between climate-related indicators and financial markets are complex and uncertain, and users could not consistently deduce the scale, timing, or even direction of climate-related financial risk from this information,” it said.

The IHS Markit report said the FSB taskforce’s proposal:

• Departs from the established concept of what material information is for investors.

• Uses metrics that are not correlated with financial risk and opportunity.

• Inappropriately suggests that companies quantify financial implications of climate-related risks under a series of scenarios.

• Fails to consider what business information should be disclosed.

• Looks beyond investment decision-making into the realm of public policy.

• Prematurely proposes a definition of carbon-related assets that excludes transportation, agriculture, materials, and buildings, and other carbon-intensive sectors.

“Developing a corporate strategy isn’t easy,” said Bullard. “Making predictions in the future is difficult, particularly for oil and gas producers. Some of the ones which said 5 years ago that they would be working heavily offshore in 2017 now are concentrated onshore.”

Yergin said, “More information can be good if it goes into a general discourse. If it goes into mandated financial requirements, it isn’t.”

Speakers noted that FSB still is taking comments on the taskforce’s proposals, and has begun some reviews. “This conversation is not over,” Harbert said. “The FSB will consider other proposals.”

“Companies which are affected by climate change can’t ignore this,” said Bullard. “They need to engaged in the discussion, and provide ideas.”

Yergin noted, “The main goal is to provide the appropriate information for investors. At the least, this should be considered before the G20 meeting this July in Hamburg.”

Contact Nick Snow at [email protected].