Comment: Financial Stability Board signals disruption ahead

2 November 2016 by Alex Malley

By Alex Malley

The Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) is currently working towards the delivery of its Phase II report. 

Recommendations on the nature of voluntary, consistent climate related financial risk disclosures are expected to be handed to the Financial Stability Board by the end of the year with a final report made public early next year.

It is widely anticipated that the Phase II recommendations will significantly raise market expectations for meaningful disclosures on climate-related risks and this will in turn have implications for the expectations as to what should be reflected in national regulation.

There is already movement of sorts in various markets.  In the United States, the Sustainability Accounting Standards Board (SASB) has released its Climate Risk Technical Bulletin providing a classification of risk types, while the Securities and Exchange Commission (SEC) has developed climate risk disclosure guidance.

In the UK the Financial Reporting Council 2014 Guidance on the Strategic Report explicitly says that disclosures about environmental issues are required when material.  Meanwhile the Council of the European Union has provided a directive for non-financial reporting, including environmental matters, for large public interest entities with more than 500 employees, to be transposed into national laws within a two year period. 

Elsewhere, the Malaysian stock exchange (Bursa Malaysia) is making it compulsory for all publicly listed companies to provide sustainability disclosures in their annual report based on the Global Reporting Initiative (GRI) Framework.

Part of the intent of the Task Force on Climate-Related Financial Disclosures is to provide recommendations that could in many ways overlay these individual territorial initiatives and provide a consistent and comparable framework for disclosure that could be applied internationally, albeit on a voluntary basis.

Given the potential ramifications of the Task Force’s work, we must consider how prepared we are to respond to the recommendations and incorporate change into our financial disclosure framework.

In reviewing the International Accounting Standards Board’s work agenda there is nothing that would suggest any preparatory work is underway in the area of climate-related risk.  Their research pipeline includes a project to consider pollutant pricing mechanisms in the future but this is a small piece of a much bigger puzzle. 

When you consider that the World Economic Forum (WEF) assesses the failure of climate change mitigation and adaptation as both high impact and high likelihood, this lack of action has the potential to leave the profession wrong-footed and appear recalcitrant. 

The scope of the issue is undoubtedly intimidating, yet so was the financial crisis of 2008.  Many national economies found themselves teetering on the brink of an economic abyss.  Once the dire circumstances became evident, the speed and scope of the global response was impressive. International short-term finance sector focussed responses kicked into action in September 2008 and spanned a period to early 2010.

In the wake of the 2008 ructions, the IMF’s view is that regulatory monitoring should extend into interdependent and interconnected sectors of an economy.

Corporate governance frameworks put forward by market or corporate regulators are increasingly shaped by bodies such as the FSB, OECD and the G20, that have arguably come to greater prominence, tend to reflect the IMF’s view.

It is inevitable that changes in climate-related international policy settings will have an impact on the way businesses operate.  Global commitments have been made, particularly the United Nations Framework Convention on Climate Change.

Governments will need to navigate the domestic policy challenges they each face but ultimately we will see markets demanding changes in the way we report on climate related risks and our reporting frameworks will need to be able to adapt accordingly.

The accounting profession needs to position itself to both adjust and make a meaningful contribution.

Alex Malley is chief executive of CPA Australia

Alex Malley is chief executive of CPA Australia Alex Malley is chief executive of CPA Australia