In response to investors request, information disclosure by global companies’ climate change risk has become full-fledged. Recommendations from Task Force on Climate-related Financial Disclosures (TCFD) are becoming standard among them.

Winning over investors through information disclosure

Major global companies are starting to conduct “scenario analysis” to examine the impact of climate change on business and finance. Looking ahead towards 2030 to 2050, they are considering how their business may be affected over the medium to long term based on scientific scenarios. The results of the analysis and countermeasures will be disclosed to investors and financial institutions. Probably, conducting such analysis is an unprecedented experience for most businesses except for energy companies and some manufacturers.

The trigger for this movement was the announcement in June 2017 of a set of recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), which called for companies to disclose information on climate change-related risks. The recommendations were prepared on commission from the Financial Stability Board (FSB), which is comprised of financial regulatory organizations around the world.

Climate change is considered to be a risk factor that could throw the global economy into turmoil just as the collapse of Lehman Brothers touched off a global financial and economic crisis. Therefore, the TCFD urged financial institutions and investors across the world to take into consideration the possible impact of climate change on companies when making investment decisions concerning corporate bonds and shares. Companies will have to provide information that can be used by investors and financial institutions as a reference for investment decisions.

The TCFD called on companies to forecast what risks their businesses and assets may be exposed to in a future society and economy affected by climate change and explain how they intend to deal with the risks. Companies must explain their response to climate change risks with a long timeframe like 15 to 30 years. Doing so will be impossible unless top managers exercise leadership.

Among the potential risks to which companies may be exposed in relation to climate change are the possibility of facing the introduction of a high carbon tax or a strict fuel efficiency regulation in countries where their manufacturing operations are located and in markets where they sell products.

The TCFD classifies those risks as policy and legal risks associated with the tightening of policy and legal regulations intended to pave the way for a transition to a low-carbon society and urges companies to consider measures and strategies to deal with the risks. For the energy, raw materials and auto industries, those risks could have a direct impact on their businesses and earnings.

In the food and beverages industries, the impact of climate change risk should be taken into consideration. For example, abnormal weather events, including the frequent occurrence of floods and heatwaves, may cause damage to agricultural products procured by food and beverage makers as raw materials. The companies must identify such future risks based on scientific research results (scenarios) and explain their policies and strategies for dealing with the risks.

An initiative like this is not something that should be pursued only by environmentally conscious companies. Toward the end of last year, more than 200 investors sent a joint email message to the top executives of 100 major global companies, calling for them to enhance information disclosure based on the TCFD’s recommendations.

TCFD becomes standard

Among the investors were California Public Employees' Retirement System, known as CalPERS, and Allianz, a major insurance company based in Germany. By now, the number of investors who have signed up for the initiative has increased to around 280. Around 10 Japanese companies have received the email message, including Hitachi, Toyota Motor and Nippon Steel & Sumitomo Metal.

Takehiro Fujimura, who heads major trading house Mitsubishi Corporation’s Corporate Sustainability Department and who is a member of the TCFD responsible for technical affairs, said: “The TCFD’s recommendations are gradually becoming a standard of information disclosure required of companies by institutional investors. By disclosing information based on the framework of the recommendations, companies will be able to help institutional investors recognize their enterprise value correctly.”

For their part, companies have indicated how they will respond to the recommendations. Two hundred seventy global companies and other entities have expressed support for the TCFD’s recommendations. Among Japanese supporters are financial institutions and the Financial Services Agency as well as companies like Kokusai Kogyo and Sumitomo Chemical. Companies in the energy, auto, raw materials and electric machinery industries are also exploring how to respond.

The TCFD’s recommendations have set forth a common code of conduct for investors and companies. If top managers act on the recommendations and provide reasonable explanations as to how their companies can continue growing during the transition to a low-carbon society under the Paris Agreement, an international framework of the fight against global warming, they will be able to win over investors.