Following Toyota Motor, Hitachi, Kirin Holdings and others, a wide range of Japanese companies is starting to disclose information in accordance with TCFD recommendations.
The Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB), an international body drawn from the financial agencies of many nations. The TCFD itself is staffed by experts dispatched from financial institutions and corporations, and investigates how financial markets can best respond to climate change issues.
Final report of “Recommendations”, which was published in 2017 by TCFD, defined climate-related risks that could affect financial markets, pointing out that investors are increasingly seeking information on the possible effects of climate change on corporations issuing stock or bonds. A framework for information disclosure was presented to help investors make informed investment choices.
Toyota Motor Corp. issued its environmental report in September 2018, including a scenario analysis section related to climate change. Hitachi Ltd. issued its sustainability report the same month, and integrated report in October 2018, discussing the risks and opportunities of climate change.
Kirin Holdings Co., Ltd. investigated the possible effects of rising temperature on key agricultural items it uses in manufacturing. They were the first major firm to release their findings, in the group environmental report issued June 2018.
All these reports disclosed information in accordance with TCFD recommendations. Corporate disclosure is becoming more common worldwide in 2019, primarily among major companies striving to demonstrate corporate value and resilience superior to the competition.
The recommendations outline responses to intensifying climate change and increasingly strong climate-change related regulations, and discuss long-term corporate strategies for 2030 and beyond, stressing the need to sway investors. Scenario analysis is one tool that has attracted considerable attention, investigating the effects of climate change on business within defined economic and social frameworks.
This sort of analysis is clearly a management task, but on a practical level it is quite difficult for management to discuss situations more than three years in the future. Even so, many companies are now beginning to develop and disclose long-term strategies.
Their rising interest is due in part to an increase in requests from investors. The Government Pension Investment Fund (GPIF) of Japan, the largest institutional investor in the world, is one of 323 institutional investors worldwide asking major corporations to follow the recommendations.
Corporate management is also supporting the TCFD, with official announcements from over 600 companies, financial institutions, investors, and government agencies as of March 18, 2019. The UK has the most, followed by the US, and then Japan with 64 supporting members. The Ministry of Economy, Trade and Industry (METI) is determined to reach 100 corporate members, establishing Japan as the leader, and in 2018 issued its own guidance on utilizing information disclosure to spotlight corporate strength.
Disclosure is progressing especially smoothly in the energy/resources sector handling fossil fuels. Royal Dutch Shell plc, for example, has been developing scenario analyses for decades already.
The sustainability report issued by Inpex Corp. of Japan also presented climate change risk analyses and outlined response strategies in accordance with the TCFD framework. The firm emphasized its business resilience, mapping out a future transition from petroleum to natural gas and renewables.
Resource development demands massive up-front investment and imposes payback periods. Companies can demonstrate business soundness by reviewing operations based on analyses of demand fluctuation due to regulatory measures and other changes, and developing a long-term strategy as recommended by the TCFD.
While there are few firms that disclose corporate strategies as Inpex did, it seems sure there will be many more in the next year or two.