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Why climate-related financial disclosure is top of mind in a COVID-19 world

Why climate-related financial disclosure is top of mind in a COVID-19 world 1

By Iggy Bassi, CEO and Founder of Cervest 

We are living in a world that we couldn’t have imagined just 12 months ago. The COVID-19 pandemic has altered the fabric of our daily lives in profound ways.

The world we find ourselves in makes it easier to imagine change on a vast scale. After all, we’ve experienced it. Questions of how rising sea-levels, extreme heat and droughts can change our lives in the near-future feel much more  real. The speed and scale of the transformation, affecting all aspects of our lives, in the wake of COVID-19 is acting as a wake-up call to the impact climate volatility is having as well.

Our post-COVID-19 awareness of fragility extends not just to a personal level, but deeply into the political and financial systems of a globalised business environment.

We are entering a new era in which risks—none more fundamental than climate volatility—will be top of mind for investors. While today the disclosure of climate-related financial risks is voluntary, we are on the cusp of that changing.

The evidence for this change is clear. Mark Carney, United Nations special envoy for climate and finance (and former governor of the Bank of England) has been calling on stock exchanges across the world to improve sharing of environmental data. Meanwhile, the UK’s PRA (Prudential Regulation Authority) has announced it expects all large publicly listed companies to comply with disclosure standards by 2022, and the EU has passed similar legislation.

Growing conscientiousness regarding financial risk relating to climate in the wake of COVID-19 is much needed. A cross-sector move to a standard-led approach will ensure the democratisation of climate related insights thereby improving transparency across the financial and business ecosystem. This can only ultimately benefit the financial and business sectors which will in turn become more resilient.

What COVID-19 has taught us about the relationship between finance and risk

Much of the financial discussion surrounding COVID-19 has focused on the steps governments are taking to head-off recessions. It’s crucial that green initiatives are at the heart of these recovery plans and initial steps are encouraging. The EU has earmarked 30% of its mammoth stimulus package (or around €550 billion over 2021-2027) to meet climate goals, while in the UK £350 million  is being made available to cut emissions in heavy industry as part of a drive for economic recovery from coronavirus.

For such bold policy moves, these steps are likely to enjoy widespread support. After enjoying clearer skies, less pollution and flourishing wildlife, research suggests almost eight in ten people in the UK believe economic recovery should be aligned with the UK’s environmental targets and commitments.

Beneath these macro moves, however, the pandemic response also highlights the now unignorable link between green businesses and solid finance. Too often dismissed as unnecessary or costly, today it’s clearer than ever that climate-literate businesses are reaping financial rewards. ESG (Environmental, Social and Governance) investments have been outperforming benchmarks in the wake of COVID-19, even as many sectors stumbled.

Governments, capital markets and investors are paying attention to these developments as well as what COVID-19 has taught us about how we can respond to “Black Swan” events. Throughout, the pandemic has shown that before disaster strikes, planning and early warning systems are invaluable. In the next stage, transparency, effective sharing of data, and clear expert-led instruction on the response are the best ways to mitigate and alleviate damage.

Globally, the response has been far from perfect, but it has shown the fundamental need for swift, science-led action in tackling international issues. And, because of the universal nature of the crisis, this information couldn’t be siloed among scientists or politicians. Disseminating information and building cooperation, support and understanding of the issues at hand from business and the public has been crucial.

Learning these lessons, and factoring in the clear link between risk and specifically, climate security, and finance in all business strategies is key to building resilience against future events.

Making climate-related financial disclosure part of global business strategy 

Iggy Bassi

Iggy Bassi

Climate issues are highly complex, non-linear and uncertain. They are also systemic in nature—in other words—there are multiple risks that impact climatic trends and looking at a singular risk will not provide an accurate picture of what is really happening.

And, in some form, climate risks (for example, extreme weather events, flooding) are present at every thinkable aspect of business, from energy use, to staff commuting, to how its computers are manufactured. On top of these ‘physical’ risks, there are also ‘transition’ risks presented by the move to a low-carbon business model.

In this sense, thinking about where to begin can be overwhelming. And, while greater transparency and data sharing with regard to climate issues is fundamentally valuable, investors, shareholders and customers are becoming less patient. What should companies share, and how?

The TFCD (Task Force on Climate-Related Financial Disclosures) offers a comprehensive pathway to businesses looking to answer these questions. Its resources range from its own recommendations to a bank of information on existing regulation. The influence of the TFCD continues to surge, with two thirds of FTSE100 organisations citing it in their reporting in 2020.

New technology can also help provide businesses with the information they need to disclose climate risk information across their operations. Recent advances in artificial intelligence, combined with Earth science, are making sense of the interconnected, vast climate systems that affect every organisation’s value chain. The insights such platforms provide can both inform business strategies with security and resilience at their core and provide objective data to be shared in future financial disclosures.

Transparency and collaboration in the future 

Implementing the TFCD recommendations and considering the potential of technology to reveal critical insights into climate risk are just two concrete steps organisations can take to improving their ability to share climate related financial disclosure. Fundamentally, what each of these steps are about is sharing intelligence with greater transparency. Just as we have seen during the pandemic, mass global collaboration is the most effective tool we have to tackle international issues.

From farmland to transport routes, many assets in global business are already shared. It’s time we start sharing data on them too. Meanwhile policy makers can engage working groups, trade associations and others to keep improving standards and offer new clarity on financial disclosure requirements.

Improved financial disclosure on climate related issues is a key step in opening up the conversation about shared responsibility over assets.

This once complex area is increasingly navigable by businesses of all shapes and sizes thanks to advances in both regulatory recommendations and climate risk assessing technologies.

By continuing to use and hone these tools, organisations can craft a more financially sound, resilient and secure future for global business, while doing more to protect the planet and its people.

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