As climate change has now become a board matter with clear outlined responsibility, we are starting to see more financial players practice climate-related financial disclosures as a material consideration to be overseen by senior management and the organization’s board of directors.
Sustainability themed and impact investing focused financial products are also on the rise, becoming a growing business strategy for the financial sector. Furthermore, among them are banks, having identified climate change as a key financial risk. As a result, there has been a growing number of financial players starting to integrate climate risk as part of their credit risk assessment to monitor and evaluate climate risks and opportunities. Despite these emerging trends in climate change reporting, the nature and extent of climate disclosures continue to vary between the banks. Disclosures were often approached on a siloed basis with limited disclosures in the financial statements and notes.
Although climate change is clearly recognized by banks as a financial risk to their business, there are still critical gaps that need to be addressed. For instance, there is no global accounting framework which is dedicated to climate risk and their financial impacts. Nonetheless, the relative maturity of the TCFD disclosures reported by banks in the 2020 reporting cycle marks the very first year in which banks have made substantive progress on the TCFD recommendations. We can see this being reflected in their standalone CSR documents, Annual Financial Reports and Sustainability Reports.
The TCFD Recommendations consist of 11 recommended disclosures around 4 thematic areas providing banks the supplemental guidance to appropriately assess climate-related issues:
Likewise, in Singapore, the Monetary Authority of Singapore (MAS) launched three sets of “Guidelines on Environmental Risk Management” for banks, insurers and asset managers – indicating that these groups should seek to improve their environmental- and/or climate-related disclosures by reference to international reporting frameworks such as the TCFD. More commonly, the number of financial players are now increasingly working towards reporting alignment with these guidelines.
The aim is to enhance the resilience of financial institutions to environmental risk and strengthen the role of Singapore as a financial sector in contributing positively to the global agenda – a transition toward a low-carbon, environmentally sustainable economy. Developed to engage the financial sector to report on environmental risks, if addressed, will allow corporates to showcase opportunities for improved financial and investment performance.
Climate Related Scenarios
Banks have established governance frameworks and put in place processes to ensure consistent oversight such as Internal Escalation, Due Diligence and Risk Management to manage potential climate-related risks that could pose a threat to their businesses. However, the use of scenarios in assessing potential implications of climate-related issues on the organization – one of the TCFD-recommended disclosures – has been highlighted as an evolving area. Due to limited climate-related disclosures in a relatively recent space, the combined challenges of data availability and a granularity approach to climate disclosures have held us back in making meaningful qualitative analysis. It is also still unclear what the opportunities are for banks, as the magnitude of effects that are likely to emerge from climate change over the medium to longer term remain uncertain.
While TCFD remains a voluntary, market-led initiative, many government organizations and regulators are taking steps to mandate its adoption. In fact, with many companies already implementing the recommendations, comparable, sustainability-related information can provide both institutional and retail investors visibility over the economic impact of their financial portfolios.
While we have yet to see the full effects of climate-related financial reporting, the TCFD recommendations are a great starting point and essential to be widely adopted. As more organizations move climate-related issues into mainstream annual financial filings, improved practices and techniques will further the quality of climate-related financial disclosures and ultimately, support a collaborative effort to reallocate capital to innovation and sustainable growth in our transition to a low-carbon economy.