Understanding climate change: Is your business ready?

Companies are under increasing pressure to disclose their exposure to climate-related risks and opportunities in their financial reporting.

Over 100 customers packed into a Nordea auditorium in Stockholm recently to hear from experts on how to tackle one of the great challenges of our time: climate change.

Three speakers presented three different solutions: carbon taxes from an economics professor, responsible investing from a sustainability analyst at one of Sweden’s national pension funds and finally carbon capture and storage from a researcher working on an innovative test facility in the Stockholm harbour.

While undeniably fascinating, why hold an event about climate change and potential solutions at Nordea?

“Climate-risk reporting has become a very important topic for our customers,” says Jacob Michaelsen, head of sustainable bonds at Nordea. “That reporting often requires scenario analysis, using different models to identify climate-related risks to their businesses or portfolios.”

While the large institutional investors are already quite advanced when it comes to climate-risk reporting, the issue is starting to gain broader traction, according to Michaelsen.

Reporting goes mainstream

The increased focus is thanks, in part, to the Task Force on Climate-related Financial Disclosures (TCFD). The task force, chaired by former New York City mayor Michael Bloomberg, was set up by the Financial Stability Board of the G20 in 2015 to develop voluntary guidelines for companies, banks and investors to use when disclosing climate-related financial risk to their stakeholders.

While voluntary until now, TCFD-based reporting becomes mandatory in 2020 for all asset owners and managers signed on to the UN Principles for Responsible Investment, such as Nordea. Companies are also under increasing pressure from the investment community to report what they see as their upcoming climate risks.

“TCFD is gradually becoming more mainstream,” says Aila Aho, executive adviser on sustainability at Nordea, adding, “It asks companies to assess the financial impact climate change may have on their business – positive or negative – and thus is relevant in many sectors.”

Aila Aho discuss sustainability reporting at a "Women in Finance" event in Helsinki in October

Aila Aho, executive adviser on sustainability at Nordea, speaking on a sustainable finance panel at a "Women in Finance" event in Helsinki in October

Aside from her day job, Aho is also a member of the European Commission’s Technical Expert Group (TEG) on Sustainable Finance, which, among other things, is working on developing the so-called “EU taxonomy,” a framework to define criteria for business activities that have a significant positive impact on climate. Other environmental targets will be covered by a permanent sustainability platform to be established by the European Commission in 2020.

“The taxonomy will define the positive contribution very clearly and also give good guidance for the boundaries of negative impact with do-no-harm criteria. Both aspects are important,” she says.

There are also other standard-setters prodding companies to report ESG issues with a financially material effect. The Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), the Carbon Disclosure Project (CDP) and the Sustainability Accounting Standards Board (SASB) are just some of the other bodies with frameworks to help businesses report on sustainability topics that matter to investors.

Drowning in the alphabet soup of ESG reporting? Here’s a guide to help decode the acronyms.

Climate change in the crosshairs

In the past, sustainability reporting was seen as a do-good type of branding activity. That’s changing as investors increasingly search for material information on sustainability and corporates have good data to support their message. Climate change has also entered the crosshairs of financial regulators and central banks, which have created a coalition of the willing called the Network for Greening the Financial System.

“Learning by doing is gaining ground, and methodologies are being tested throughout the financial sector,” says Aho.

Credit rating agencies have started focusing on ESG risks when assessing companies’ creditworthiness.

Policymakers are also recognizing the importance of having information on the potential impacts of climate change and mitigating action. The European Commission in June 2019 integrated climate-related information into its guidelines on reporting non-financial information, the Non-financial Reporting Directive (NFRD).  The political agreement EU co-legislators reached on the taxonomy regulation in December further strengthens transparency. Corporates that are obliged to report under NFRD will be required to disclose the share of their business, capex and/or assets that is taxonomy aligned.

In France, a first-of-its-kind law from 2016 requires investors to disclose information around climate-related risk. The UK in July 2019 announced it would consider a mandatory requirement for listed companies and pension funds to disclose climate-related risks by 2022. China has also said it wants mandatory ESG reporting for listed companies by 2020. And the European Banking Authority launched its intentions for ESG risk evaluation and reporting for banks at the end of 2019.

Mapping out climate change scenarios

The increased focus on climate-risk reporting is forcing companies to think through what impact climate change will have on their business. Scenario analysis is one of the biggest challenges companies are grappling with, says Gemma Clements from the Climate Disclosure Standards Board, who runs TCFD workshops.

Projecting a change of 4 degrees, for example, the impacts are likely to be physical, with more extreme weather, more flooding and drought. That can affect a company’s assets, operations, supply chain or insurance costs. A future with a 1.5-degree change, on the other hand, would likely mean less physical impact but more regulation, which can also have significant effects.

Yet even after doing an analysis, what should companies then disclose? How do you disclose something that’s a possibility and not based on past evidence? These are some of the questions that come up at the TCFD workshops, says Clements.

More companies are getting on the disclosure bandwagon. The TCFD released its guidelines in 2017 with the backing of just over 100 CEOs. Two years later, in 2019, that number had grown to nearly 800 organisations, and 340 investors with nearly $34 trillion in assets under management were asking companies to report under TCFD. Yet while the disclosure of climate-related financial information has increased, it is still insufficient for investors, the TCFD concluded in in its June 2019 status report.

Mind the data gap

Everyone is looking for data, says Kristiina Vares-Wartiovaara, head of ESG at OP Asset Management in Finland, who recently spoke on a sustainability panel with Nordea’s Aho at a “Women in Finance” event in Helsinki.

“Investors have long been trying to find relevant sustainability data in order to make investment decisions,” she says. That’s why ESG reporting is such a goldmine and TCFD an asset to investors, but data availability remains a challenge, she adds.

“It is improving, but now we need to find a way to harmonize the collection of ESG data,” she says.

Kristiina Vares-Wartiovaara, head of ESG at OP Asset Management in Finland, discuss sustainability reporting at a "Women in Finance" event in Helsinki

Kristiina Vares-Wartiovaara, head of ESG at OP Asset Management in Finland, speaking on a sustainable finance panel at a "Women in Finance" event in Helsinki in October

Nordea as a company follows the GRI standards as the basis for its sustainability reporting, as well as the TCFD recommendations. In October, the Danish publication Økonomisk Ugebrev Ledelse named Nordea as a top performer in sustainability reporting. That recognition was, in part, thanks to new features in the bank’s annual sustainability report, according to Jenny Fransson, Nordea’s sustainability reporting expert who is responsible for the report.

“We disclose short- and long-term targets and follow up on them. We also have a factbook at the back of the report where we disclose all our data, so it’s easy for analysts to find the hard facts”, she says.

In her 19 years in sustainability reporting, Fransson says she has seen a dramatic evolution of the field. The new development is the focus on climate risks that can have a financial effect, she says:

“Sustainability issues can actually have a financial impact. They are not just something on the side but rather need to be integrated into your business model. You need to have a sustainable business model.”

The information provided within this website is intended for background information only. The views and other information provided herein are the current views of Nordea Bank Abp as of the date of publication and are subject to change without notice. The information provided within this website is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided within this website is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided within this website has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Bank Abp is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

The information provided within this website may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Bank Abp.

Related articles