IHS Markit Challenges Recommendations of the Task Force on Climate-Related Financial Disclosures
In another chapter in the ongoing debate
regarding the future of public company disclosures concerning the environment,
the London-based consulting firm IHS Markit Ltd. has issued a lengthy report
critiquing the Draft Recommendations published in December 2016 by the Task Force on Climate-related Financial
Disclosures (TCFD). A handful of energy company supermajors provided
financial support for the report, entitled Climate-Related Financial Risk and the Oil
and Gas Sector.
IHS Markit Responds Critically to the TCFD
The IHS Markit Report asserts that the TCFD
Draft Recommendations represent a “radical departure from established concepts”
in disclosing financial risks, including traditional concepts of “materiality,”
raising a debate about the amount of information that companies should disclose
related to climate change risks.
The IHS Markit Report makes six overarching criticisms
of the TCFD Draft Recommendations:
- The Draft Recommendations depart from the
established concept of materiality in financial disclosures by requiring
companies to disclose even non-material climate-related risks.
- The Draft Recommendations establish metrics that
are not correlated with financial risk and opportunity.
- The scenario analysis recommended by the Technical
Supplement to the TCFD Draft Recommendations does not reflect the
strategic changes that companies will make over time and as such will mislead
investors who may treat the scenarios as projections.
- The Draft Recommendations, if adopted, will
require disclosure of confidential business information regarding costs,
strategies, and scenario assumptions.
- The Draft Recommendations extend beyond the
scope of financial disclosures to policies related to climate change, which
should be left to regulators.
- In the view of the IHS Markit Report, the Draft
Recommendations focus on a definition of “carbon-related assets” that excludes
many carbon-intensive sectors beyond the energy industry, such as transport,
agriculture, and materials and buildings.
IHS Markit has focused its criticisms on the breadth
of analysis and disclosures that would be required if the Draft Recommendations
were to become the standard climate-related disclosures for public companies. At
present, most companies listed on a national securities exchange in the U.S. disclose
only those climate-related risks that companies have determined to be material
under the SEC’s Guidance
Regarding Disclosure Related to Climate Change. Under this SEC Guidance,
“material” information exists where there is “a substantial likelihood that a
reasonable investor would consider it important in deciding how to vote or make
an investment decision, or, put another way, if the information would alter the
total mix of available information.” Notably, SEC Guidance does not suggest
that the granular disclosures set forth in the Technical Supplement to the TCFD
Draft Recommendations — including climate scenario analysis — are necessarily
appropriate. Nor does SEC Guidance require disclosure of anything like the climate
scenario analysis called for by the TCFD. In addition, companies may be
ill-equipped to undertake this analysis because there are no analogous
circumstances where scenario analysis is required to be employed in public
financial disclosures. The following, taken from the TCFD Technical Supplement
and modified, shows some of the ways that the TCFD Draft Recommendations depart
from current financial disclosure analysis:
Drawing on the current definition of
“materiality” provided by the SEC, the IHS Markit Report claims that by
requiring companies to undertake and disclose climate scenario analysis, the
TCFD is overbroad and in some cases will call for companies to disclose non-material
risks. IHS Markit further asserts that not all information that the TCFD would
have disclosed correlates with financial risk and opportunity, that detailed
disclosures based on climate scenario analysis would necessarily include
confidential information, and that such disclosures would not allow for
companies to account for dynamic changes to their portfolios and assets.
The IHS Markit Report also applies these general
criticisms to some of the more specific disclosure items called for by the TCFD.
One of these criticisms surrounds the TCFD Draft Recommendations’ call for
disclosure of Scope 1, 2, and 3 Greenhouse Gas (GHG) emissions as defined by
the World Resources Institute’s and the World
Business Council for Sustainable Development’s
GHG Protocol. Briefly, these
categories of emissions represent direct emissions from a company’s facilities,
indirect emissions from purchased energy for a company’s use, and indirect
emissions from production of materials purchased by a company.
The IHS Markit Report asserts that disclosures
based on these emissions categories do not necessarily correlate to financial
indicators and that they could easily be read out of context by investors. The
IHS Markit Report states that this level of disclosure can only be understood
in the context of many factors, including “emission management, portfolio
shifts, changes in the degree of vertical integration, declining production, or
other factors” that would not be included in even expanded financial
disclosures. The following chart provides several examples of this and other potential
“pitfalls” the IHS Markit Report identified in the TCFD Draft Recommendations:
IHS Markit Report’s Recommendations
The IHS Markit Report provides the following counter
recommendations to the TCFD:
- Material climate-related information should
continue to be shared via public financial filings. For climate-related
information that does not meet the established principles of materiality,
companies should determine what is most appropriate to communicate through other
channels, such as strategy presentations, sustainability reports, and
independent reporting programs.
- Many of the long-term trends associated with
climate-related risks are public information. Investors should make their own
assessments of the financial implications based on a combination of
company-specific information; trends in the policy, economic, social, and
business environment; and their own investment theses and risk appetites.
- Financial regulators and investors should not
ask for quantified financial implications of long-term scenario analysis. Such
information does not provide substantive, objective information that can be
used to assess financial risk.
- Companies should not be asked to disclose what
they view as competitively sensitive information that could damage existing
- Financial disclosure should not be used to drive
policy goals that are beyond the remit of financial regulators. Climate policy
should be designed and implemented by government agencies with the requisite
mandates and expertise.
Since the [TCFD] believes that “further work is
needed on defining [carbon-related assets] and their potential financial
impacts,” it should not limit which sectors banks consider to be
“carbon-related” for the purpose of reporting credit exposure.
Will IHS Markit Impact the Final TCFD Recommendations?
The May 2017 IHS Markit Report claims that the
TCFD Draft Recommendations go too far in recommending innovations to “established
concepts” in disclosing financial risks related to climate change. The TCFD
takes the position that climate-related risks are distinct from other financial
risks and therefore require a new framework — climate scenario analysis — to
allow investors to evaluate these risks and companies’ preparations for those
risks. The IHS Markit Report believes that this new framework will be difficult
for companies to implement and will confuse and mislead investors, who have not
been presented with scenario analysis in public financial disclosures relating
to other kinds of financial risks. Essential to the debate is the definition of
what should constitute “material” information for disclosures related to
climate change. Companies with high carbon imprints should be paying attention
to competing arguments about what information is properly considered material,
especially in light of a new wave of shareholder proposals calling for
companies to undertake and disclose analyses comparable to those recommended by
the TCFD. It remains to be seen whether the IHS Markit Report will impact the
TCFD Draft Recommendations before the TCFD finalizes those recommendations in anticipation
of the July 2017 Group of Twenty (G20)
Summit in Hamburg, Germany.