TCFD: time to get serious?
Estimated reading time: 3 minutes
Mark Carney, Governor of the Bank of England, recently gave a speech at the inaugural Task Force on Climate related Financial Disclosures (TCFD) summit in Japan. Amid the backdrop of Typhoon Hagibis and, given the fact that Japan has recently risen to the top of the TCFD league tables, there was perhaps no better place to have held the summit.
One of the key points raised in the speech is that both the UK and EU have signalled their intentions to make TCFD disclosure mandatory. This could have a profound effect on small to medium sized insurers within the UK. To date there has been a tendency for the smaller firms to adopt a ‘wait and see’ approach whilst the large companies begin to develop best practice for TCFD disclosure.
We have been considering some of the steps ALL insurers should be taking now, in order to avoid (at best) being left behind the pack, in terms of TCFD disclosure. At worst, insurers risk non-compliance with regulatory expectations if the TCFD recommendations become mandatory.
What is the TCFD?
Having been asked by the G20 to review how the financial sector can take account of climate related issues, the Financial Stability Board (FSB) established the TCFD. This is an industry led task force made up of 32 members, chaired by Michael R. Bloomberg, to develop consistent, voluntary climate related financial risk disclosures for stakeholders such as lenders, insurers and investors.
The TCFD recommendations involve asking firms to provide voluntary (for now) information in the below areas, as part of their normal annual disclosures:
- Governance – management and the Board’s role in assessing, managing, and overseeing climate related risks and opportunities
- Strategy – approach to risks and opportunities, including how they could impact your business model
- Risk Management – how climate related risks are identified and managed
- Metrics and targets – used to assess strategy and risk relating to climate change
It is worth noting that these four recommendations are very closely aligned to recent Prudential Regulation Authority (PRA) publications, setting out the PRA’s expectations of firms with regards to managing climate related risk.
It is not the intention of the TCFD to create significant reporting burdens on firms. Rather, the key element of the disclosures is that they are high quality disclosures that are comparable and, in particular, ‘decision useful.’
In his speech, the Governor highlighted that a definitive view of what counts as high quality is still a work in progress. He suggested no decision on mandatory disclosures will be made until there is a consensus of what constitutes high quality climate related disclosure.
Climate change has long been considered by insurers as a Corporate Social Responsibility (CSR) or an Environmental, Social and Governance (ESG) issue. However, few have considered climate change as a risk that will impact them financially.
This approach is no longer sustainable for two reasons. Firstly, regulatory direction of travel indicates that much more is expected from insurers in terms of climate related risk management. Secondly, insurers who adapt their business strategy to take a holistic view of the impact of climate change on their business will be able to take full advantage of the potential opportunities brought on by the world’s adaptation to new global conditions; for example, by investing in green bonds and offering ‘climate-conscious’ products.
We have highlighted some actions insurers should be taking below:
- Responsibility for managing financial risk from climate change needs to be allocated to an existing Senior Management Function
- Climate related risks and opportunities should be considered up to Board level, with the potential impacts on business strategy and planning identified
- Insurers should be considering performing detailed scenario testing within their own risk and solvency assessment (ORSA). These scenarios do not necessarily have to be quantified. The PRA consider ‘walkthrough’ scenarios that focus on narrative to be useful in considering the insurer’s resilience to climate related risk
- Insurers should be aligning their annual disclosures with the TCFD recommendations
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