By Stacy Swann

The Biden administration is reportedly preparing an executive order that will require federal agencies to measure, manage, and disclose climate risks — and which, by extension, likely signals new rules for financial institutions and for companies working in sectors from energy to agriculture. Meanwhile, the Federal Reserve is setting up committees to look at climate risks to banks and the broader financial system, and the Securities and Exchange Commission is considering climate disclosure requirements for public companies. At the state level, the New York Department of Financial Services has put the nation’s first-ever regulatory framework for climate change risk out for public comment, while California has launched a Climate-Related Risk Disclosure Advisory Group.

As climate risk management moves to center stage for U.S. policymakers and financial regulators, many American financial institutions and corporations are playing catch-up, as what has been clear to governments and financial overseers in other parts of the world (such as the UK and New Zealand) is now coming into sharp focus in the United States. Climate change is not an issue for future consideration; rather, it is happening now. And climate risk is a financial risk that cannot be ignored.

At Climate Finance Advisors, we’ve worked with firms around the world on identifying, evaluating, and managing climate risk, and preparing for publicly disclosing this information using frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD). Our clients have found that the process helps them rethink institutional and business approaches to evaluating risks and opportunities. This helps businesses and investors alike understand the financial effects of climate change in the short, medium, and long terms.

Better known in international financial circles than by U.S. businesses, the TCFD — which was established by the G20’s Financial Stability Board — is increasingly regarded as the industry standard for climate risk evaluation, management and disclosure around the world. The TCFD framework offers clear, consistent, and comparable disclosures. TCFD also deepens understanding of climate-related risks and opportunities, so firms and investors are better able to direct capital in sustainable, climate-smart, and resilient directions.

The TCFD’s recommendations — which, for now, remain voluntary in most of the world — guide companies in disclosing how climate-related risks impact their organization’s governance, strategy, risk management, and the metrics and targets used to drive growth. As a disclosure framework, TCFD can also give markets what they need to know to evaluate and incorporate the financial impacts of climate risk. TCFD recommendations include:

  • Disclosing a business’s governance around climate-related risks and opportunities;
  • Disclosing actual and potential impacts of climate-related risks and opportunities on an organization’s businesses, strategies, and financial planning;
  • Disclosing how a company identifies, assesses, and manages climate-related risks; and
  • Disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities

Year after year, the influence of the TCFD framework has been building. In 2019, the EU incorporated the TCFD recommendations in its Non-Financial Reporting Directive. In 2020, the United Kingdom, Hong Kong, Brazil, and New Zealand announced plans for mandatory climate risk disclosure following TCFD guidelines for certain companies and financial institutions.

So far this year:

  • The chair of the International Organization of Securities Commissions, Ashley Alder, has spoken about the importance of a standard framework for climate-related disclosure and the need to have a “more substantive uptake” of TCFD.
  • US Federal Reserve governor Lael Brainard expressed her support for mandatory climate disclosures by banks.
  • US Security Exchange Commission Acting Chair Allison Herren Lee announced plans to strengthen climate disclosure requirements for public companies.
  • Over 1,900 companies across 78 countries have expressed their support for TCFD by April of this year — a number that has almost doubled over the past year.

As support for rigorous climate risk disclosure continues to grow, so does the recognition that climate risk assessment, management, and disclosure capabilities will need to grow, too. Climate-risk analytics and software have been rapidly evolving, and a growing number of quality tools can help risk managers better understand climate risk.

But these tools still require translators, particularly while many firms and investors are just beginning to understand the myriad ways in which climate change could impact profitability, growth strategy, and long-term sustainability. Managing climate risk and capturing related opportunities to drive growth requires trained, experienced risk managers who know how to apply tools, interpret data, and integrate information in a way that actively manages climate risks, as well as business leaders who can find opportunities in this information. Without translators —  experts on applying climate-risk tools consistently and effectively — investors and policymakers advocating sound climate-related risk management will be limited in what they can accomplish. Corporations, financial institutions, investors, and regulators must ramp up their  human capacity and skills in order to understand how climate change can affect the bottom line, the financial system, and the economy as a whole.

I have no doubt that expanding these capabilities is worth the investment for firms, investors, and governments, and will also provide benefits beyond those that direct stakeholders will realize. As climate risk becomes an increasingly expected element of financial assessments and investment decision-making, it is highly likely that cost-of-capital will better reflect how organizations address and manage climate risks. Over time, climate-smart strategies will be rewarded. The economy and society will become more resilient and more prosperous. That will be good for business and financial stability — and good for society and the planet.

Stacy Swann is CEO and Founding Partner of Climate Finance Advisors, a benefit LLC based in Washington, DC. She has held senior positions with the World Bank Group, the International Finance Corporation, and the US Department of the Treasury.