Opportunities and risks of climate-related financial disclosures

27 October 2017

In May, Finance Director Europe held a London briefing that addressed climate-related risks and how connected financial disclosure will not only improve financial stability but also unlock commercial opportunities. Lead speaker Graeme Pitkethly, CFO of Unilever and vice-chair of the Financial Stability Board’s taskforce on climate-related financial disclosures, highlighted the trials and rewards of a business addressing global warming.

While there are those who doubt the threat of climate change, it is widely accepted that it poses a risk to all aspects of human life, including the business arena. On 11 May 2017, finance leaders convened for an FDE Breakfast discussion at London’s Dorchester Hotel to hear a keynote address from Unilever CFO Graeme Pitkethly. Delegates were keen to discover how the consumer goods giant was taking the lead on environment-related financial disclosures.

Introducing Pitkethly was former Unilever chief enterprise support officer Pascal Visée, who is now an executive adviser working for a number of companies, including event sponsor Genpact. Visée highlighted the importance of the Financial Stability Board (FSB) taskforce on climate-related financial disclosures (TCFD).

“The rules of the game are not there,” Visée remarked. “Companies pick the sustainability themes that suit them best and tweak definitions for the purpose of greenwashing. At a recent climate congress at Princeton, the conclusion was that things are getting worse – and at a faster rate than expected. Arctic ice is melting faster, and there are worries about permafrost melting in Greenland and releasing organic material such as carbon dioxide or methane. Summer ice in the Arctic will soon be a thing of the past.

“Efforts to mitigate global warming are essential, but the state of the Arctic shows that humans can’t simply undo climate change. We will have to adapt to it. So, FSB had great foresight in looking at the information that investors and lenders need to assess to address environment-related risks and opportunities.”

A stark look at climate risk

As Unilever’s CFO, Pitkethly had a busy first quarter looking at the long-term business horizon versus short-term value realisation.

“The questions of long and short-term value creation, and fiduciary responsibility between providers of capital, asset owners, asset managers and the company responsible for stewardship, are part of the same continuum as discussions about long-term value and climate change,” he said at the event. “Unilever has a long-term model, and this perspective has always been important to us in how we think about, manage and prepare our business.”

The TCFD included the full spectrum of financial and non-financial market participants with a cap of $1.5 trillion, and featured banks, insurance companies and asset managers with more than $20 trillion in assets under management. Its job is deceptively simple but, Pitkethly noted, very daunting. It is to develop voluntary, consistent climate-related financial disclosures that would be useful to investors and lenders in understanding material risks. Pitkethly believes there is a business case and a moral case for the risks and opportunities of climate change being firmly on everyone’s radar.

“I’m not a climate change evangelist, but I found it quite a shock to be exposed to the truth,” he said. “I thought it was very worthwhile to have an industry-led set of recommendations that would enable companies to navigate the sheer complexity of this area in a more practical way. The challenges currently posed by climate change pale in significance compared with what might be just over the horizon.”

The discussion touched on the potentially enormous cost to the coming generation, the current lack of adequate incentives to deal with the problem and the need to consider financial stability in the long term. It noted the importance of thinking about climate risk in financial reporting, classifying it as a long-term material threat and bringing that discussion into an arena where it can be priced by the financial markets.

“We have to help investors make better decisions for the longer term, to allow markets to evaluate and price climate-related exposures and opportunities more easily,” Pitkethly said. “We have lacked a clear and practical framework for disclosing and considering environment-related risks, which makes it hard for leaders to know what to include in reporting and how it should be presented. The TCFD is a start – but only a start.”

Future focus

One important point Pitkethly emphasised was that the disclosures recommended by the TCFD are about the impact of global warming on the business, not about the impact of business on the climate, about which there is already a lot of reporting. They are also defined with practicality and utility in mind. Furthermore, they are voluntary and emphasise opportunity as much as risk.

“We need to improve engagement from stakeholders and alter the dialogue as it enters the boardroom,” said Pitkethly. “Real thought and discussion are what we are trying to engender. These recommendations allow people to go at their own pace, which is important for industries that are fledgling in their approach.”

We have to help investors make better decisions for the longer term, to allow markets to evaluate and price climate-related exposures and opportunities more easily.

At the start of an enthusiasic Q&A session, Dr Tom Herbstein, programme director for ClimateWise, which comprises insurance companies and is part of the Cambridge institute for sustainability leadership, noted that timeframes and scenarios are the areas of greatest uncertainty for his organisation when it comes to standardising reporting. He also asked if there were any other gaps in the recommendations that needed further exploration. Pitkethly responded that materiality is a key area but that the FSB deliberately left the issue open.

“Bring that conversation into the boardroom and it happens with the stakeholders in the company,” the Unilver CFO replied. “Analysts would love to have standardised processes they can drop into models and make investment recommendations, but that is missing the point. The point is that this is a long-term issue and impacts everybody’s business model differently.”

The discussion touched on the need to have clear communication with the right people within a business, the clear link between climate-change threat and credit risk for banks, and the importance of the TCFD recommendations in reducing the possibility of a shock through better and more accurate pricing.

The closing words fell to BK Kalra, senior vice-president and business leader for consumer goods and healthcare at Genpact. He emphasised the need to look beyond the enterprise to understand the risks across the supply chain, and the importance of integrated reporting for greater visibility and accountability. And, with the advent of near-time risk information from advanced analytics and digital technologies, organisations have access to the insights they need to meet the goals set out by the TCFD.

He also talked about the need to look beyond the enterprise to understand the risks across the supply chain, and the importance of integrated reporting for greater visibility and accountability.

Graeme Pitkethly, CFO of Unilever, delivers the keynote address.
Left to right: Unilever’s Graeme Pitkethly and Pascal Visée with Steve Dunkerley from FDE.
Event chair Pascal Visée in conversation at the event.
Genpact’s BK Kalra responds to a question.