Company climate risk disclosure would distort markets: IHS Markit

LONDON (Reuters) - Proposals by a G20-backed task force for companies to disclose how they manage climate risks would mislead investors and distort markets, according to research by analytics and data provider IHS Markit on Thursday.

A chimney is seen at an industrial site on Teesside, northern England February 8,2009. REUTERS/Nigel Roddis(BRITAIN)

Last year, the Task Force on Climate-Related Financial Disclosure (TCFD), set up by the G20’s Financial Stability Board, proposed that companies disclose in their public financial findings how they identify and manage risks to their business from climate change.

Although the measures are voluntary, some of the task force’s members argue they should become mandatory.

The TCFD was set up due to growing concerns among the financial community that assets are being mispriced because the full extent of climate risk is not being factored in and increased calls for company transparency.

IHS Markit said some of the TCFD’s proposals could help investors better understand how firms manage potential climate risks but others would actually undermine the aim of improving capital allocation decisions and financial market functioning.

Climate risk disclosure could lead to unintended consequences, such as investors downgrading other risks which might have similar financial impacts but do not have to be disclosed in the same way, the research said.

“The task force’s proposals are useful in terms of heightening the discussion around climate risk but eight decades of understanding of the materiality concept would be changed by this initiative,” Daniel Yergin, IHS Markit vice chairman and co-author of the report, told Reuters.

“The use of scenarios and metrics is misleading; there are issues around confidentiality and why should we single out just one risk?”

IHS Markit said its report was financed by oil firms BP, Chevron, ConocoPhillips and Total, which are in one of the sectors most exposed to climate-related financial impacts, but its conclusions were its own.

Proposals for disclosing the financial impact of long-term scenarios and using metrics to quantify climate risk could be misleading, the report said.

Not only are scenarios based on a large number of assumptions, the assumptions will vary according to different companies and sources and are not comparable, IHS Markit added.

A TCFD recommendation that oil and gas firms disclose information related to the cost of supply for current and future projects could undermine their competitive positions. Such costs change constantly due to market and technology changes.

Companies could also face potential litigation if their future costs do not match the projected costs in their disclosures, the report said.

After a public consultation, the TCFD is expected to bring its final recommendations to the G20 at its meeting in Germany in July. The TCFD has 32 members from large banks, insurance companies, asset management companies, pension funds, credit rating agencies and accounting and consulting firms.

Reporting by Nina Chestney, editing by David Evans