To mitigate such risks, through the provision of relevant information to the market, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) published recommendations for climate-related disclosures by companies in 2017.
Research undertaken by a team from the University of Sydney examined the challenges corporate entities face in seeking to measure and disclose their climate-related financial risks, as well as the challenges investors face in analysing such risks.
The findings indicate that demand for climate-related financial disclosures is escalating rapidly. The ability for preparers of financial reports to provide such information in a manner that is decision-useful is, however, limited by three fundamental problems, including:
a) The lack of specification and guidance available;
b) The nature of the measurements required, which are often complex and require significant scientific expertise; and
c) The desire for investors to see, in the market, forward-looking information pertaining to organisational strategy, stress-tested against a variety of climate change ‘scenarios’. This latter information is inevitably uncertain, as well as being possibly commercially sensitive in nature.