Considerations for Directors of Public Companies on the Disclosure of Environmental Risks and their Management

Acceleration of climate change is increasing business risks and opportunities related to the economic transition to a low carbon economy, and potential direct and indirect operational impacts. The Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) frame the issues cogently – so far as existing disclosure requirements go. One of the critical unanswered questions is noted in Section E – Key Issues Considered and Areas for Further Work, Paragraph 8 – Time Frames for Short, Medium, and [most importantly] Long Term.

Time-Frame Challenge: Although climate change is underway, specific material risks and opportunities for a business may or may not currently be reasonably probable or estimable. Investors, boards of directors, and management should consider defining a reasonable time horizon for disclosure of material environmental risks, considering the availability and quality of measurement.

Evaluation: Prerequisite to disclosure would be internal analysis of environmental risks and opportunities. Boards of directors should be considering:

  • How is the company identifying, measuring and managing material environmental risks and opportunities, specifically:
    • Timeframe / outlook – how far ahead?
    • Economic transition to low carbon economy – positioning and strategy?
    • Operations – assessment of direct and indirect impacts broadly defined?
    • Quantitative / qualitative measurements – what and how? Auditable?
    • Context – comparability, benchmarking, targets?
    • Contingencies – measurable risk and ill-defined uncertainties?
    • Counterparty / public risk – reliance on others (suppliers, insurers, lenders, etc.) / public infrastructure – and risks / impacts of failure?
    • Assumptions and Ranges – what critical assumptions and ranges of estimates are being used? How often updated, given rapid changes?
  • Can the company’s long-term climate-related liabilities be reasonably estimated?
    • Is fair value measurement (FASB ASC 820) applicable?
    • TCFD recommendations include scenario-based analysis (consider accounting for contingencies, FASB ASC 450).
    • Is it reasonable to develop probabilistic estimates using long-term forecasts of potential impacts of identified risks and opportunities above a materiality threshold, indicating annualized estimates of cost ranges and probabilities?

Disclosure: Boards of directors may want to address the large volume of requested ESG disclosure surveys by identifying and focusing on only material factors. Industry-based approaches such as SASB’s encourage uniformity of disclosure standards by industry, perhaps offering a measure comfort in meeting a reasonable level of disclosure. Disclosure standards will likely evolve rapidly based on regulations, legal decisions, industry practices and stakeholder demands. Best to give this deep consideration in advance…

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