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…