nance ministries and international financial organizations. The
FSB reports to the G20, the international forum comprised of
20 of the world’s largest advanced and emerging economies.
The FSB is expected to present the final TCFD recommendations to the G20 summit in Hamburg in July 2017.
The report says some elements of the TCFD framework could
be helpful to investors in understanding how companies comprehend and manage potential risks related to climate change.
However, the analysis concludes that several of the recommendations could obscure material information and create a
false sense of certainty around the financial implications of
“The TCFD proposal represents a radical departure from
established financial reporting rules and goes against the basic
principles of disclosure,” said Antonia Bullard, IHS Markit vice
president for energy-wide perspectives. “Singling out one type
of risk for separate treatment would prevent financial markets
from accurately assessing, comparing and pricing all risks and
opportunities. That would undermine, not support, the goal of
improving capital allocation decisions and market functioning.”
Among the problems that the IHS Markit report identifies:
Departure from the established concept of materiality
in financial reporting
Disclosing information on climate-related risks as part of required public financial filings represents a radical departure
from the established concept of materiality, the report finds. It
could lead to unintended consequences, such as investors
downgrading other risks that might have comparable financial
impacts, but are not subject to specific disclosure
Use of metrics that do not correlate with financial risk and
There is no evidence that the types of metrics referenced by
the TCFD will allow investors to quantify climate-related financial risks, the report says. The impact of climate-related factors
is more complex and multi-dimensional than typical financial
drivers like commodity prices.
Metrics taken out of context do not allow for proper comparisons and could lead to inefficient investor choices. Carbon emissions do not correlate with climate-related financial risk in a
straightforward manner. For example, operational emissions
might decrease due to declining production rather than the result
of improved emissions management, which could have a greater
financial impact than climate-related risk, the report finds.
The TCFD also suggests a direct link between future earning
capacity and emissions in a company’s entire value chain (Scope
3 emissions). However, any link would be highly dependent on
company specifics, such as the countries and sectors where its
products are used and the pace of adoption of relevant climate-related policies.
“The Task Force acknowledged that further work is needed
to define carbon-related assets and their potential financial
impacts,” Bullard concluded. “There is absolutely no consensus
on the methodologies and metrics that could translate company-
level climate-related metrics into measures of systemic risk.”
In addition, the TCFD recommends the disclosure of “
climate-related opportunities”—such as investments in low-carbon alternatives—in terms that imply that these opportunities will generate
positive financial outcomes. No such guarantee can exist. In fact,
some “clean energy” investments have high financial risk and
some of the recommended disclosures could lead investors to
misprice assets and increase their financial risk, the report says.
Misuse of scenarios analysis
The report finds that including financial implications of long-term scenario analysis in public filings as recommended in the
TCFD draft would mislead investors about the certainty of
those outcomes. This would distort markets, not enhance them.
Scenarios are not intended to serve as forecasts or generate
financial projections. Any financial disclosures based on scenario
analysis will be contingent upon a large number of assumptions
about markets, technologies, prices, costs, company strategies
and other variables, the report says.
Scenarios from different companies will use different assumptions and will vary depending on focus, approach and
internal and external resources. Disclosing financial implications
from scenarios created under different conditions cannot provide comparable information for pricing financial assets and
risks, the report finds.
“IHS Markit has a long experience working with scenarios
and regards them as a valuable tool,” said Daniel Yergin, IHS
Markit vice chairman and a co-author of the report. “But the
use of scenarios as proposed by the TCFD conflates the hypothetical—using different plausible futures as an exercise to test
strategic thinking—with detailed financial forecasts and projections. “This would create a false sense of certainty in the face
of multiple possible outcomes.”
Disclosure of confidential business information
The TCFD recommends that oil and gas companies disclose
metrics such as “indicative costs of supply for current and future
projects.” Disclosures of such confidential information would
undermine companies’ competitive positions and harm existing
shareholders, the report says.
In the oil and gas sector, disclosing information about project
plans could reveal a company’s development priorities and
impair its position with host governments, project partners
and service sector companies. In addition, absolute and relative
costs shift constantly in response to market and technology
changes. Companies also could face litigation if future costs do
not align with the projected costs in the disclosures.
“The TCFD recommendations extend beyond the scope of
investor needs and enter the realm of climate policy,” Yergin
concluded. “Climate policy is best designed and implemented
by government agencies with the requisite mandates and expertise, not financial regulators.”