Climate Change and Risk Management
Global ESG Regulatory Tracker
Climate change presents perhaps the greatest systemic risk of our time. That’s why regulators are mandating corporate disclosure and investors are looking more closely for double standards on climate action. And yet, companies are unprepared.
Data shows that the majority of corporate disclosures on climate change related risks are quite generic, with very few companies being transparent about risk mitigation strategies and related impacts. This begs the question - which companies are for real and which ones are just greenwashing? And which ones are leading and which ones are simply following the rules?
As regulators mandate corporate disclosure on specific climate risk mitigation activities and investors start to ask tougher questions, companies need to better prepare - or get left behind.
How has the regulatory landscape changed in regards to climate change?
Since the adoption of the Paris Agreement in 2015, data insights show a sharp increase in the number of both mandatory and voluntary climate-related regulation. This increase is particularly relevant in 2015 and 2019.
2015 was also the year the Financial Stability Board determined that climate change poses a material risk to global financial stability. The Board’s international industry-led Task Force on Climate-related Financial Disclosures (TCFD) was launched in 2015 and has established the basic formwork needed to assess, manage and report on climate-related risk and opportunities.
Since the publication of the TCFD recommendations in 2017, the framework has been endorsed, supported and adopted by governments, regulators, international organisations and the private sector.
While proportionally more companies are including risk mitigation efforts in their annual reports than those filing 10-Ks, the proportion of companies not making any acknowledgment of the coronavirus crisis in their annual report is significantly higher.
In 2018 and 2019 central banks and supervisory authorities notably increased their attention on how to direct firms towards integrating and managing climate-related risks and opportunities. As such, one can see another big increase in 2019 with regards to regulations in this space.
Institutional Investors have been instrumental in driving the climate action agenda. This has materialised into the increased regulation in the financial sector, which is fundamental to driving action.
This has trickled down to different sectors and in particular high energy or high GHG emitting sectors. However, additional policies and regulations will be needed to drive emission in hard to abate sectors such as the built environment, agriculture and transport.
The impact of the Paris Agreement: a commentary from DLA Piper’s experts
Throughout 2015, in the runup to the adoption of the Paris Agreement, we witnessed a flurry of activity at the national level to enact different elements of governments’ Nationally Determined Contributions (NDCs).
NDCs are one of the key aspects of the Paris Agreement, and generally contain agreed national targets, regulations and policies relating to climate mitigation and adaptation. New or updated NDCs are submitted every 5 years as part of countries commitment to the Paris Agreement, which aims at responding to the threat of climate change and efforts to hold temperature increase to well below 2º and pursuing efforts to limit the temperature increase to 1.5º to significantly reduce the risk and impacts of climate change.
2020 marks the end of the initial NDC cycle under the Paris Agreement. Increasingly, we’ve observed many non-state actors and private sector participants voluntarily committing to long term targets aligned to the Paris Agreement. Some national governments have enacted long-term GHG mitigation targets into domestic law, including Denmark, France, Sweden, and the UK. However, we observe policy positions and aspirations of net zero in countries in all continents; perhaps most notably the Chinese commitment to carbon neutrality by 2060, including as most recently particularised in China’s 14th Five-Year Plan.
The extent of regulatory activity in the financial services sector, particularly from 2017, is likely attributable to the publication of the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in June 2017. Since then, regulatory uptake of the recommendations – including by incorporation in regulatory guidance associated with corporate disclosure (as is the case in Australia) through to more express mandatory measures (including in New Zealand and the UK) – have continued to gain momentum. However, regulatory engagement still appears to lag behind the five year time frame contemplated by TCFD, and regulators have their work cut out for them if we are to reach broad adoption of TCFD-compliant climate risk disclosures by the middle of 2022.
We anticipate increased regulatory activity and ambition from countries as they prepare to participate in the next round of NDC under the Paris Agreement in November 2021.
Global ESG Regulatory Tracker
Seeking alignment on ESG reporting: our regulatory snapshot, featuring views from DLA Piper
The current momentum in ESG policy-making is unprecedented. The recent developments in the non-financial reporting space spotlight the growing regulatory and investor demands for more quality corporate disclosure on ESG and ultimately, reinforce the need for senior corporate leaders and Board members to proactively embed ESG issues into their risk management, annual reporting and Board oversight processes.
Fill the form on the right to read the latest regulatory developments on corporate disclosures, in this exclusive snapshot featuring Datamaran and DLA Piper experts' views.