CERAWEEK Conversations: Governments join investors in pushing for climate risk disclosure

Investors are no longer alone in asking companies to disclose the exposure their operations face from climate risks. Governments are now joining the fold in seeking to mandate disclosures that until now have been voluntary in nature.

Lydie Hudson, head of sustainability, research and investment solutions at Credit Suisse, spoke with IHS Markit Chief Energy Strategist Atul Arya about the growing awareness among investors and regulators about the need to disclose climate risk in a CERAWeek Conversation (The entire conversation can be heard here).

Credit Suisse began reporting for the first time in 2020 the climate risks its various operations face, using the guidelines recommended by the Task Force on Climate-related Financial Disclosures.

Leading up to the UN COP26 meeting this November in Glasgow, Hudson said there is an "enormous amount of momentum" among governments to be "a force for [climate] disclosure."

Hudson pointed to recent announcements by the US Securities and Exchange Commission, the Swiss Federal Council, the UK, and the EU as examples. In Asia, Singapore Exchange also has proposed a climate disclosure rule and is seeking comment on it.

Banks like Credit Suisse are adopting and sharing best practices too, while recognizing how they need to change their own business models to achieve net-zero ambitions in order to assist clients in transitioning towards a low-carbon economy, she added.

Financial institutions are working more closely with regulators than they did when the Paris Agreement on climate change was signed six years ago.

"All transitions are local"

Looking ahead, Hudson said companies evaluating risks, especially those posed by climate change, have to take an integrated view of the impact of environmental, social, and governance (ESG) concerns.

She noted that the COVID-19 pandemic and social unrest of the past year or more "really pushed the social topic to be almost equal to some of the environmental topics."

"If you think about the ESG ambitions of an organization and someone trying to deliver on [Paris Agreement targets], they have to have considered the social factors and the social implications of delivering on an environmental strategy that gets to some sort of net-zero or decarbonization effort," Hudson said.

That means, she added, "you have to think through the type of staffing you have, the type of employee engagement you have, and all the ancillary topics that will enable a transition pathway on climate sensitive sectors or climate sensitive business strategies."

Hudson agreed with Arya that the ongoing energy transition, and especially a "just" transition, has different meanings depending on where a company is located.

"There's the expression 'all politics are local;' all transitions are local. The energy transition for some people still means getting electricity and we don't want to stand in the way of that progress, and what that means versus decarbonizing an organization in the Western world is very different," she agreed.

Climate disclosure is about risk disclosure

Ultimately, Hudson said, any form of climate disclosure is about risk disclosure.

"It's about understanding risk profile so that various stakeholders, whether it's investors or regulators, can understand the fragility or strength of a company and how much exposure they have to sensitivity around climate," she said.

Hudson said she does not underestimate the effort of writing a rule to mandate climate risk disclosure.

"It is quite hard because the data is novel, and it's not organized as much as we as an industry would want it to be," she said.

But in the future, she said, "it will look very much like other types of risks we manage once that data infrastructure is built up."

CERAWeek Conversations summary by Amena Saiyid, Net-Zero Business Daily.