Climate-related Financial Risk and the Oil and Gas Sector

IHS Markit report finds that the draft recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) could obscure material information, create a false sense of certainty, and distort markets.

In its December 2016 report, the TCFD recommended a common framework for voluntary, climate-related disclosures in mainstream (or public) financial filings by all entities with public debt or equity. The TCFD was established by the Financial Stability Board (FSB), an international body composed of financial regulators, central banks, finance ministries, and international financial organizations. The FSB reports to the G20, the international forum that comprises 20 of the world’s largest advanced and emerging economies.

The TCFD framework centers on governance, strategy, risk management, and metrics and targets. Some elements of the framework—climate-related governance, strategy, and risk management—are useful for assessing climate-related risks and their financial impacts.

But the TCFD recommendations for standard disclosures of climate-related financial risks in public financial filings and its focus on metrics and the financial implications of scenarios could undermine the goals of efficient capital allocation decisions and market functioning. Adopting these recommendations could obscure material information and create a false sense of certainty about the financial implications of climate-related risks. This could lead investors to misunderstand opportunities and risks, misprice assets, and forego future returns.

Several key issues are discussed in more detail in this report, including:

  • Departure from established concept of materiality in financial reporting
  • Metrics that are not correlated with financial risk and opportunity
  • Misuse of scenarios
  • Disclosure of confidential business information
  • Inappropriate scope
  • Lack of agreement on defining carbon-related assets and measures of risk

As a leading independent provider of information and analysis on the oil and gas industry, IHS Markit seeks to contribute to the dialogue resulting from the draft TCFD recommendations to ensure proper consideration of their potential impact on markets.

The Task Force is currently revising its recommendations following public consultation. The FSB is expected to present the final recommendations to the G20 at its meeting in Hamburg, Germany in July 2017

Climate-related Financial Risk and the Oil and Gas Sector

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