CLIMATE GOVERNANCE PAPERS Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises Toolkit for Shareholders and Regulators June 2022 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Contents List of Figures iv List of Tables iv List of Boxes v Acknowledgements vi Abbreviations, Acronyms, and Key Concepts vii 1. Introduction 1 1.1 Background 1 1.2 Why Focus on Climate Change? 2 1.3 Scope, Framework, and Methodology 5 1.4 Assessment Matrix and Toolkit Structure 8 2. Frameworks and Standards 9 2.1 Frameworks and Standards Considered 9 2.2 The Adopted Framework Based on TCFD Recommendations 11 3. Climate Change Guidance for SOE Regulators 15 3.1 Clearly Define Why Soes Should Consider 15 Climate Change 3.2 Specific Guidance on Tcfd Core Recommendations 17 3.3 Specific Climate Change Guidance on Three SOE Sectors 31 4. Where to Present Climate-Related Financial Disclosures 33 4.1 Filings and Reports 33 4.2 Principles of Good Disclosure 34 5. Introducing Climate Change into the Management Process 36 5.1 Climate Change Risk Management and the Disclosure Maturity Framework 37 6. Getting Started: Guidance for Regulators and SOEs 40 6.1 Regulators 40 6.2 Individual SOEs 43 Notes 45 Appendix 1: Resources and Further Information 47 Figures Figure 1. Percentage of Sustainable Bonds by Region 5 Figure 2. The Four Pillars of Integration and Disclosure 13 Figure 3. Using Scenarios to Test the Strategy 21 Figure 4. Examples of What to Consider When Assessing Strategies for Adaptation and Mitigation of Climate Risk 23 Figure 5. Risk Matrix 27 Figure 6. Risk and Opportunity Assessment 29 Tables Table 1. Consideration and Comparison of Existing Frameworks and Standards 10 Table 2. Climate Change Management Practice and Disclosures 14 Table 3: Using the TCFD Recommendations as a Framework for SOE Management and Disclosure of Material Climate Change Impacts 16 Table 4. Climate-Related Risks and Potential Financial Impacts 24 Table 5. Maturity Framework 37 Boxes Box 1. Reporting Frameworks and Standards Assessed 7 Box 2. Current Frameworks and Standards 9 Box 3. Regulatory Developments on Climate-Related Financial Disclosures 11 Box 4. New Zealand Government Mandates TCFD Disclosure 12 Box 5. A Typical Governance Disclosure Framework 19 Box 6. Determining What is Material 34 Acknowledgements This climate change management and disclosure Toolkit for SOE shareholders and regulators was developed by the World Bank in partnership with the International Federation of Accountants (IFAC), the International Integrated Reporting Council (IIRC),1 and the Carbon Disclosure Standards Board (CDSB). The development of the tool involved engagement with many stakeholders that included disclosure experts from the United Kingdom, India, Malaysia, South Africa, and New Zealand, as well as reporting standard setting bodies. Desktop reviews were conducted of existing reporting frameworks. The team acknowledges the contributions made by all these stakeholders and their significant bodies of work. This toolkit was prepared by a team comprised of Karin Ireton (Lead consultant), Gabriella Kusz (consultant), Monika Kumar (Environmental Specialist), Kjetil Hansen (Senior Public Sector Specialist, Co-Task Team leader), and Patrick Kabuya (Senior Governance Specialist, Co-Task Team Leader). The tool benefited immensely from the comments of the peer reviewers, including Henri Fortin (Lead Financial Management Specialist), Fiona Elizabeth Stewart (Lead Financial Sector Specialist), Stephane Hallegatte (Lead Economist), Gemma Clements (CDSB), and Natalie Manuilova (Senior Governance Specialist). The team gratefully acknowledges Stathis Gould (Director, Advocacy at IFAC), Jonathan Labrey (Chief Strategy Officer, IIRC), Gemma Clements (Capacity Building and Engagement Manager, CDSB), Adrian Fozzard (Practice Manager, Governance Global Practice), Adenike Sherifat Oyeyiola (Practice Manager, Governance Global Practice) and Nicholas Menzies (Senior Governance Specialist) for their guidance and support. The team acknowledges the Task Force on Climate-Related Financial Disclosure (TCFD), as the Toolkit draws heavily on the TCFD recommendations and related guidance documents, as well as the work of the CDSB, which manages and regularly updates the TCFD hub with new guidance and learning. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators vi Abbreviations, Acronyms, and Key Concepts 2°C Two degrees Celsius ADAPATION As some degree of climate change is inevitable, adapting to physical changes in weather patterns, precipitation, and ecosystems is required. CDP Formerly the Carbon Disclosure Project, a nongovernmental organization that helps companies to disclose their environmental impact CDSB Carbon Disclosures Standards Board CIF Climate Investment Fund CO2 Carbon Dioxide: Greenhouse gas emissions are measured in CO2 or CO2 equivalents ESG Environmental and Social Governance EU European Union FSB Financial Stability Board (global) GHG emissions Greenhouse Gas Emissions: Scope 1 refers to all emissions from the activities of an organization or under its direct control, including fuel combustion, fleet vehicles, air conditioning leaks, etc.; Scope 2 refers to indirect emissions from electricity purchased and used by the organization; and Scope 3 (if appropriate) refers to risks related to business travel, procurement, waste, and water. G7 Intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States G20 Group of 20 of the world’s largest economies GRI Global Reporting Initiative IFAC International Federation of Accountants IFRS International Financial Reporting Standards IIRC International Integrated Reporting Council IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change iSOEF World Bank’s Integrated State-Owned Enterprises Diagnostic Framework ISSB International Sustainability Standards Board Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators vii MATERIALITY An issue or a cost is considered material (or of significance) on a number of grounds. It can be financially material when it is above or below a determined financial threshold, or it can be material based on impact, threat, or opportunity and/or its importance to others. Double materiality means that a negative or positive effect of a company can also be material if it does not affect its value. Companies therefore should assess and publicly disclose these externalities as part of their reporting. Double materiality is already recognized partly in the EU’s Sustainable Finance Disclosure Regulation (SFDR). MITIGATION Steps taken to reduce activities and emissions that contribute to climate change NDC Nationally Determined Contribution NGFS Network (of central bankers) for Greening the Financial System OECD Organisation for Economic Co-operation and Development REGULATORS In this document, the term “regulators” is used as an inclusive term and covers shareholder departments, financial authorities, and reporting and auditing authorities SASB Sustainability Accounting Standards Board: U.S.-based body that developed standards to enable reporting on sustainability issues to the U.S. Securities and Exchange Commission. SASB is now subsumed into the VRF (see below). SDGs UN Sustainable Development Goals SML Short, Medium, and Long (Terms) SOE/SOC State-Owned Enterprise/State-Owned Company, also known in some countries as Crown corporations or state corporations or public enterprises VRF Value Reporting Foundation, created in June 2021 following the merging of the IIRC and SASB TCFD Task Force on Climate-Related Financial Disclosures, created by the Financial Stability Board (FSB) in 2015 and now formally endorsed by countries and regions around the world. TCFD recommendations will form the framework on which future sustainability reporting standards will be built. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators viii 01 Introduction 1.1 Background Climate change is now recognized as a true global emergency that requires concerted efforts by all countries, businesses, and even individuals to achieve the Paris Agreement goals aimed at addressing the crisis. These goals include holding the rise of average global temperatures to well below 2 degrees Celsius (2ºC) above pre-industrial levels and pursuing actions to limit the temperature increase to 1.5ºC above pre-industrial levels. Climate change is a risk multiplier that creates physical and socioeconomic threats to most countries, with impacts on health, food security, water availability, migration, development, and economic growth. As the pressure to address the climate crisis grows, governments around the world are grappling with the most effective ways of ensuring the long-term well-being and development of their people and the economic activities on which they depend. Governments have developed Nationally Determined Contributions (NDCs), which are pledges their countries make to aid in the achievement of the Paris targets by reducing national emissions or taking mitigatory action. These plans also highlight what is needed for them to adapt to those unavoidable impacts of climate change that are already being felt and will persist even if the Paris targets are met, as the climate continues to change because of the long-term impact of emissions already in the climate system. In addition to the Paris Agreement,2 global long-term goals for adaptation have also been articulated under the UN’s Sustainable Development Goals.3 More than 125 developing countries have developed adaptation plans. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 1 In most countries, state-owned enterprises (SOEs) Clearly, SOEs should be required to consider and play a strategic and significant economic role and take appropriate actions to maximize climate change deliver many essential services. They are therefore opportunities and manage risks. This document also important economic actors in achieving national provides the structured framework that SOEs need to and international climate mitigation and adaptation accomplish this important objective: the Climate-Related goals. SOEs should thus play an instrumental role in Management and Financial Disclosures for State-Owned assisting governments in meeting their climate change Enterprises Toolkit. This mechanism can assist SOE commitments by taking appropriate impactful actions to boards and senior management to strategically identify prevent climate change and the resulting environmental and manage physical, transition, and litigation risks; damage. For SOE regulators, this means ensuring that to benefit from climate-related opportunities; and to SOEs are taking effective steps within the management appropriately report on the financial impact of adaption of their organizations to understand and minimize their and mitigation actions. SOE owners and regulators climate impacts and to adapt to those changes that are should play an instrumental role in instituting these now unavoidable. This would entail that owners and requirements and supporting SOEs to implement them. regulators require SOEs to create climate mitigation and adaptation strategies and to consider whether their 1.2 Why Focus on Climate Change? governance models, strategies, and performance metrics and targets enable them to take the appropriate actions to protect their businesses and the services they deliver. There is a recognized environmental rationale for SOEs to focus on climate change in their Delivering on global objectives in order to protect management and operations. Yet, there are other, people, the planet, and national economies will perhaps less evident reasons also. Specific examples require countries to make tough choices at every of why SOEs should focus on climate change are stage of development. Yet, climate change presents outlined below. not only risks but also opportunities that SOEs should consider in order to successfully achieve their mandates, operate effectively, and meet their financial performance 1.2.1 Impact of Climate Change on goals. For example, integrating climate change into Developing Nations management practices may also unlock opportunities to fast-track cleaner, more efficient technology. SOEs Inevitably, it is the most vulnerable countries and should therefore not only improve in their efforts to people that are at particularly high risk. The rapidly identify and manage the strategic risks of climate change changing climate brings with it further threats to already but also increasingly explore ways to benefit from the weak health systems, emergency funds, and institutions, climate change opportunities. increasing economic vulnerabilities that affect individuals, communities, and states as a whole. In just one example, To ensure that these collective actions are sufficient the shocks of the COVID-19 pandemic have signaled the and meaningful, decision makers are calling on need to take stock, rebuild, and reduce the risks to the SOEs and other public institutions to back up their global economy. management actions with disclosure of better quality financial and non-financial information. This Therefore, in developing economies, governments— will enable them to assess the financial consequences of and particularly SOE regulators—should ensure their actions (or inaction) to address climate change risks that all SOEs have appropriate measures in place and the financial benefits or costs of any opportunities at to address climate change risks and to benefit from the level of both company and economy. This information the opportunities. This is especially the case for those is important for stakeholders as it helps them in meeting a SOEs that deliver essential services, such as energy, variety of objectives, including: informing policy decisions water, and transport. The increasing number of climate- related to climate change; raising awareness about linked natural disasters in recent years has demonstrated climate change; and reporting against climate policies, the potential for rapid and destructive disruption and the strategies, and plans in order to ensure accountability. resulting impoverishment of vast numbers of people. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 2 1.2.2 Climate Change Risks that damage to power generation and transport infrastructure alone is already as much as US$18 billion Physical Risks a year in low- and middle-income countries. Disruptions to households and businesses cost a further US$390 At a physical level, climate change means that the billion a year. These are not only costly to the SOE frequency, severity, and range of extreme weather but also impact the lives of citizens, as highlighted by events will continue to rise, causing significant vulnerability maps or the World Bank’s Climate Change damage to SOEs’ infrastructure and the disruption of Knowledge Portal.4 their business operations. The World Bank estimates Source: “Climate Change Vulnerability Index 2017,” https://reliefweb.int/report/world/climate-change-vulnerability-index-2017. Transition Risks liabilities faced by companies and governments. At the same time, disruptive cleaner technologies and changing In addition to the physical risks and costs of rebuilding regulatory regimes, both at home and in the countries of infrastructure and economic capacity, there are risks trading partners, suppliers, and markets, combined with related to the resulting need to transition to a lower- the growing international trend of carbon pricing, create carbon economy. These can result from, for example, risks for all companies that are not addressing climate abrupt changes in regulations, market and consumer change as the global community attempts to achieve pressures, the cost and availability of insurance, and growth while reducing the carbon footprint. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 3 SOEs are important employers in many countries, emissions. Commercial and development banks are and they should therefore with some urgency begin limiting loans to new fossil fuel–linked technologies and to identify these risks, including by becoming aware requesting more detailed information on climate risk of the sectors and types of jobs that could be lost if management from their clients in an effort to de-risk their a rapid transition is required. It is essential that SOEs own portfolios. plan for social justice outcomes, but this goal is unlikely to be met unless the risks are identified and built into Thus, access to new climate- and sustainability- strategic realignment and national plans. linked finance, particularly through the bond market, continues to grow and present a significant Litigation Risks opportunity to those seeking to make the transition to a more sustainable future. These are frequently loosely The Grantham Institute at the London School termed “green bonds” but include bonds earmarked of Economics tracked litigation cases against for climate adaption and mitigation as well as for other governments, including their SOEs, filed between environmentally oriented issues. May 2019 and May 2020 across six continents. These included complaints made to the National Contact Points The Climate Bonds Initiative5 estimates that the for the OECD’s Guidelines for Multinational Enterprises, cumulative value of certified or labeled green bonds, the UN Committee on the Rights of the Child, and various that is, those that have undergone review and meet UN Special Rapporteurs. agreed standards and principles, is a cumulative US$1.524 trillion. Issuance in 2021 alone is expected to The Grantham Institute reported that for cases surpass US$435 billion. outside the United States, trends in the type of plaintiff and defendant are similar to previous years: The Green Climate Fund’s commitment of US$10.0 over 80 percent were brought against governments billion in funding for 190 projects and the World (including SOEs). Climate change was at the center of Bank’s US$8 billion Climate Investment Fund (CIF) the legal argument in about 41 percent of cases (155 are further examples of the emphasis international out of 374) and was a peripheral issue in the remaining funders are placing on reducing climate-related risk 59 percent. For non-U.S. cases, 58 percent (187) through mitigation measures, such as investments had outcomes favorable to climate change action, 33 in renewable energy and clean technology and percent (106) had outcomes unfavorable, and 9 percent adaptation actions that increase resilience. Access (28) had no discernible likely impact on climate policy. to CIF funds and other sources, such as those of the Clearly, SOEs need to be aware of the likelihood of being Green Climate Fund, require that recipients identify and impacted by the risk of this type of legal action and to put manage environmental and climate risks and disclose in place appropriate mitigating measures. the actions taken in this regard. 1.2.3 Unlocking Opportunities and Sustainable The CIF accelerates climate action by empowering Finance: Access to New Funding transformations to clean technology, energy access, climate resilience, and sustainable forests in Reimagining and building a more resilient people developing and middle-income countries. The CIF’s and climate-friendly economy creates many large-scale, low-cost, and long-term financing lowers the opportunities. SOE boards should focus on identifying risk and cost of climate financing. It tests new business and pursuing these opportunities, including those that models, builds track records in unproven markets, and might mean access new capital. For example, access boosts investor confidence to unlock additional sources to funding through bonds, grants, and loans is now of finance. frequently linked to taking action to reduce carbon Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 4 Figure 1. Percentage of Sustainable Bonds by Region Percentage of sustainable bonds by region that were based on GBP, SBP, SBLP (excluding supras) in 2020: Circle size is proportional to total sustainable bond issuance by region North Russia America Central & South Europe America 95% 99% 100% 96% Asia Middle East 95% 100% Africa 100% Oceania 95% Supernationals 96% Source: Note: ICMA analysis based on Enviromental Finance Bond Data 1.3 Purpose, Scope, Framework, respond to the risks and opportunities associated with climate change; to align resources with climate change and Methodology priorities; and to consider and report on the opportunities, risks, and impacts involved. The purpose of this Toolkit is to better equip SOE The primary target users of the Toolkit are the owners and regulators to drive the regulatory, shareholder departments and regulators that policy, and institutional changes needed to ensure are charged with oversight of SOEs and that set that SOEs consider climate change, integrate it into reporting requirements, as well as the sovereign their operation, and disclose their strategies and financial authorities that either provide capital or actions to address the issue. The Toolkit also provides stand as guarantors for bonds and loans to the the boards and executive leadership of SOEs with a SOE. The secondary target users are the boards, senior framework and guidance on how to understand and leadership, and stakeholders of SOEs. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 5 1.3.1 Scope business and to those enterprises that are significantly impacted by climate change, such as utility companies The Toolkit presents a framework of key elements that provide water or energy or those from the transport that SOEs should consider integrating into their or extractive sectors. management practices in order to benefit from climate change opportunities and reduce their 1.3.2 The Applied Framework climate-related risks. They should also develop a culture of disclosing these risks and opportunities. The The Toolkit is based on the recommendations of the Toolkit provides guiding principles that SOE regulators Task Force on Climate-Related Financial Disclosures should follow when developing national regulatory, policy, (TCFD),6 which has become internationally and institutional requirements for SOEs to manage recognized as the most complete framework to and disclose climate change–related information. drive consistent and comparable decision-enabling Disclosure is critical as it ensures that the right quality disclosure of climate-related management practice of management practice has been instituted; it also within organizations. The decision to use the TCFD was provides shareholders, finance ministries, grant funders, based on an analysis (see chapter 2) and consideration and others with information that facilitates decisions of several frameworks and standards that focus on about protecting and growing the value provided by the climate change (see box 1); the specific climate change– SOE. Disclosure is not an end in itself, but disclosure related frameworks being adopted in different countries; requirements can be an important driver of changes to and the results of interviews with representatives of management and compliance practices over time as it SOE regulators, SOEs, and World Bank staff. There is brings attention to gaps or weaknesses. international acceptance and application of the TCFD recommendations by organizations in both the public The Toolkit considers an SOE to be any company and private sectors. The design of the Toolkit avoided or corporation in which the state has majority creating something new, but rather refers to and relies ownership or control. However, the state can also on internationally established standards and frameworks apply the Toolkit to private companies in which it holds that could be applied in both the public and private sectors. minority shares. Its application will be most relevant to SOE-specific aspects have also been incorporated into SOEs that significantly contribute to climate change the tool. through carbon emissions because of the nature of their Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 6 Box 1. Reporting Frameworks and Standards Assessed • Global Reporting Initiative (GRI) Standards • Sustainability Accounting Standards Board (SASB) Standards • Climate Disclosure Standards Board (CDSB) Framework • International Integrated Reporting Council (IIRC) Framework • Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) There is significant agreement that the the requirements of all best practice reporting standards methodologies and recommendations developed by and will remain core to the future development of any the TCFD6 provide a useful framework for managing international climate reporting benchmarks. Importantly, and disclosing climate-related financial risks. This they should be considered to be not only disclosure will result in comparable, comprehensive information pillars but also essential elements of good management that will lead to better informed decision makers, whether practice for integrating climate change consideration they are regulators, investors, providers of capital, or into an organization’s operations. These elements other stakeholders. The TCFD was established by the include good corporate governance, stress testing Financial Stability Board (FSB)7 in 2015 at the request of of the organization’s strategy, sound management of the G20 to address the need for better disclosure of the all opportunities and risks, and the setting of targets risks of climate change to the global economy. Although and performance metrics. The Toolkit lays out how the recommendations, published in 2017, have become SOEs should apply the TCFD recommendations and the global benchmark for climate-related disclosure, they mainstream them into management and also how they are firmly based on standard management practices that can report on the financial impact that climate change will should be mainstreamed in organizations to mitigate have on the organization’s ability to conduct its business. impacts on climate change and plot a strategic way forward. As noted, the TCFD recommendations have The international community is working toward been widely endorsed by governments, stock exchanges, developing one globally accepted sustainability business leaders, and international organizations. standard to address the existing complexity and confusion created by the many existing frameworks In its status report published in October 2020, the and benchmarks. A common standard will result in the TCFD reported that nearly 60 percent of the world’s improved coherence, consistency, and comparability 100 largest public companies supported the TCFD in reporting necessary to provide more usable and report in line with its recommendations. By mid-2021, credible information to users and ultimately, to contribute the TCFD confirmed that more than 2,500 organizations to improved decision making. Five of the existing across 88 countries, with a market capitalization of standards bodies committed in 2020 in a statement of more than US$25 trillion, had officially registered as intent to work together on the development of a single supporters on their web portals. That number also standard.9 In November 2021, the International Financial includes 12 national governments and many regulators Reporting Standards (IFRS) Foundation established and individual government entities.8 Moreover, a number an International Sustainability Standards Board (ISSB) of governments have mandated climate-related financial that will be responsible for developing a comprehensive reporting or are in the process of doing so (see box 3 in global baseline of high-quality sustainability disclosure chapter 2 below). In June 2021, the finance ministries standards to meet investors’ information needs. The IFRS of the G7 countries issued a communique promoting Foundation also issued a Climate-Related Disclosures mandatory reporting, and the United Kingdom, the Prototype and a General Requirements for Disclosure of European Union (EU), and the Norwegian government Sustainability-Related Financial Information Prototype, have all taken steps toward this goal. New Zealand is in both of which are based on the TCFD. The Foundation the process of passing legislation in this regard. also announced that the development of standards by the ISSB will be informed by the TCFD. These developments The TCFD recommendations focus on four core provide more evidence for using the TCFD framework as pillars: governance, strategy, risk management, and the basis for the Toolkit. metrics and targets. These pillars are consistent with Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 7 1.3.3 Methodology assess climate change aspects in national SOE diagnostics. The findings will inform governments and The design of the Toolkit involved (a) an extensive SOEs regulators on critical areas where regulatory, policy, review of the significant body of work on climate and institutional capacity development are required change and climate-related disclosure; (b) a survey to accelerate consideration and disclosure of climate- of World Bank staff to obtain information on climate related financial information by SOEs. Most importantly, change reporting practices across the world, and the findings and recommendations will be integrated into (c) interviews with different stakeholders, especially the SOE reforms in the country. To support regulators, climate change standard setters, SOE regulators, training materials on the Toolkit and the assessment managers, and board members, and SOE staff matrix have been developed and are available for responsible for preparing company business plans their use. and reports. The design also benefited from members of the project advisory team: representatives from the The Toolkit is structured as follows. Chapter 2 International Federation of Accountants (IFAC), the presents an analysis of the frameworks and standards Integrated Reporting Council (IIRC), and the Carbon that were considered and an overview of the selected Disclosure Standards Board (CDSB). Key resources framework on which the toolkit is based. Chapter 3 from which users may gain additional insights are listed outlines climate change guidance for SOEs, that is, in Annex 1. how SOEs should consider, mainstream, and disclose climate-related financial information for each of the TCFD recommendations. Chapter 4 provides information on 1.4 Assessment Matrix and how SOEs can present their climate-related disclosures, Toolkit Structure and chapter 5 describes how to introduce climate change into the management process. Finally, chapter 6 outlines ways to get started by offering guidelines for An assessment matrix based on the Toolkit has been regulators and SOEs. Annex 1 contains key resources designed and integrated into the World Bank’s SOE and references that were used in the preparation of diagnostic, the Integrated State-Owned Enterprises this document and that may be consulted for further Framework (iSOEF),10 as a way for Bank teams to information on the topic. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 8 02 Frameworks and Standards 2.1 Frameworks and Standards Considered Several existing frameworks and standards that focus on climate change were considered and analyzed to determine the appropriate framework upon which to base the Toolkit (see box 2). As noted, the analysis involved conducting desktop research, surveys with Bank staff, and interviews with representatives of SOE regulators and SOE report preparers and users. The analysis also considered the specific climate change– related frameworks being adopted in different countries. Box 2. Current Frameworks and Standards Global Reporting Initiative (GRI). The GRI standards focus on the governance, economic, environmental, and social impacts of a company and hence its contributions—positive or negative— to sustainable development. Users of the GRI standards identify issues that are of primary importance to their stakeholders, thus reports vary from organization to organization. International Sustainability Standards Board (ISSB). The ISSB was established in 2021 by the IFRS Foundation to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs, consolidating the CDSB, the Value Reporting Foundation, which houses the Integrated Reporting Framework, and SASB standards by June 2022. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 9 The Sustainability Accounting Standards Board (SASB). This was established in 2011 to focus on reporting to the U.S. Securities and Exchange Commission. It has taken an industry-based approach based on a 10-sector classification system. The SASB’s industry-specific standards identify the subset of sustainability-related risks and opportunities most likely to affect a company’s financial condition (e.g., its balance sheet), operating performance (e.g., its income statement), or risk profile (e.g., its market valuation and cost of capital). In November 2020, the SASB and IIRC announced their intention to merge and form the Value Reporting Foundation. Climate Disclosure Standards Board (CDSB). This is an international consortium of business and environmental nongovernmental organizations committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. International Integrated Reporting Council (IIRC). This is a global coalition of parties focused on the adoption of integrated thinking and reporting on an international basis as a means to improve communication about value creation, to advance the evolution of corporate reporting, and to make a lasting contribution to financial stability and sustainable development. IIRC primarily positions itself as a global advocate, knowledge generator, and convener. Task Force on Climate-Related Financial Disclosures (TCFD). Created by the FSB to improve and increase reporting on climate-related information, the TCFD has issued recommendations for more effective climate disclosures to enable better decision making about climate-related risks to organizations. The recommendations have become the benchmark standard for reporting on climate-related risk and will allow companies that issue public debt or equity to incorporate climate-related risks in their risk management and strategy planning, with sector-specific guidance. Selection of the framework was based on three criteria (see table 1): level of international acceptance, level of government support or involvement, and extent of emphasis on climate change disclosure. The objective was to rely on existing frameworks and standards rather than designing something new. Table 1. Consideration and Comparison of Existing Frameworks and Standards Government Emphasis on Standards International Acceptance Involvement/Support Climate Disclosure IIRC Moderate Moderate Low GRI Moderate Moderate High TCFD High High High CDSB Moderate Moderate High SASB Moderate Moderate Moderate Source: Assessment by G Kusz and K Ireton. Based on the analysis, the TCFD recommendations recommendations about the global financial system and were selected and adopted as the basis for is supported by many international organizations. The developing the Toolkit. The recommendations are selection is further supported by the fact that as noted being applied or considered in many countries to above, the IFRS Foundation, which has established the enhance management of and reporting on climate- ISSB, announced that the latter will refer to the TCFD related financial impacts (box 3). In addition, they were framework in developing its climate-related global developed by a task force established by the FSB, an sustainability standards. The Foundation also issued institution that has a global mandate to monitor and make prototypes for General requirements for disclosure of Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 10 Sustainability-related financial information and Climated- To ensure that the Toolkit maintains global related financial Disclosure prototypes based on the relevance, it will be evaluated and revised regularly TCFD framework that will be issued as standards to incorporate evolving developments on climate in 2022. change disclosure, including the reforms currently being championed by the IFRS Foundation to harmonize sustainability reporting. Box 3. Regulatory Developments on Climate-Related Financial Disclosures • In June 2021, G7 finance ministers and central bank heads announced that they supported a move toward mandatory climate-related financial disclosures that provide consistent and decision-useful information, based on the TCFD framework. • In May 2021, the Norwegian Finance Ministry, the Oslo Stock Exchange, and a group known as Nordic CEOs for a Sustainable Future announced their support for the TCFD recommendations. • In early 2021, the U.S. Securities and Exchange Commission announced it would increase scrutiny of how well companies disclose the risks that climate change poses to their businesses. • In November 2020, the UK’s Chancellor of the Exchequer and the Department for Business, Energy and Industrial strategy announced that the United Kingdom would mandate economy-wide disclosures, in line with the TCFD, by 2025. • In 2021, the London Stock Exchange announced that new rules will require premium listed companies to make disclosures consistent with the TCFD. • In 2020, the French Ministry of Finance and the top 40 members of the CAC exchange endorsed the TCFD. • In 2020, Blackrock, which manages the pension assets of some 300 million people globally, asked all its companies to report in alignment with the TCFD recommendations and on broader material sustainability issues. • In 2020, Canadian companies and federal Crown corporations began taking steps to implement the recommendations of the TCFD. The Canadian government said it supported voluntary international disclosure standards and a phased approach to their adoption. It aims to raise firms’ awareness of the importance of tracking, managing, and disclosing material climate-related risks and opportunities in a consistent and comparable way and will encourage adoption by federal Crown corporations where appropriate and relevant to their business activities. • In 2020, the New Zealand government was the first to mandate TCFD compliance for companies listed on the New Zealand stock exchange (see box 4). 2.2 The Adopted Framework Based on underpinned by 11 recommendations. In addition, the TCFD produced guidance documents to support all TCFD Recommendations organizations in developing climate-related management practices and financial disclosures consistent with its recommendations, supplementary guidance for specific The TCFD recommendations for disclosure are sectors, and principles of effective disclosure. structured around four thematic areas that are core elements of how organizations operate, Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 11 Although the adopted framework emphasizes SOE regulators should mandate the incorporation of disclosure, it also provides specific guidance on these management requirements and actions in the requirements and actions that SOEs should integrate short term and subsequently transition to requiring the into their management practices to enhance their disclosure of the information to provide the appropriate ability to benefit from climate change opportunities financial and non-financial information needed for and to adapt and to mitigate climate change risks. decision making in the medium to long terms. Box 4. New Zealand Government Mandates TCFD Disclosure In 2020, the New Zealand Cabinet agreed to introduce mandatory TCFD reporting for companies listed on the New Zealand stock exchange, referring to large financial sector entities, including banks, non-bank deposit takers, isurers, asset managers, and Crown financial institutions. The disclosure regime would include Crown financial institutions (with over US$1 billion assets under management), such as the New Zealand Superannuation Fund and the Accident Compensation Corporation, as well as listed state- owned entities, such as Air New Zealand, Meridian Energy, and Mercury Energy, the latter two of which generate power from renewable energy. The 2020 announcement followed a consultation process launched in 2019 that included many entities that would be affected by the regulation but were supportive of the proposals, numbering some 200 entities and about 90 percent of the assets under management in New Zealand. Respondents to the 2019 consultation also supported the inclusion of public sector and private companies beyond the original focus on financial market participants. Parliament held a first reading of the bill, part of an omnibus Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Bill on April 15, 2020. To support implementation, New Zealand’s External Reporting Board will publish standards to ensure regulatory compliance and to promote consistent, comparable, reliable, and clear reporting. These standards will build common understanding around disclosure of methodologies and assumptions that will be inevitable in the reporting of future impacts and scenarios. Voluntary disclosure by listed privately owned companies has already started, with some of the major banks and energy companies leading the way. Sustainability reporting by listed and non-listed entities has dramatically increased over the past few years. In 2019, 112 organizations in New Zealand published sustainability-related reports, up from 54 in 2018. The TCFD’s four pillars are governance, strategy, • The protocols and procedures for identifying, risk management, and metrics and targets (figure assessing, and managing or adapting to climate- 2). Specific disclosures are recommended to illustrate related risks how these are incorporated into the company’s management practice. • The targets and metrics that will be used to set the ambition and measure the SOE’s progress • The organization’s governance specific to its management of climate change impacts • A review of the business model and strategy based on scientifically sound scenarios Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 12 Figure 2. The Four Pillars of Integration and Disclosure 1 Governance How the organisation will be structured to address climate-related risks and opportunities, 2 Strategy An analysis of how the actual and potential impacts of climate-related physical and and how the leadership will provide oversight. transitional risks and opportunities on the Name committees and accountable executives; organization’s businesses, strategy, and assess capability of board to provide oversight financial planning; consider impacts on income on this issue. statement, balance sheet, and borrowing. Test the strategy against different scenarios. Elements of Disclosure 4 Metrics and Targets The metrics and targets used to assess and manage relevant climate-related risks and Risk Management 3 Describe the processes used to identify, assess, and manage physical and transition opportunities; many organisations begin with risks. Identify opportunities for new commercial disclosing Scope 1 (emissions generated in solutions. Test the risk framework for longer term the process of conducting the business) and 2 risks including the need for new infrastructure, emissions (from purchased electricity). or assets that become obsolete early due to changing climate, technology or markets. Source: Adapted from TCFD final recommendations. The four overarching recommendations are supported foremost on sound management. Therefore, adoption of by key climate-related financial disclosures— the framework by SOEs will enable them to demonstrate referred to as recommended disclosures—that build that they are fully aware of the risks posed by climate out the framework with information that will help change and that they have integrated climate change investors and other stakeholders understand how opportunities and risks into their procedures and practices reporting organizations consider climate-related to ensure that the enterprise remains sustainable. issues (see table 2). The framework is based first and Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 13 Table 2. Climate Change Management Practice and Disclosures Elements What Is Expected of SOEs Governance a) Create or amend specific governance measures (policies, structures, roles, and responsibilities) to address climate-related risks and The organization’s governance opportunities and disclose these in reporting. around climate-related risks b) Assign and describe management’s role in assessing and managing and opportunities climate-related risks and opportunities. Strategy a) Identify and prioritize the climate-related risks (physical, transition, and litigation, etc.) and opportunities that could impact the SOE’s strategy The actual and potential impacts of over the short, medium, and long (SML) terms. climate-related risks and opportunities b) Describe the impact of climate-related risks and opportunities on on the SOE’s businesses, strategy, the business’s strategy and financial planning and amendments to and financial planning where such the strategy. information is material c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. Risk Management a) Establish procedures in the organization for identifying and assessing climate-related risks. How the SOE identifies, assesses, b) Describe how these procedures are integrated into the SOE’s overall and manages climate-related risks risk management. c) Describe the SOE’s procedures for managing climate-related risks (mitigation, adaptation, strategy change, etc.). Metrics and Targets a) Determine the metrics to be used by the SOE to assess climate- related risks and opportunities in line with its strategy and risk The metrics and targets used to management process. assess and manage relevant climate- b) Assess the SOE’s Scope 1, Scope 2, and if appropriate, Scope related risks and opportunities where 3 greenhouse gas (GHG) emissions and the related risks and such information is material disclose these.11 c) Establish and disclose the SML-term targets to be used by the SOE to manage the climate-related risks and opportunities and the performance against these targets. Source: Adapted from TCFD for SOEs by G Kusz and K Ireton. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 14 03 Climate Change Guidance 3.1 Clearly Define Why SOEs Should for SOE Regulators Consider Climate Change National SOE regulators should require SOEs to consider and integrate into their operations the TCFD core recommendations and supporting recommended disclosures as set out in table 3 below. The regulator should prescribe the adoption approach and timing based on the guidance referred to in section 4.2 SOE regulators should clearly articulate why it is important for SOEs to consider the impact of climate change on their business model and sustainability. Key reasons include: • SOEs can assist governments in meeting national commitments and targets on climate change. • Climate change presents opportunities and risks that SOEs should consider and integrate into their business model to successfully achieve their mandates, operate effectively, and meet their financial performance goals. • SOEs should minimize and mitigate their harmful impact on the environment. • Climate-related risks are becoming evident in many SOEs, and the risk of inaction is likely to result in higher potential costs. • Accessing funding for SOE projects, such as infrastructure upgrades and building resilience into the economy, will increasingly be subject to climate risk screening. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 15 Table 3. Using the TCFD Recommendations as a Framework for SOE Management and Disclosure of Material Climate Change Impacts Themes Governance Strategy Risk Management Metrics and Targets Core Establish or amend Assess and Assess and Determine recommendations and disclose the disclose the disclose how the appropriate metrics SOE’s governance material actual SOE identifies, and targets to be and accountabilities and potential assesses, and used to assess and around climate- impacts of climate- manages climate- manage relevant related risks and related risks and related risks. climate-related risks opportunities. opportunities on the and opportunities SOE’s businesses, that are material. strategy, and Disclose financial planning. performance trends over time. Recommended Establish or amend Establish a formal Establish and Agree and disclose disclosure and disclose process to test the disclose the SOE’s the metrics to be board oversight strategy against procedures for used by the SOE and capacity in the climate-related identifying and to track climate- terms of climate- SML-term risks and assessing climate- related risks and related risks and opportunities the related risks. opportunities opportunities. SOE has identified. Disclosure will in support of its Document the enable regulators strategy and risk Assign and process, including to assess the management describe the assumptions adequacy of the process. the specific and values used, process being responsibilities and disclose them. used. of the executive leaders. Assess and Assess and Assess, using describe the impact disclose how the internationally on the SOE’s SOE identifies, accepted business strategy assesses, and methodologies, and financial manages climate- such as those of planning. related risks. the CDP or CDSB, and disclose, as appropriate, Scope 1, Scope 2, and Scope 3 GHG gas emissions and related risks. Stress test the Describe how Describe the SOE’s strategy, procedures targets used by the considering for identifying, SOE to manage different scenarios, assessing, and climate-related risks including a managing climate- and opportunities Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 16 Table 3 continued Themes Governance Strategy Risk Management Metrics and Targets 2 degree or related risks are and performance lower scenario. integrated into the against targets. For example, SOE’s overall risk if significant management. regulatory interventions such as carbon taxes were imposed, would the business model still be viable and if not, what steps will be taken to build in resilience? Source: Adapted from the TCFD final recommendations. 3.2 Specific Guidance on TCFD Core exist, specific expertise can be contracted to advise the board while expertise is built. Whatever choices are made Recommendations about climate-specific governance structures, they should be linked to the overall governance of the SOE. Regulators should provide the following guidance The board and senior leadership should familiarize to SOEs to enable them to integrate climate-related issues into their business and management practices themselves with the sector, national, and international and to develop climate-related financial disclosures climate change policies and targets. consistent with the TCFD recommendations. This guidance provides context and suggestions for effective Integration of Climate-Specific Governance Issues inclusion in daily SOE management practices and into Management Practice disclosure of the impacts that climate change could have on the SOE’s future, finances, customers, shareholders, The integration of climate-related issues into SOE and stakeholders. governance should include the following elements: 3.2.1 Governance Policy Establishing specific climate-related governance • A policy on climate change and/or a statement of structures, such as committees, policies, and commitment should be developed. accountable individuals, assists the SOE in managing this complex issue and signals, both internally and • The policy should be formally approved by the CEO externally, the importance of climate change and and/or the board. how the risks it presents will be managed. In some companies, such as banks, climate-specific, multi- • The policy should set out the SOE’s commitment disciplinary subcommittees have been established to to reducing climate change risk (mitigation and facilitate integrated contributions from individuals who adaptation actions) and clearly state its ambitions, drive company strategy, risk management, long-term targets, and management procedures. It should financing requirements, and environmental, social and commit to a periodic review of the policy and its governance (ESG). Where in-house capacity does not yet supporting structures, resources, and capacity. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 17 • The policy should name the board and executive communication of identified risks and opportunities committees charged with policy oversight and and performance on required actions, as well as what implementation and assign accountabilities for key oversight is provided by the board and executive management actions. leadership. Procedures • The organigram should identify the senior accountable executive positions, committee chairs, • A review of existing competence and capability at the technical or scientific experts, and senior staff with board and executive levels should be conducted and climate change experience, competence, and linked to the training and capacity-building programs capability and clearly specify their management held for these individuals. and performance management accountabilities and opportunities to build this capacity. • The board should approve or nominate committee or organizational structures that will be responsible for Disclosures on Governance the identification and analysis of climate-related risks to strategy, service delivery, or operations and how The governance disclosures should include frequently these should be conducted and reported indicators for all of the issues specific to the SOE’s to the board. governance of climate change in terms of the policies, procedures, and structures outlined above. • Procedures should be established to keep the board The disclosure of these climate-focused governance and/or board committees informed of climate-related structures enables decision makers to assess whether issues and a regular timetable adopted for their the SOE is well-positioned to respond in a timely manner inclusion on the board’s agendas. to the identified risks and opportunities. If the SOE decides to use existing committees, the climate-specific • Monitoring and oversight of progress against the terms of reference and mandates of those bodies and targets and metrics included in the policy should their accountabilities and responsibilities need to be be part of the executive and board mandates and spelled out. Whether included in existing annual reports, reported to regulators and other stakeholders. Integrated Reports, and/or stand-alone Climate-Related Financial Reports (Disclosure 3.3), it is essential that • The board should require that all data, methodologies, disclosures provide insight into the governance structures and procedures are auditable or verifiable. This will specific to climate change: the leadership, oversight, and build confidence in the underlying systems and will procedural mechanisms for responding to or anticipating prepare for the likely future requirement that climate- climate change impacts. related financial disclosures are audited or verified. Reporting frameworks generally do not differentiate Structure between SOEs and public companies in terms of expected disclosures on governance and governance • Climate change risks should be specified in the roles indicators of existing reporting frameworks, such and responsibilities at the board, executive, and as the “TCFD Report Playbook,” published by the management levels, which should include assigning United Nations Environment Programme (UNEP), accountabilities for identifying and assessing risks, the Institute of International Finance, and EY. analyzing the impact on strategy, and approving Typical governance indicators can also be found in the performance targets and measures. frameworks of the Gold Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) and • The accountable senior executive should prepare these can be used as the basis of governance disclosure, an organigram showing which committee structure if there is the added climate-related focus. and management teams will be accountable for the Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 18 Box 5. A Typical Governance Disclosure Framework Board: Structures and Procedures The disclosures should provide a clear description of the board’s structure and experience relating to climate change and should include: • A clear description of the entity or individual with primary responsibility for managing climate risks at the board level; this could be, for instance, a specific board committee or subcommittee or an individual board member or delegate • A clear description of the roles and responsibilities of the board in defining the enterprise’s commitments with respect to climate impacts, as well as in addressing related risks and opportunities • Experience of board members on climate change • Specific board committees that are overseeing climate risks and membership and the cadence of the meetings • Climate-specific structures/committees in place (if any) and related decision-making procedures Processes and frequency by which the board and/or board committees are informed of climate-related issues: • Training received and experience of board members on climate change • How the board and/or board committees contextualize climate-related issues (e.g., in the context of risk management policies, strategy, business plans, divestments, and acquisitions) • How the board monitors and enforces progress toward metrics and targets that are aligned to the enterprise commitments to stakeholders Management: Structures and Procedures This disclosure provides a clear description of management’s organizational and reporting structure. This section should include: • Specific ESG functions or committees and climate-specific functions, relevant committees, or designated individuals responsible for management of climate-related risks • A description of the ESG or the climate-specific committee’s structure • Whether these committees report to the board or a committee of the board • A description of the interaction across the SOE’s finance, risk management, and ESG-specific functions. This disclosure also details the process by which management is informed of and manages climate-related risks and opportunities. It should include: • Procedures by which management is informed of climate-related issues • Scope of management’s responsibilities, including whether management directly assesses/manages climate- related issues • How management monitors and addresses climate-related issues • Description of the roles of the first and second lines of defense, which include identifying the responsible individual(s) for the management of risk and the authority of the control functions Sources: EY, IIF, and UNEP, “TCFD Report Playbook” (London: Ernst &Young Global Limited, 2020). Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 19 Example: Governance EDF is a French public energy company, listed on the CAC exchange. It reports that its “raison d’être is to build a net zero energy future with electricity and innovative solutions and services, to help save the planet and drive wellbeing and economic development.” This has been incorporated into the management practice of the organization. It has set a target of being carbon neutral by 2050. It’s board of directors consists of appointed directors, a representative of the state, and employee representatives. The board is advised by five committees: Audit, Strategy, Corporate Responsibility, Nuclear Commitments Monitoring, and Remuneration and Nominations. Extract of EDF disclosure on climate change governance “The Corporate Responsibility Committee examines, in connection with the Group’s strategy, the Group’s commitments and policies, as well as their implementation, in terms of ethics, compliance, and corporate responsibility. It examines the way in which the Company takes account of issues relating to climate change. It makes sure, in conjunction with the Audit Committee, of the existence of programs to identify and manage the main risks in these fields and comply with legal and regulatory provisions. In the line of its duties, it particularly examines the information regarding the declaration of extra-financial performance included in the management report in accordance with the French Commercial Code, in conjunction with the Audit Committee, the annual ethics and compliance report, the EDF mediator’s annual report, as well as the annual reports by the French inspector general for nuclear safety and radiation protection and the inspector for hydropower safety. It submits an opinion to the Board on the way in which EDF implements a non-discrimination and diversity policy, particularly in terms of balanced representation of women and men in governing bodies.” This EDF disclosure touches on: governance—who is accountable; strategy—which board committees are involved in approving and oversight of the strategy; risk accountabilities; and the ambition or target of a net zero energy future. This is only a small part of the climate disclosure on its website: https://www.edf.fr/en/meta-home. 3.2.2 Strategy country or region if global efforts to manage climate change are not successful. These scenarios allow the Undertaking a focused analysis of climate-related SOE, for example, to consider the consequences if there risk to the business model and strategy over the is success in maintaining rising temperatures to a mean short, medium, and long (SML) terms is critically annual increase of less than 2ºC and the consequences important. In SOEs, this is even more so when they if there is not. What happens if the global average deliver essential services for their governments to the temperature rises above 2ºC (which is considered to be a population. Regulators should focus on directing and potentially destabilizing temperature tipping point)? What enabling SOEs to identify the potential impact of climate are the implications on the SOE’s operation in a region change on their primary socioeconomic mandate (such under any of these conditions? as public transport or energy production). SOE boards should also regularly consider the impact on the value- Therefore, as the future cannot be predicted with creation model, income statement, balance sheet, and any accuracy, SOEs are encouraged to use different ability to raise and service debt over the SML terms. scenarios to test the impact of various physical and transition risks on their strategies in the future, Integrating Climate Scenarios into Strategy as presented in figure 3. These might, for example, Assessment and Management consider an orderly transition to net zero emissions by 2050, the impact of abrupt changes on the business Climate scenarios outline the possible future environment, and/or the impacts of failing to achieve a physical and transition risks that could confront the socially just transition to net zero. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 20 Figure 3. Using Scenarios to Test the Strategy Future 1 Exploratory Scenarios • Exploratory scenarios provide the basis for stress testing the company’s value creation strategy and capital allocation. • These should be a range of hypothetical, plausible futures Present Future 2 (not forecasts). • The different scenarios should be sufficiently diverse and drawn from either publicly or privately available sources, such as the IPCC or the International Energy Agency. • The scenarios should describe an outcome at a cretain time Future 3 horizon and a pathway from the current situation. Source: Adapted from multiple sources by G Kusz and K Ireton. Example: Scenario The Intergovernmental Panel on Climate Change (IPCC)12 predicts with high degrees of certainty that even if a less than 2ºC mean temperature rise is achieved, some regions—particularly Africa, with its large land mass—may in the medium term experience a temperature increase beyond levels that support production of current crops and livestock. This could also have an impact on rainfall and precipitation, leading to further declines in quality of life and livelihoods. SOEs operating in these areas will have to consider that these impacts will have severe consequences for their customers and their operations, thus potentially leading to loss of operational functionality and revenue. In this case, an adaptation strategy should be identified and implemented. Conducting a scenario analysis requires the SOE to model against the potential changes in weather take a number of steps: and operating conditions (changes in precipitation, flooding, and drought and fire patterns and intensity, • Establish whether there is a government scenario for example). These are the physical manifestations for anticipated changes in weather patterns, such or risks of climate change. Additionally, the Network as the likelihood of increased flooding, more severe for Greening the Financial System has scenarios droughts and fires, or more extreme storms and agreed by its member governments. Significant temperature changes, that will affect people, their guidance exists on the TCFD hub. livelihoods, and the agriculture sector, and determine the impact of these changes on the country or region • The SOE should also test its strategy against the of operations. potential national or international governmental regulatory change that may result, for example, • Using information from the government’s climate regulations that might prevent the use of certain input policies and action plan at the national and sector materials or that tax those input materials, markets levels, if they exist, or the regional assessments that may shun products produced with “dirty” energy developed by the Intergovernmental Panel on Climate produced from fossil fuels, and so on (see figure 3). Change (IPCC), the SOE should test its business Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 21 • In many cases, the SOE will need to use conversion • The most material findings in the primary financial factors or assumptions to calculate its carbon factors report/annual report of the SOE. Details can be to take into account, for example, the particular provided in a stand-alone or secondary report, such energy mix in its country of operation, and guidance as a sustainability report. on doing so exists within the standards. These calculations and assumptions should be properly • The scenarios and assumptions or conversion documented to facilitate auditing or assessment factors that were used in the exercise to ensure when appropriate. comparability and credibility. Assumptions and methodologies should also be fully documented for • Having undertaken this calculation, the SOE is audit and review purposes. able to assess its contribution to climate change in relation to the country footprint, its sector, and/or its • The regulatory change, both locally and peers. Many peer SOEs are already reporting the internationally, particularly where it affects the data in their sustainability reports, thus enabling an products or services or financial/capital investment assessment against a benchmark. To be aligned requirements of the SOE into the future with best practice, the data should be contextualized, analyzed, and benchmarked against relevant • Assessment of risks relating to the supply chain and standards. downstream product offtake The strategic exercise should consider climate • An assessment of the risks of slow or no action by change’s widespread impacts on water, health, the SOE to be considered and reported. As the productivity, and social well-being, as well as on climate crisis becomes more urgent, the accelerating infrastructure, and business-as-usual practices. pressure on management action could prove costly What will have to change? What might change? What for the SOE. infrastructure investments could be stranded (or made redundant) before their time? What new infrastructure or • The expected physical impacts on the region or investments in technology will be needed? subregion as described by the IPCC or in scientific sources (see Annex) of climate change under Once potential impacts are identified, the SOE various scenarios should go through an exercise of identifying adaptation and climate mitigation strategies. Figure • The effects of determined action by the SOE to aid 4 highlights the potential of mitigating climate change the national government in achieving its climate (reducing emissions, for example) or taking adaptive change objectives on the SOE’s future growth and steps (changing procedures, technologies, or input investment expectations materials or protecting natural systems that absorb carbon or regulate the flow of flood waters). These steps • Opportunities arising out of changing regulatory and should become a routine part of the SOE’s executive physical conditions, consumer preferences, and the management and board oversight procedures to ensure need to deliver a lower-carbon economy that the SOE remains viable over the SML terms. The source of the scenarios and the underlying assumptions • An insight into the scenarios for climate change that should be well documented so that the scenario can be were explored in terms of expected physical impacts assessed periodically and that necessary changes can as well as the transitional impacts of regulation, be made should physical or regulatory changes require technology, and legal liability it. The leadership should assess whether the SOE can survive and grow in changing circumstances. • The impact of unmitigated climate change: increasingly severe weather impacts and the effects Disclosures should include an overview of the of increasingly angry regulatory and consumer following material aspects: responses to companies perceived as contributing to climate change Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 22 • The impact on the income statement and balance averse. Most leading multilateral and commercial sheet as well as the ability to raise and finance debt. banks have policies that prohibit them from As an example, it is becoming increasingly difficult to funding new coal power stations and increasingly, raise finance for new fossil fuel–based power stations new coal mines. as financial institutions become increasingly risk- Figure 4. Examples of What to Consider When Assessing Strategies for Adaptation and Mitigation of Climate Risk Changing location ot structural resilience of roads, bridges, rail, etc. based on changes anticipated Infrastructure or experienced. Repairing natural system store functioning - e.g., marshes, riverbanks Technology; new delivery methods - new skills, new Adaptation Logistics hardware, etc. Crops and Adaptations for heat, drought, disease livestock Climate Change Emissions Improving process efficiency, heating, ventilation, reductions and air conditioning, improving buildings Choosing lower-impact energy/improving fuels, Mitigation Fuel switching energy sources Carbon sinks Tree planting, investing in offsets Source: Adapted from multiple sources by G Kusz and K Ireton. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 23 3.2.3 Risk Management changes to address mitigation and adaptation requirements related to climate, and this transition SOEs should integrate climate-related risks into their may pose varying levels of financial and reputational existing risk management procedures. They should risk to companies. Examples of policy-related transition also develop or adapt these procedures to specifically risks applicable to SOEs include implementing carbon- include climate-related issues, noting that the time frames pricing mechanisms to reduce greenhouse gas (GHG) for climate impacts and responses are frequently beyond emissions, shifting energy use toward lower emissions those used in typical risk assessments by companies and sources, adopting energy-efficiency solutions, enhancing may therefore need to be adapted. SOEs should consider emissions-reporting obligations, and adopting greater climate change in the perspective of risks to their own water efficiency measures. Similarly, technological organization (within their corporate boundaries), risks improvements or innovations that support the transition within their supply chain, and the resultant risks to their to a lower-carbon, energy-efficient economic system can clients, as well as the aggregated risk that they and have a significant impact on companies. For example, others present to the government and/or funders and the development and use of emerging technologies, shareholders. These should include the spectrum of such as renewable energy, battery storage, energy physical and transition risks as presented in table 4. efficiency, and carbon capture and storage, will affect the competitiveness of certain companies, their production Physical risks resulting from climate change can be and distribution costs, and ultimately the demand for their event driven or stem from longer-term shifts in climate products and services from end users. patterns. Such risks may have financial implications for SOEs, such as direct damage to assets and indirect Risks to the sovereign may result from the SOE’s impacts from supply chain disruption. Physical risks from inability to deliver its services or meet debt obligations, climate change can impact businesses directly, indirectly, particularly where the sovereign is a guarantor of or through cascading or interrelated effects. Examples financial transactions. However, it is also clear that there include risks from the increased severity of extreme are many opportunities for new industries and more weather, changes to precipitation and weather patterns, resilient models of doing business and that an SOE and rising mean temperatures.13 board should fully assess these kinds of opportunities as well as the risks. Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market Table 4. Climate-Related Risks and Potential Financial Impacts Type Climate-Related Risks Potential Financial Impacts Transitional Policy and legal • Increased operating costs (e.g., higher risks compliance costs, increased insurance • Increased pricing of GHG emissions premiums) • Enhanced emissions-reporting obligations • Write-offs, asset impairment, and early • Mandates on and regulation of existing retirement of existing assets due to policy products and services changes • Exposure to litigation • Increased costs and/or reduced demand for products and services resulting from fines and judgments Technology • Write-offs and early retirement of existing assets • Substitution of existing products and • Reduced demand for products and services with lower-emissions options services Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 24 Table 4 continued Type Climate-Related Risks Potential Financial Impacts • Unsuccessful investment in new • Research and development expenditures technologies in new and alternative technologies • Costs to transition to lower-emissions • Capital investments in technology technology development • Costs to adopt/deploy new practices and procedures Market • Reduced demand for goods and services due to shift in consumer preferences • Changing customer behavior • Increased production costs due to • Uncertainty in market signals changing input prices (e.g., energy, water) • Increased cost of raw materials and output requirements (e.g., waste treatment) • Abrupt and unexpected shifts in energy costs • Change in revenue mix and sources, resulting in decreased revenues • Repricing of assets (e.g., fossil fuel reserves, land valuations, securities valuations) Physical • Increased severity of extreme weather • Reduced revenue from decreased risks events, such as cyclones and floods production capacity (e.g., transport • Changes in precipitation patterns and difficulties, supply chain interruptions) extreme variability in weather patterns • Reduced revenue and higher costs from • Rising mean temperatures negative impacts on workforce (e.g., • Rising sea levels health, safety, absenteeism) • Write-offs and early retirement of existing assets (e.g., damage to property and assets in “high-risk” locations) • Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants) • Increased capital costs (e.g., damage to facilities) Source: TCFD, “Guidance on Risk Management Integration and Disclosure” (Task Force on Climate-Related Financial Disclosures, 2020), 36–37. Incorporating a climate change assessment into seek opportunities to change their products, delivery, or the governance, strategy, risk management, and technology or to build new solutions. Where technologies disclosure procedures is not only about risk. The flip fall out of favor, or input materials are threatened by side of risk is opportunity—where a risk presents itself, weather patterns, for example, it is possible to maximize SOEs and others can reassess whether mitigating or the opportunity for reimagining a more resilient, people- addressing the risk can present additional opportunities. and climate-friendly economy, as the COVID 19 pandemic Risk management procedures also enable SOEs to has highlighted. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 25 SOEs frequently operate in high-impact sectors, • Taking steps to reduce or mitigate the risks such as energy, transport, and infrastructure and extractive industries, which have been the focus of • Creating a longer-term action plan to manage this guidance. In these cases, potential opportunities to the residual risks and consider the strategic be realized by the SOE or the nation through addressing reassessment that may be needed key risks could include, for example: shifting from fossil fuel–generated energy to avoid air quality problems and • Taking preemptive steps to prepare for any future associated health impacts and deploying better and safer risks, for example, having emergency plans for public transport modes. the energy supply in the event of major events or emergency public transport plans that can be put Integrating Climate Risk Management into the Way into effect within relatively short time frames SOEs Do Business Many boards already have a risk subcommittee. In It is good practice for all organizations to conduct some companies, they are having their mandates regular climate risk identification, management, amended to include climate change; in others, and mitigation exercises and to create systems and given the need to fast track capacity-building and build capability to carry these out in a consistent and procedures, dedicated climate committees are being consequential way. The SOE may well already have a set up at board, executive, and management levels. generic risk management system that has been endorsed Risk analysis procedures should be regularly reviewed or required by the regulator. All risk management for relevance and rigor. This enables the routine review procedures fall under the fiduciary duties of the board of how risk is identified, prioritized, and managed. and the executive management. Several steps would be considered essential to any risk management process The risk management system should consider a and should be repeated at regular intervals: scale of both likelihood and consequences. Many companies use a five-box matrix such as the one below. • Scanning the operating context for risks (such as Overlaid on this should be an assessment by the board those highlighted by the framework) of the SOE’s risk appetite—what is acceptable and what is not. The color coding would be in line with and • Assessing the scale, immediacy, and priority of determined by the SOE’s risk appetite. Risks highlighted the risks of major significance should be managed and mitigated to the extent possible. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 26 Figure 5. Risk Matrix Consequence Insignificant Minor Moderate Major Critical Almost certain Probable Likelihood Possible Improbable Remote chance Source: Originally developed by US Department of Defence. Risk and Opportunity Disclosures • The risks of un-insurability (or rising cost of insurance) and the potential of claims against directors or other As outlined in table 3, the disclosure should include: liability claims • The details of the risk identification exercise, • A quantification of new business opportunities for risk management procedures and policies, and the SOE and whether these can also create new job residual risks (those that remain after mitigation and opportunities within the company, its supply chain, or adaptation processes have been undertaken) local community • Qualitative and, if possible, quantitative evaluation • A focus on the risks and opportunities for creating a of future risks to the delivery of the SOE’s services, “just transition” to new opportunities and technologies products, or revenue as a result of physical risks that considers the employees and communities that associated with the changing climate based would be affected by change within the organization on the scenarios considered. All assumptions should be documented and linked back to the Figure 6 indicates how a typical risk management scenarios evaluated. process would go, from identifying a potential hazard, such as a major storm, to understanding whether • Risks to livelihoods: will the SOE need to realign its this affects people, ecosystems, livelihoods, or the workforce given the risks? Will a change in strategy business model. From identifying the implications on or risk management actions affect the supply chain people and systems that are related to a hazardous or local community? occurrence, the risk team should understand what is vulnerable or sensitive in that system; for example, • Qualitative and, if possible, quantitative assessment whether a vulnerable community or endangered species of the future risks related to likely or potential changes is going to be affected by exposure to those hazards in regulation, technology, and consumer preferences and the nature of its ability to adapt, or the extent of an Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 27 entity’s vulnerability to severe damage. Mitigating these and to adapt and therefore reduce vulnerabilities. risks presents many business opportunities. These could be impacts on human lives, on ecosystems, or on economic structures. It is insufficient in a risk Impacts are the residual outcomes or consequences management process to simply stop at identifying for the SOE and its supply chain and customers the hazard. after it has taken steps to avoid or mitigate hazards Example: How a Water Utility Could Face Multiple Risks Related to Climate Change Physical and transition risks Consequence to business Increasingly • Insufficient water • Significant short-term expenditure on severe • Regulatory caps on water use relief drought • Insufficient drinking and clean water for • Medium- to long-term expenditure on health and welfare of populations additional infrastructure • Threat to energy generation in many • Increasing cost of insurance countries where water is a key input • Officers’ liability cover • Local businesses and community charge SOE with negligence and human rights abuses • Excessive uncertainty in planning Too much • Risk to infrastructure and local • Higher cost and lower availability of water communities if dams or impounds fail insurance • Pollution and health threats from unmanaged flood waters In conducting a risk or opportunity assessment, other aspects out of their control that could affect the regulator or SOE should consider the following their business factors, which together assist in determining how material a risk could be: 2. The EXPOSURE they have or the potential or propensity to be affected, given the nature of their 1. The HAZARD presented by physical events or business or their geographical location manifestations of climate change and how that impacts, for example, their customers, their 3. The IMPACT that this would have on their business operational or distribution infrastructure, and Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 28 Figure 6. Risk and Opportunity Assessment Potential occurence of a climate-related event or physical impact Hazard The presence of people, ecosystems, resources, infrastructure, or economic/social assets in places and settings that could ve affected by the hazard Exposure The propensity or predisposition to be affected, such as sensitivity or susceptibility to harm, Vulnerability/ and lack of capacity to cope and adapt Sensitivity The presence of people, ecosystems, resources, infrastructure, or economic/social assets in places and settings that could ve affected by the hazard Impact The residual outcomes of consequences, after adaptation and mitigation measures for climate- related vulnerabilities Source: Developed by G Kusz and K Ireton. 3.2.4 Targets and Metrics Determining and Integrating Targets and Metrics Setting multi-year targets is an essential part With respect to climate change, the SOE should adopt of framing the issue and setting performance targets that at the very least are linked to national measures. This matter is critical, as investment in goals, though they could be even more ambitious for infrastructure or changing the business model for a large advanced SOEs. To ensure speed of uptake, they should company requires foresight and intent beyond the typical be specified by the regulator. Having a clear target, with budget cycle. appropriate milestones, enables concerted action and Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 29 regulatory supervision. Examples of targets linked to Disclosures associated with metrics and targets national goals could include those stated in a national should specify the following: climate change act, policy, or strategy and/or the NDC published by the country signaling its commitments to • How has the SOE determined its overall ambition the Paris Agreement. In the NDC, national governments and performance targets? Is this a net zero target makes commitments to stabilize or reduce national based on the Paris Agreement or a target linked to a emissions and/or to the international ambition of holding national or regulator-specified goal? mean temperature rise to well below 2oC above 1990 levels. Many countries have set net zero targets, with • If using a national or international goal, has it been the intention of being carbon neutral by a specific year. adapted on a proportionality basis to shape the Having a clear target enables concerted action. SOE’s contribution to climate-risk mitigation and adaptation? For example, if the NDC commits to In guiding their SOEs, regulators should specify reducing emissions, regulators should expect that whether and which national climate targets should an SOE’s strategic actions will include targets on be included in their target-setting procedures. For emissions reductions. example, if the country is aiming for net zero emissions by 2030 or 2050 (as some countries have already declared), • The ambition should be that an individual then SOEs should align with this target. Where national company’s actions should be proportional to targets do not already exist, SOEs should be guided by its direct and indirect impact. If, for example, international sector-specific benchmarks or procedures, the energy utility is responsible for a significant such as those of the We Mean Business Coalition14 or portion of the national emissions—and therefore the UN agencies, such as UNEP, the United Nations impacts climate change—it should have a Industrial Development Organization (UNIDO), or the significant program to reduce emissions in line United Nations Conference on Trade and Development with the national ambition. (UNCTAD), where most relevant, and should focus on those applicable to their particular activities. • Disclosure on metrics and targets should start with but go beyond the numeric calculation of GHG The correct metrics assist in ensuring that emissions and consider what percentage of revenue performance is on track and in identifying challenges (or portfolio) is affected by physical, transition, or and opportunities along the way. The metrics needed liability risks and how those impacts can be mitigated. for emissions reporting are well established. They include, for example, Scope 1 and Scope 2 GHG emissions • What are the precise emissions, energy intensity, that result from the organization’s own operations and fuel sources, and other quantified data that highlight activities as well as from the purchase of electricity; they the SOE’s contribution to the causes of climate also include the quantification of CO2 avoided by new change? Energy emissions and energy intensity procedures or technologies. Specific metrics for sectors metrics focused on key sectors are available in the are also available in the reporting frameworks, such as TCFD guidance. the GRI and SASB, as well as in the TCFD guidance for prioritized sectors. A summary of the GRI energy reporting metrics for Scopes 1, 2, and 3 is included in Annex 1. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 30 Example: Emissions Targets Metro de Santiago is contributing to the fulfillment of the Chilean government’s national development goal, NCRE: 2025, which states that Chile intends to source 20 percent of its networked energy from non- polluting energy sources. Metro is one of the first metro transport companies in the world to source most of its power from non-conventional renewable energies (NCRE). Forty-two percent of Metro’s energy is solar power from the Pelican photovoltaics plant and 18 percent from wind. At Eskom, the South African national energy provider, the strategic plan includes reducing reliance on fossil fuels as its coal-fired generating plant nears the end of its life. However, as the utility still generates more than 90 percent of its energy from fossil fuels, there is a long way to go. Eskom is also exploring the potential of incorporating opportunities for communities that will be affected by the closing of fossil fuel power stations into their strategic plans for installing renewable technologies. This would provide a “just transition” for communities associated with the old power stations, thereby reducing opposition to the uptake of renewable energy and addressing both social and climate-related concerns Hydro Quebec, is a Canadian public utility that generates and distributes hydro-electrical energy. The company has for many years been reducing the GHG emissions linked to its operations. It continues to work on reducing employee travel impacts and aims to decarbonize all of its business activities and markets. It has set a target of being carbon neutral by 2030. 3.3 Specific Climate Change Guidance categories, such as emissions generated and factors for calculating emissions, water consumption, land use, on Three SOE Sectors and so on, which are the primary steps in understanding impacts and risks in this sector. SOEs in the energy, transport, and extractive However, the recommendations on climate- sectors usually make a significant contribution to related financial disclosure go further, focusing on their economies. They are also considered to have understanding and disclosing the financial risks a significant impact on climate change. Regulators that emanate from: the changing price and value thus have a strong need to understand the potential of carbon-focused assets; the costs of carbon in vulnerabilities to climate change in these sectors that the value chain; the costs of capital, investment, could impact national service delivery and even national impairments; and the early obsolescence of assets. financial stability. In response, regulators should require Where SOEs are majority held or controlled by the the following specific considerations and disclosures by state, the risk becomes systemic, impacting not only the these sectors. individual SOE but also the population that relies on its services and even the nation’s finances. Recommended 3.3.1 Energy Sector disclosure should include an assessment of the following impacts: For the energy sector, the recommended specific climate-related financial metrics15 recognize the • Revenues and expenditures interconnectedness of energy generation and • New products and revenue streams distribution to GHG emissions, water and land use, • Capital investments and the rapid energy technology transformation • Access to/cost of capital taking place in many countries as they seek to • Life cycle assessment and reporting, that is, going lower emissions. Most leading reporting standards, beyond just the production of oil or the mining of coal such as GRI, SASB, and CDP (formerly the Carbon and including its use/impact in the value chain Disclosure Project), for example, provide indicators • Investments in new lower-carbon technologies and methodologies for reporting on the climate-related Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 31 Example: Physical Risks Following extreme weather events that destroy property and infrastructure, households and businesses could be forced to relocate or close down for protracted periods. It may not be possible to repair all infrastructure in the short to medium term, and some businesses and household may be forced to relocate. If these events become more frequent it would have an impact on the SOE’s business model, financial performance and financial position. 3.3.2 Transportation Sector disruptive technologies that are becoming cost effective and sought after in the race to reduce The transportation sector, which includes air freight, emissions. These new technologies may lead to early passenger air, maritime transport, rail, trucking, redundancy of existing equipment and assets, with and automobiles, faces major risks from regulators significant financial consequences. seeking to reduce emissions and from new and Example: New Technologies in Transportation A growing number of freight and passenger vehicles are electric and there are policies in numerous countries to inhibit the sales of new internal combustion driven engines. The recommended metrics and methodologies16 for quality, and cost of adverse weather events, such as floods, calculating and reporting emissions, for example, fire, drought, and storms, have an impact on production. or for expenditure on research and development in These factors make forward-looking climate-related risk new equipment or services or for energy-efficiency assessment essential to an accurate evaluation of the measures incorporated into the design, are value of their reserves. Although some products, such extensively covered in the reporting standards. For as coal, are under increasing scrutiny because of their the recommended climate-related financial disclosures, causality with GHG emissions, other mining products the analysis should include management of the transition are experiencing significant opportunities as a result to more efficient equipment, the potential costs, and the of the drive for less polluting technologies, such as impact of regulatory change. energy storage. 3.3.3 Extractive Sector Consequently, disclosures should focus on qualitative and quantitative assessments and the Specific additional recommendations have been potential financial impacts of the following:17 made for the materials cluster of industries, of which the mining sector is a part. Mining and extractive • Investments in research and development and new industries are heavy industries; as such, they are capital technologies intensive and usually location specific. They are also • Increased regulation and taxing of carbon emissions significant users of raw materials, including energy and • Vulnerability to natural disasters and extreme water, with resultant carbon emissions and climate risks. weather events Mining companies frequently have long investment • Opportunities for products that can provide solutions cycles, with high upfront costs and expectations of an for improved energy efficiency and recyclability extended operating lifespan. They also usually have long (circular economy) downstream value chains, including transporters and • Reserve valuations processing intermediaries, before products reach the • Market switches to products with lower embodied final consumer. At each stage new risks are introduced. carbon Production output is influenced by location and the input costs of energy and water. Water availability, Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 32 04 Where to Present Climate- The regulator should provide SOEs with guidance on where climate-related financial disclosures should Related Financial Disclosures be presented, such as in the primary annual report produced for oversight purposes and in any public reporting. Reference should be made to reporting practices in the country. This guidance should propose three options, noting that the TCFD recommendations specify that the impact of climate change as assessed against the SOE’s business strategy with reference to scenarios should be reported in the primary annual report of the company, as these would involve financial consequences. 4.1 Filings and Reports As per the TCFD recommendation, organizations should report material climate-related financial disclosures in their mainstream (i.e., public) annual financial filings or annual reporting suite (see box 6 on determining materiality). If the SOE is following an integrated reporting format that emphasizes conciseness, a supplementary report will be needed to provide the detail required about the models and methodologies used to make the determinations of materiality. This adds to the credibility and auditability of the information. It is increasingly likely that audits of climate-related financial disclosure will be expected in the future as the climate crisis grows. As asset managers, financiers, and national financial authorities require more access to climate-related financial disclosure information and seek to verify its credibility, it is expected that in addition to the material disclosures in the primary SOE report, a stand-alone report may be required. Many companies produce a suite of reports, sometimes in one annual report, sometimes disaggregated for user ease. These Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 33 include reports on governance, risk, and strategy, as well • Be comparable between sectors, industries, or as sustainability reporting. portfolios. • Be consistent over time, including consistency in Where climate-related disclosure is contained in reporting boundaries, that is, what is included or multiple disaggregated reports, it would be essential excluded. to improve access to the information for the regulator • Focus on relevant, material issues. and other users by including an index or tagging • Be reliable, verifiable, and objective. system so that a coherent picture can be obtained. • Be timely. There should be consistency between any statutory filings and reports to the regulators and information Good disclosure must be based on sound management provided to other investors or stakeholders. and a demonstration of the following: Governance: 4.2 Principles of Good Disclosure • Having the appropriate governance structures, policies, and procedures in place to manage and Climate-related financial disclosures should be mitigate the risks iterative and produced regularly as part of the SOE’s • Clarity on the boundaries of the disclosures reporting cycle. It is essential that what is disclosed is (the SOE and its subsidiaries). There should be based on management actions and practice within the consistency on how both the positive and negative enterprise. Disclosures should: risks, opportunities, and data are dealt with. The boundaries should be clearly stipulated. • Contain complete information. • Be clear, balanced, and understandable. Box 6. Determining What is Material The purpose of climate-related financial disclosure is to go beyond carbon footprint accounting. Climate concerns must be analyzed to establish their potential impact on an SOE’s strategy, business model, and financial well-being, looking forward into the SML terms. For example, if there is a carbon tax or other carbon pricing mechanism, the impact should be assessed and disclosed, or where a technology in use is being penalized or discontinued because of its climate impact, this should be assessed as well as its impact on capital allocation, investment, or depreciation of assets. An SOE should go through a routine process to determine potentially material impacts on strategy and the resultant long- term financial consequences of climate change, such as limitations on the ability to operate under certain conditions. These material impacts should be reported in the SOE’s primary annual report and annual financial statements. Where the SOE’s contribution to climate change, through its emissions, products, or procedures, is material, this should be stated and contextualized. Informed stakeholders would expect to have an explanation of the underlying procedures and actions if the SOE fails to report material impacts or found “no material impacts.” In addition to the public reporting, these material issues should be linked to the statutory or regulated reporting that is required by the regulator. In many jurisdictions, multiple national agencies are involved in determining statutory reporting requirements for SOEs, and all should be involved to ensure clarity and consistency. As disclosure is resource intensive, it is important that the material indicators and information is consistent across all reports generated by the SOE. The credibility of the conclusions and usefulness of the disclosure are in the detail and analysis. It is recommended therefore that SOEs disclose how they determined materiality. This information should be readily available in clear and consistent language in the primary report or in linked documents, such as a stand-alone climate-related disclosure. Determining materiality should be a process that is fully documented for future management use and should be disclosed to key stakeholders to enable them to assess the quality of the information. The process should include: Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 34 • Which methodology or procedures were used to assess the strategic risk? • Which scenarios were used, and what are the academic/scientific sources of those scenarios? • What time horizons were considered? • What risk methodologies are in place to mitigate risk? • Where does the accountability lie within the governance process? • What targets and metrics have been set? Strategy: • Risk management and mitigation methodologies • Materiality assessments • The ambition of the organization to address climate- • Analysis of the risks inherent in the supply chain of related risks and contribute to solutions the company and its customer base • How the strategy was tested, using scenarios, to ensure resilience Targets and Metrics: • Analysis of the impact that key risks could have on their business and operating models, strategies, • The target is set, such as a net zero target by 2050 capital requirements, and performance over the (in line with or exceeding the government ambition) SML terms • Timelines (SML terms) • Performance metrics that indicate the starting Risk Management: point and that will be used to monitor and evaluate progress • A process to identify climate-related risks that may undermine the ability of the SOE to deliver essential or other services Example: Comprehensive Data All operating subsidiaries, as well as logistics, procurement, land holdings, and leases owned or managed by the SOE, should be included. Where insufficient data exist or where something is deemed not material to an assessment, that should be clearly stated. If an issue is not covered because of a lack of data, a program to improve data availability should be initiated. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 35 05 Introducing Climate Change For an SOE that is already calculating its GHG emissions and/or is aware of climate change as a into the Management Process significant—and in some cases even an existential— threat, it should take steps toward improving its disclosures by applying principles of good disclosure outlined in section 4.2. For SOEs that have not yet embarked on this journey, there are several steps that need to be taken (some in parallel) to ensure that they are on track to address climate change risks before they manifest as fatal threats. First steps include: • Making a commitment and beginning to develop a policy in line with the national government’s aims, ambitions, and climate action plans • Assigning roles and responsibilities at board, executive, and management levels • Undertaking a climate risk assessment using predictions of impacts of climate change on the SOE, its suppliers, and its customers • Calculating current GHG and equivalent gas impacts. Many gases have global warming potential. To aid management and reporting, these should be accounted for in terms of their impact relative to CO2. Several organizations, such as the U.S. Environmental Protection Agency, have calculators that enable the assessment of equivalence.18 • Setting targets or ambitions for the SML terms • Selecting appropriate metrics from reporting frameworks, such as the CDP, GRI, or SASB, for measuring and reporting improvements • Assessing opportunities for avoiding emissions through improved technologies or operating practices Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 36 • Assessing sources of funding, such as commercial the progression will be somewhat easier. Regulators bond markets, regional development banks, or should therefore require SOEs to begin the process as the Green Climate Fund, that may assist in the soon as possible, recognizing that it may take two–three acquisition of technology and process improvements years before full management integration and disclosure and provide training or capacity building for key staff can be achieved. Regulators should consider a two-year members lead time for the first mandatory disclosure reports. During this time, SOEs should immediately adopt voluntary disclosure of the procedures, policies, and data that are 5.1 Climate Change Risk Management available, guided by the maturity framework in table 5. and the Disclosure Maturity Framework Regulators will need to ensure that the internal process and changes outlined above under the four Regulators should require SOEs to develop or refine pillars (governance, strategy, risk management, multiple internal procedures in order to achieve and metrics and targets, see 3.2.1–3.2.4) occur consistent good management of climate-related sufficiently early and are appropriately geared to issues and disclosure of meaningful information. assisting in delivering on the targeted ambition. SOEs that have previously not identified or managed The regulator can use the maturity framework set out in these issues will require time to undertake the integration table 5 to determine a timeline for SOEs to fully address of the necessary management practices, to set policies climate issues. Regulatory actions can be supported and targets, and to assess scenarios. For SOEs that by the guidance contained within this Toolkit on the already report carbon emissions and the regulatory specific pillars, recommended management actions, and impacts of carbon taxes in their own or client jurisdictions, disclosure recommendations that have been outlined. Table 5. Maturity Framework Maturity Framework for SOE Climate Management and Disclosure Actions Limited (Beginner) Moderate (Progressing) Full (Advanced) Disclosures & financial filings Governance The board’s oversight of How the board considers Capacity and competence climate-related risks risks/opportunities of the board to respond to climate-related risks Management’s role in Board knowledge of assessing and managing climate-related risks and Integration of climate-related climate risks development of expert risks and opportunities into advisory committees or the regular board agenda Creation of a policy/ board training commitment linking the Integration of climate- SOE’s formal mandate Named board-level related risks into executive and national climate responsible individual(s). performance management commitments to C-suite Although increasingly there systems and/or incentives accountabilities and is pressure to name an performance individual or the person holding a specific portfolio (such as the Chairman of the Risk Committee), in some companies this may be the board chairman. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 37 Table 5 continued Maturity Framework for SOE Climate Management and Disclosure Actions Limited (Beginner) Moderate (Progressing) Full (Advanced) Disclosures & financial filings Strategy Operational GHG emissions Consider and disclose SML- Consider the impact of reductions term impact on strategy regionally relevant scenarios and financial planning if for high, medium, or low Links to strategic intent of climate change physical climate change risk (e.g., the SOE and to the NDCs or transitional risks are 4ºC, 2ºC, and 1.5ºC) using to the Paris Agreement factored in. credible analysis sourced (or directly to the Paris from the IPCC’s periodic Agreement) What opportunities have reviews or climate scientists been identified that could or the Networking for change the business model Greening the Financial or mitigate risks to value System (or similar) creation and preservation or the social mandate of Does the SOE have an the SOE? internal carbon pricing strategy (shadow pricing or Review the long-term capital actual pricing dependent on funding of infrastructure for current regulatory regimes)? public goods (e.g., public transport, energy, and water Does the SOE advocate utilities). on climate-related risks in collaboration with peers and/ The mandate of SOEs or other stakeholders to to deliver basic services achieve positive change? that could be disrupted or rendered inefficient or costly by climate-related risks Risk Acknowledge need to Describe Identified risks and Describe how the management reduce climate impacts opportunities procedures for identifying, and GHG emissions and assessing, and managing reassess risk management Assess and describe climate-related risks the potential impact on are integrated into the strategy, income statement, core business and risk and balance sheet in the management. SML term. How does the SOE contribute to domestic or international efforts to reduce climate-related risks or national vulnerabilities? Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 38 Table 5 continued Maturity Framework for SOE Climate Management and Disclosure Actions Limited (Beginner) Moderate (Progressing) Full (Advanced) Disclosures & financial filings Metrics and Scope1 and Scope 2 Scope 1: Emissions under What metrics are used to targets GHG emissions (using, for direct control assess progress on climate example, the CDP or GRI risks and opportunities frameworks) for appropriate Scope 2: Indirect emissions in the strategy and risk metrics and methodologies from electricity purchased management process? Scope 3: Input - (supply What are the long-term chain) and output-elated targets? Are they science risks. based and do they link to the global or national emissions Use and describe reductions targets? measurement methodologies that are Measure and report clearly defined and in line performance against targets. with recognized guidance. Disclose the link to the Publish quantified SML- country’s NDCs. term targets to reduce GHG emissions and performance. Source: Adapted for SOEs from TCFD and A4S. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 39 06 Getting Started: Guidance 6.1 Regulators19 for Regulators and SOEs As they prepare to regulate the management and disclosure of climate-related issues, SOE shareholder departments or regulators should consider a number of steps, including the need to build capacity in their own ranks and within SOEs to ensure that the outcomes add value to the long- term sustainability of the SOEs as well as the state. It would benefit both the regulator and the SOE if regulators start by determining whether there is a culture of climate-related reporting or experience in country on which SOEs can build and test their thinking with key external stakeholders. For example, do listed companies in the country or sectoral bodies report on climate change impacts, using internationally acknowledged frameworks, such as the TCFD, International Integrated Reporting Framework, GRI Standards, or SASB standards. These can provide important examples of relevant local experience on which SOEs can build. If no such reporting currently exists in the country, SOEs can lead the way and encourage commercial companies to follow suit. Regulators should take the following specific steps: 1. Set the management requirement. • Stipulate that management of climate-related impacts is required, and if necessary, develop regulation to support this requirement, building on the TCFD’s four pillars: • Governance • Strategy • Risk management • Metrics and targets Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 40 2. Establish a disclosure requirement as this climate change). Is the aim a net zero goal, for supports good management and assists the example, and if so by when? regulators or shareholders in identifying weaknesses. • National taxonomies20 on green finance/ sustainable finance and climate strategies, • Specify by which date disclosure will become ensuring credibility and aiding eligibility for mandatory, and for which time period. green or climate financing. Where a taxonomy does not yet exist, consider working with other • Set minimum requirements for climate-related national or regional regulators to adopt one. financial disclosures. • Delivery of the specific socioeconomic goals • Recommend a baseline climate scenario that and/or contributions that the SOE has to the SOEs should use as a part of their strategic achievement of the Sustainable Development risk assessments and stress tests. This can Goals prioritized by the country be based on the scenarios recommended, for example, by the Network for Greening the 5. Use this framework in the following ways: Financial System or those developed by other academic or intergovernmental organizations. • Recommend or require the use of a framework to ensure consistency and coherence in what is • Ensure consistency between regulatory and managed and reported. Accept that achieving public disclosures. full disclosure will take a number of years to achieve, but that an immediate start on 3. Set the timelines. management and disclosure is warranted by the growing climate emergency. • Set the financial year for which the first report must be produced and the deadline after the • Ensure that SOEs start as soon as possible close of the financial year. with those aspects on which there is significant international (and often local) experience that • Set the timelines and ambition levels and the they can build on (such as disclosure of carbon date by which each maturity level (table 5) emissions, for example—see table 5). Build should be achieved. capacity at regulator and SOE level. • Agree metrics with SOE boards by which • Link requirements to other key regulators in the performance will be tracked and measured. country, such as the environmental or economic regulators, budget office, finance ministry, and • Ensure consistency between regulatory and local development agency. In many countries, a public disclosures, such as those submitted variety of ministries or agencies exercise some to parliament or published by any other measure of control over companies. Some stakeholders. may set the national accounting and disclosure requirements while others, for example, will 4. Link any recommendations and actions taken be charged with investment in or regulation of to initiate climate-related financial disclosure in SOEs. Any action by regulators should aim to SOEs to: create consistency to enable better uptake. • Country ambitions on climate change, specified • Ensure alignment of the disclosure requirements in the country’s own NDC or national goals on with the financial reporting requirements climate change, as agreed by the cabinet or applicable to SOEs in the country—these are highest decision-making body sometimes spelled out in national standards or specific acts—and mandate the use of • Established SML-term ambition levels aligned some standards such as IFRS. Aligning these with the country’s goals (or a higher ambition disclosure requirements with those standards level depending on the SOE’s contribution to will aid uptake. Where there is no existing Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 41 alignment, the regulators should take steps to • Partner with appropriate institutions in the address this. country or multi-lateral development agencies and consultancies for the delivery of training. 6. Prepare an adoption approach. • Require SOEs to stress test their strategies • All SOEs should manage and disclose climate- against anticipated climate change and to related issues, but consider prioritizing SOEs assess their ability to deliver on government in the productive sectors, such as utilities mandates in the face of climate-related physical that deliver essential services (energy, water, or transition risks. Include an assessment of telecommunications); oil and gas and mining the risks related to slow or inadequate action, companies with their high contributions to for example, the risk to the long-term ability climate change and vulnerability to changing to generate and distribute electricity, provide acceptance of fossil fuels; and enterprises that rail services, create jobs, or generate revenue are significantly reliant on infrastructure to deliver or taxes. goods and services. • Consider developing (or adopting and adapting) • Begin the policy and regulatory process as a taxonomy. The benefit of this is that there is soon as possible. A delay in the regulatory clarity between regulators, SOEs, and other process will delay the course for SOEs and their stakeholders and on the terminology used contribution to national ambitions in managing and whether actions taken are consistent with climate change. All SOEs will require some lead climate impact management. time to put in place the necessary management procedures, data, and methodologies in order to • A number of countries, including China, address climate-related risks. Mongolia, South Africa, Chile, and others, as well as the EU, are in the process of, or • Encourage SOEs to take voluntary action have developed or adopted, taxonomies. ahead of regulation. Starting with voluntary These assist all players in ensuring that the management and disclosure, for example, may actions taken or described are consistent allow for more rapid uptake by leaders in the with the focus on climate mitigation and SOE sector while regulation is being drafted and adaptation and in preventing green washing. approved. • A clear definition of what is widely • Regularly review and revise management and considered climate friendly or a “greener” disclosure requirements as understanding activity is essential in accessing earmarked increases about climate-related risks and the funding that can be obtained internationally actions required of individual countries. Engage from the World Bank or other funds like the stakeholders and tap into available expertise. Green Climate Fund. Disclosure is one of the steps increasingly required if funds need 7. Outline support for SOEs. to be raised from multilateral institutions or on the bond markets. • Develop a template or roadmap that SOEs can utilize to adopt these practices. • Assessing and adapting an existing taxonomy is faster and more cost efficient • Conduct training of SOE boards and senior than developing one from scratch. Having management teams or require SOEs to access a nationally agreed taxonomy will aid training. Reference could be made to training consistent and credible disclosure. material developed by the World Bank (see Annex) as well as other available training 8. Carry out auditing of climate change information. courses. • It is not yet common practice to audit these • Design a schedule of required training on procedures and disclosures, but audit protocols climate change. and practices are evolving and are likely Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 42 to be considered essential in the short to 9. Develop capacity within the regulator. medium term. • Develop the capacity within the regulatory • Regulators should require SOEs to adopt environment to guide SOEs and to assess the practices, protocols, and methodologies that will disclosures that are received, employing training be auditable in the future. and capacity-building initiatives provided by multilateral and other institutions. • Marking a significant step forward in supporting assurance for non-financial reporting, the • Reporting and disclosures should have International Auditing and Assurance Standards value to SOE management, shareholders, or Board (IAASB) recently published the Non- regulators. These should not be considered Authoritative Guidance on Applying ISAE 3000 “compliance” exercises. They should be subject (Revised) to Extended External Reporting (EER) to regular review and form part of the long-term Assurance Engagements. The assurance or planning cycles. auditing of non-financial disclosures, including those related to climate change, is not yet • Consider the creation of a help desk within the common internationally, but the guidance by the regulator and of building capacity within SOEs IAASB is a step in that direction. and expert advisors. • The Guidance addresses a number of 6.2 Individual SOEs overarching matters, including applying appropriate competence and capabilities, exercising professional skepticism and To assist the emergence of good management judgement, and ensuring the preconditions for practice on climate change and the disclosure of its an assurance engagement, as well as more financial implications, regulators should develop a specific technical matters. The Guidance also roadmap to ensure that management procedures provides further explanation and examples and disclosures are meaningful and realistic. It is to better understand the distinction between essential that the leadership of SOEs recognize both limited assurance and reasonable assurance climate-related management practices and the disclosure engagements. of the financial implications as part of ongoing steps to protect and grow the value of their enterprises. Executive • Together with ISAE 3000 (Revised) and ISAE teams and boards should be encouraged to address key 3410, “Assurance Engagements on Greenhouse challenges including the following: Gas Statements,” this Guidance forms a strong package that will help enhance confidence in 1. Capacity Building assurance reports and improve their reliability, including by enabling practitioners to respond to new reporting regimes. Acknowledge the capacity needs and constraints within the SOE to ensure answers to the following questions: • Consider at what stage auditing or review of the disclosures will be required. • Have the required management procedures that must underpin the disclosure been • Given the importance of good data on which implemented? to base decisions that may impact capital allocations, budget reallocation, revised strategies to ensure ongoing delivery of services, • Have the reporting templates and disciplines and so on, the reporting of these aspects should that will be required been developed? be aligned with current international accounting standards and therefore auditable. • Has capacity building been offered to the board of directors and executive team? Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 43 • Has the board been fully briefed on the • Engage stakeholders—regulators, investors, regulator’s expectations? financiers, and others—on what information they require and ensure that the disclosure • Have the board and executive committee meets requirements. received any awareness-raising/capacity- building information on climate change and the • Look at the existing reporting suite with a view to disclosure requirements? integrating climate disclosures. 2. Governance: Roles and Responsibilities • Include current sustainability reporting, emissions reporting through the CDP, the CDSB Integrate climate change into key governance framework, and SASB standards for information processes and define roles and responsibilities. on commonly reported indicators that are relevant to the sector and to SOE activities. • Which board committees, such as risk or audit, will take primary responsibility? 5. Targets and Metrics • Has a lead director or lead executive been • Set targets in line with national goals and named to head up the process? commitments. • Has a mechanism been created for bringing • If no national goals exist, align with regional, together senior professionals from governance, sectoral, or international goals (see section finance, compliance, reporting, and sustainability 3.2.4 for more detail). teams to coordinate the approach, the activity, and the disclosure? This will allow for greater • Set metrics that will enable performance coordination and collaboration between and monitoring and ensure that plans are on track. among departments. • Select metrics from those commonly reported 3. Scenarios to Determine Impact by referring to international reporting standards, such as the GRI, SASB, CDP, CDSB, and so on. • Use scenarios (available from insurance companies or academics or adapted from the 6. Disclosure of Financial Impacts work of the IPCC) to test the strategy for the SML- term potential impacts. In the process, consider • Align climate-related risks with financial lines of business, operational and market accounting. To date, most climate-related geographies, customers, and the potential disclosures have been largely technical in impact of physical or regulatory changes (such nature (quantified GHG emissions, for example) as a carbon tax) on income, the balance sheet, or qualitative statements on policy and intent. capital requirements, assets, and liabilities. They have seldom been fully incorporated into the financial accounting and disclosure of annual • Work within the sector or at the business results. Technical accountants are, however, association level to share the development increasingly determining the accounting costs of scenarios, or work with government on standards that could be applicable. a government-led baseline scenario to ensure scientific credibility and subregional detail. 4. Risk Management • Adapt risk management procedures to take climate-related risks into account. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 44 Notes 1. In June 2021, the IIRC and the Sustainability Accounting Standards Board (SASB) merged to form a new body, the Value Reporting Foundation (VRF). 2. UNFCCC, “New Elements and Dimensions of Adaption under the Paris Agreement (Article 7),” https://unfccc.int/topics/adaptation-and-resilience/the-big- picture/new-elements-and-dimensions-of-adaptation-under-the-paris-agreement-article- 7#adaptation-planning-and-implementation. 3. SDSN, “Target 13.1: Strengthen Resilience and Adaptive Capacity to Climate-Related Hazards and Natural Disasters in all Countries,” Sustainable Development Solutions Network, https://indicators.report/targets/13-1/. 4. World Bank, “User Manual. Climate Change Knowledge Portal” (Washington, DC: World Bank, 2021). 5. See Climate Bonds Initiative, Mobilizing Debt Capital Markets for Climate Change Solutions. 6. For more information, see www.fsb-tcfd.org. 7. See the website of the FSB at www.fsb.org. The FSB’s mandate is to promote international financial stability through strong coordinated policies and supervisory practices. Its members are the governors of central banks, the International Monetary Fund, the World Bank, the Bank for International Settlements, the Organisation for Economic Co- operation and Development, the European Central Bank, the European Commission, the International Association of Insurance Supervisors, and the International Accounting Standards Board. 8. Source: TCFD Press Office 2020 Status Report: Task Force on Climate-related Financial Disclosures 9. See Value Reporting Foundation, “Statement-of-Intent-to-Work-Together-Towards- Comprehensive-Corporate-Reporting.pdf (netdna-ssl.com),” involving the five framework- and standard-setting institutions of international significance (GRI, SASB, IIRC, CDP (a nonprofit that helps companies to disclose their environmental impact), and CDSB). The statement committed the five organizations to working to build “a comprehensive corporate reporting system… [which sets] the frameworks and standards for sustainability disclosure, including climate-related reporting, along with the TCFD recommendations.” Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 45 10. The iSOEF aims to provide guidance on assessing the performance of SOEs in an economy. This includes the SOE’s rationale, its economic implications, factors enabling its operational efficiency, and options for reforming the SOE sector. The iSOEF takes a modular approach, allowing for flexible application according to the specific country context and development needs. 11. According to the Greenhouse Gas (GHG) Protocol, Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. For more information, see the website for the Greenhouse Gas Protocol at https:// ghgprotocol.org/. See item 16 in Annex 1 for more information. 12. See https://www.ipcc.ch/library/. 13. TCFD, “Guidance on Risk Management Integration and Disclosure” (Task Force on Climate-Related Financial Disclosures, 2020), 35–36. 14. See ttps://www.wemeanbusinesscoalition.org/blog/category/case-study/. 15. “Energy Group Metrics – Illustrative Examples,” https://live-tcfdhub.pantheonsite.io/ Downloads/pdfs/E10%20-%20Energy%20-%20metrics.pdf. 16. “Transportation Group Metrics – Illustrative Examples,” https://live-tcfdhub.pantheonsite. io/Downloads/pdfs/E13%20-%20Transportation%20-%20metrics.pdf. 17. “Materials and Buildings Group – Illustrative Examples,” https://live-tcfdhub.pantheonsite. io/Downloads/pdfs/E12%20-%20Materials%20&%20buildings%20-%20metrics.pdf. 18. U.S. EPA, “Greenhouse Gas Equivalencies Calculator,” https://www.epa.gov/energy/ greenhouse-gas-equivalencies-calculator. 19. Shareholder departments and SOE regulators. 20. World Bank, “How to Develop a National Green Taxonomy for Emerging Markets - A New World Bank Guide,” July 12, 2020, https://www.worldbank.org/en/news/press- release/2020/07/12/how-to-develop-a-national-green-taxonomy-for-emerging-markets- a-new-world-bank-guide. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 46 Appendix 1. Resources and Further Information The following resources are among the many that have been used to inform this Toolkit and the associated assessment matrix. They will provide any reader seeking additional knowledge and know-how with a source of credible references to aid in the implementation of a climate-related financial disclosure process for SOEs. Additional information on important sources has been added. The resource base for climate-related issues and disclosure is growing rapidly, with new publications added frequently to, for example, the TCFD hub. Many of these sources also offer online courses and programs that may be of additional use. 1. World Bank Climate Change program, including reports and publications: https://www. worldbank.org/en/topic/climatechange/ 2. Intergovernmental Panel on Climate Change (IPCC): https://www.ipcc.ch/. The IPCC is the key international source of peer-reviewed and synthesized climate science. It also publishes detailed regionally focused and special reports as well as methodology reports assessing physical risk, climate science, socioeconomic impacts, vulnerabilities, adaptation, and mitigation. The Fifth Assessment Report was published in 2014, with numerous special reports published subsequently. The Sixth Assessment Report will be published in 2022. 3. Task Force on Climate-Related Financial Disclosures (TCFD): https://fsb-tcfd.org. The most widely adopted and accepted framework for reporting on climate-related financial risks by organizations, the TCFD facilitates better informed decisions by stakeholders (including regulators, investors, financiers, shareholders, and the public). In 2015, at the request of the G20, the Financial Stability Board (FSB) established the TCFD to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions. This would in turn enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks. The TCFD is committed to market transparency and stability. It focuses on better information that will allow companies to incorporate climate-related risks and opportunities into their risk management and strategic planning processes. As this occurs, company and investor understanding of the financial implications associated with climate change will grow, empowering the markets to channel investment to sustainable and resilient solutions, opportunities, and business models. As of December 2020, the TCFD had over 1,600 self-declared supporters from 70 countries and was aligned to all of the key reporting frameworks, such as those of the International Integrated Reporting Framework, the Sustainability Accounting Standards Board Standards, and the Global Reporting Initiative Standards. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 47 The TCFD website contains a significant number of consortium of business and environmental publications, including the final recommendations, nongovernmental organizations. It is committed which have now been adopted by numerous to advancing and aligning the global mainstream professional and other organizations as the best corporate reporting model to equate natural framework to use for reporting climate-related risk. capital with financial capital. It offers companies a It is recommended by the central banks’ Network framework for reporting environmental information for Greening the Financial System and other similar with the same rigor as financial information. It offers bodies and will become mandatory in New Zealand a variety of publications and resources via its website for use in the financial sector. and online offerings. The CDSB also manages the TCFD knowledge hub. The CDSB 2019 Framework a. “Final Report: Recommendations of the is referenced by several stock exchanges in their Task Force on Climate-Related Financial disclosure requirements. Disclosures,” 2017, https://assets.bbhub.io/ company/sites/60/2021/10/FINAL-2017-TCFD- 6. Comprehensive Corporate Reporting. In Report.pdf 2020 leading reporting organizations issued the following statement of their intent to work b. “Guidance on Scenario Analysis for toward comprehensive corporate reporting: Non-Financial Companies,” 2020, https://29kjwb3armds2g3gi4lq2sx1-wpengine. https://assets.bbhub.io/company/ netdna-ssl.com/wp-content/uploads/Statement-of- sites/60/2020/09/2020-TCFD_Guidance- Intent-to-Work-Together-Towards-Comprehensive- Scenario-Analysis-Guidance.pdf Corporate-Reporting.pdf. c. TCFD Knowledge hub, https://Tcfdhub.org 7. International Financial Reporting Standards (IFRS) Foundation: https://www.ifrs.org/. IFRS Practice 4. Science Based Targets initiative (SBTi): https:// Statement 2, “Making Materiality Judgements,” sciencebasedtargets.org. The SBTi champions November 2020, is useful in assessing whether the science-based target setting as a powerful way of effect of climate-related matters is material. See boosting companies’ competitive advantage in the also Nick Anderson, “IFRS Standards and Climate- transition to the low-carbon economy. In essence, Related Disclosures,” IFRS In Brief, November 2019, this means that a target to reduce climate impact https://www.ifrs.org/news-and-events/2019/11/ set by an organization is independently evaluated nick-anderson-ifrs-standards-and-climate-related- and found to be scientifically consistent with and disclosures/. proportional to its contribution to the global problem. This aids in setting appropriate targets and prevents 8. “TCFD Report Playbook,” published by EY, in greenwashing. Science-based targets provide a conjunction with the Institute of International Finance clearly defined pathway for companies to reduce and UNEP Finance Initiative; © 2020 EYGM Limited: greenhouse gas (GHG) emissions, helping prevent https://www.unepfi.org/wordpress/wp-content/ the worst impacts of climate change and to future- uploads/2020/09/UNEP-FI-IIF-TCFD-Report- proof business growth. Targets are considered Playbook.pdf. Provides information for financial science-based if they are in line with what the latest sector companies on advanced disclosure guidance. climate science deems necessary to meet the goals of the Paris Agreement: limiting global warming 9. “Financing a Sustainable Economy,” Draft to well below 2°C above pre-industrial levels and Technical Paper 2020, National Treasury, Republic pursuing efforts to limit warming to 1.5°C. The SBTi of South Africa. This paper, specific to South Africa is a collaboration between CDP, the United Nations but useful for other countries, recommends the Global Compact (UNGC), the World Resources adoption of TCFD disclosures to regulators and Institute (WRI), and the World Wide Fund for the financial sector: http://www.treasury.gov.za/ Nature (WWF) and one of the We Mean Business publications/other/Sustainability%20technical%20 Coalition commitments. paper%202020.pdf. 5. The Climate Disclosure Standards Board (CDSB): 10. “CDP Technical Note on the TCFD: Disclosing www.cdsb.net. The CSDB is an international in Line with the TCFD’s Recommendations,” Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 48 CDP, 2020, https://cdn.cdp.net/cdp-production/cms/ performance in relation to climate change. guidance_docs/pdfs/000/001/429/original/CDP- TCFD-technical-note.pdf?1512736184. a. UNEP: “Emissions Gap Report 2019,” UN Environment Programme, https://www.unep. 11. “Climate Financial Risks: Assessing org/resources/emissions-gap-report-2019 Convergence, Exploring Diversity,” J. A. Bingler, C. Colesanti Senni, and P. Monnin, Council on b. UNEP et al.: “TCFD Report Playbook,” see Economic Policies, 2020, https://www.cepweb.org/ no. 8 above wp-content/uploads/2020/12/CEP-DN-Comparing- climate-risk-metrics-Final-2.pdf. This paper c. UNIDO: Various publications on safeguarding compares climate risk metrics. the environment are available: https://www. unido.org/resources-publications/publications- 12. Grantham Research Institute on Climate safeguarding-environment Change and the Environment, London School of Economics and Political Science: https://www.lse. d. UNCTAD: other relevant publications ac.uk/granthaminstitute/ https://unctad.org/publications 13. A number of UN agencies are excellent sources 14. “GRI 305: Emissions 2016,” Global of information and offer a number publications on Reporting Initiative, https://www.globalreporting. the topic, some sector specific and others that look org/standards/media/1012/gri-305-emissions-2016. at issues from a global perspective. These can be pdf. This publication includes energy reporting valuable resources for regulators wishing to set and requirements. Excerpts are below: advance targets and metrics for improving SOE Direct (Scope 1) GHG Emissions The reporting organization shall report the following information: a. Gross direct (Scope 1) GHG emissions in metric tons of CO2 (carbon dioxide) equivalent. b. Gases included in the calculation, whether CO2, CH4 (methane), N2O (nitrous oxide), hydrofluorocarbons (HFCs), per and polyfluorinated chemicals (PFCs), SF6 (sulfur hexafluoride), NF3 (nitrogen trifluoride), or all. c. Biogenic CO2 emissions in metric tons of CO2 equivalent. d. Base year for the calculation, if applicable, including: i. the rationale for choosing it; ii. emissions in the base year; iii. the context for any significant changes in emissions that triggered recalculations of base year emissions. e. Source of the emission factors and the global warming potential (GWP) rates used, or a reference to the GWP source. f. Consolidation approach for emissions, whether equity share, financial control, or operational control. g. Standards, methodologies, assumptions, and/or calculation tools used. Indirect (Scope 2) GHG Emissions The reporting organization shall report the following information: a. Gross location-based energy indirect (Scope 2) GHG emissions in metric tons of CO2 equivalent. b. If applicable, gross market-based energy indirect (Scope 2) GHG emissions in metric tons of CO2 equivalent. c. If available, the gases included in the calculation, whether CO2, CH4, N2O, HFCs, PFCs, SF6, NF3, or all. d. Base year for the calculation, if applicable, including: i. the rationale for choosing it; ii. emissions in the base year; iii. the context for any significant changes in emissions that triggered recalculations of base year emissions. e. Source of the emission factors and the global warming potential (GWP) rates used, or a reference to the GWP source. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 49 f. Consolidation approach for emissions, whether equity share, financial control, or operational control. g. Standards, methodologies, assumptions, and/or calculation tools used. Other indirect (Scope 3) GHG Emissions Scope 3 emissions: Scope 3 emissions represent the greatest source of total emissions for many companies. For a target to be officially validated by the SBTi, companies whose Scope 3 emissions cover more than 40 percent of their total emissions need to set Scope 3 targets. However, setting Scope 3 targets, understanding which emissions to report, collecting data, and then reducing these emissions can be challenging and complicated. The reporting organization shall report the following information: a. Gross other indirect (Scope 3) GHG emissions in metric tons of CO2 equivalent. b. If available, the gases included in the calculation, whether CO2, CH4, N2O, HFCs, PFCs, SF6, NF3, or all. c. Biogenic CO2 emissions in metric tons of CO2 equivalent. d. Other indirect (Scope 3) GHG emissions categories and activities included in the calculation. e. Base year for the calculation, if applicable, including: i. the rationale for choosing it; ii. emissions in the base year; iii. the context for any significant changes in emissions that triggered recalculations of base year emissions. f. Source of the emission factors and the global warming potential (GWP) rates used, or a reference to the GWP source. g. Standards, methodologies, assumptions, and/or calculation tools used. Management and Disclosure of Climate-Related Financial Impacts for State-Owned Enterprises | Toolkit for Shareholders and Regulators 50 A Adapting Fiscal Decentralization Design to Combat Climate Change