Disclosure of Climate Change Risks
Thomas Rochford
Abstract:Climate change not only represents a global environmental problem, but for many organizations, it also has grave financial impact. This paper explores whether climate change presents a new class of non-financial risk, and gives arguments for why it should be recognized as a non-financial risk. The paper explains the importance of transparency on climate risk disclosures for directors and considers the ethics of deciding to ignore climate change as a non-financial risk and failing to disclose organizations’ vulnerability to climate change.
Introduction
It is widely accepted one of the main reasons for the Global Financial Crisis (GFC) is a lack of ethical governance practice and accurate financial disclosure. Therefore, corporations are now under much greater expectation and pressure to provide consistent, timely and correct information to shareholders regarding financial performance and in particular, the risk to that performance. If investors are to make informed judgments of the risks and rewards of any investment, this information is critical to justify their decisions (Fung, 2014).
The importance of these disclosures cannot be underestimated – since the GFC, stakeholders are paying more attention to the process and content of disclosure. This reporting has been at the forefront of establishing a new social paradigm, which seeks to balance the ethics of reducing unscrupulous corporate practice whilst preserving a competitive business environment (Fung, 2014). Extensive disclosureenables investors to be aware of ethicalaspects of business practices and their consequences (Hoje, 2007).
The Relationship Between Ethical Conduct and Corporate Disclosure
Business ethics is related to the moral philosophy, values and norms of behavior that guide a corporation’s decision-making processes. Ethics concerns formalized principles and codes of conduct as well the value systems of society that guide how people behave and address ethical situations that may arise in the conduct of business (Francis, 2003).
The Organization for Economic Co-operation and Development (OECD) has established that investor confidence and market efficiency depend on the disclosure of accurate timely information about corporate performance. To be of value in global capital markets, disclosed information should be clear, consistent and comparable (OECD, 1998).
A key pillar to the notion of ethics as established by the OECD is the dissemination of information and the transparency behind this reporting. This is because a shareholder has a financial stake in a company’s successes and failures and therefore has a legitimate right to know an organization’s understanding of corporate strategy, including strategic risks and possible investment vulnerabilities (Hummels, 2004). This right extends beyond the established right to financial information on a quarterly or yearly basis to non-financial performance and the portfolio’s risk exposure to include non-financial factors, as these can directly impact upon a company’s financial position (Repetto, 2000).
