Adding Climate Liabilities to Corporate Balance Sheets Could Boost Speed of Transition; TCFD ‘Not an End in Itself’ (1)

–WARNING RE THIS BREAKING IDEA: Getting clarity on this
–Adds Lewis comments, in response to questions

By Mathew Carr (CarrZee)

The prospect of adding decarbonisation costs to corporate balance sheets, as a new liability to be carried, was raised today in Barcelona at a key climate conference.

I’m publishing this excerpt from the European Climate Summit in the city, comments by Mark Lewis, Head of Climate Research – Andurand Capital Management.

On problems with the standards of the Task Force on Climate-related Financial Disclosures:

“One of the problems is that there are too many people out there who think that disclosing and reporting has become an end in itself, almost, rather than a means to an end.

“That you comply with the recommendation of the TCFD to report and disclose and then say: ‘okay, we’ve done that’

“It’s viewed separately from actually the decarbonisation challenge.”

On a closed workshop that occurred last night at the conference and on adding a climate liability to corporate balance sheets:

“There isn’t enough (linkage between investors and carbon markets). There is nowhere near enough overlap between what institutional investors are doing and what carbon markets are doing.

“There needs to be a much more fluid crossover there between those two pieces, because carbon instruments that are intrinsically aligned with net zero as of today, I think (are) the clearest way to allow private-sector participants, whether in the corporate sector, but particularly in the investment sector, to decarbonize portfolios, decarbonize their footprints and align with net zero … and I think that’s the next piece.

“One of the questions we got in the workshop yesterday, which I thought was a very good question:

“You have the UK government taking a lead on this saying it wants to make TCFD reporting mandatory for companies above a certain market capitalization [from this year…CarrZee added].

“But what if we took it one step further? What if the UK government or any government for that matter … what if it became part of the whole Paris Agreement procedures that we were to say we want companies that have carbon liabilities on their balance sheet, which is basically every company in the world, not only to report those emissions, but to carry the cost of reducing those emissions in line with net zero on the asset side of their balance sheet.

[CarrZee note here – Lewis got in touch to clarify:

What I was suggesting is that in the future it might be an idea for the emissions liabilities of corporates (on the liability side of the balance sheet) to be balanced by carbon allowances/eligible credits (eg carbon removal units) on the asset side of the balance sheet.

I need to think about it more myself but if you had an independent accounting agency valuing the emissions liability at a given price then you could imagine a situation whereby corporates might be required to carry eligible carbon credits of the same value on the asset side.

I know it sounds fanciful given where things stand today but I think there is the seed of an insightful idea here, and as I say, I need to give it more thought myself.”]

“In other words, beyond requiring companies to disclose their carbon footprint, should the Paris Agreement (this is very speculative comment, but I think it’s a very rich insight that we got out of that exchange yesterday) … Should governments be asking corporates to say this is effectively putting a price on their balance sheet of the carbon liabilities that they are carrying and aligning via the use of Paris-aligned carbon instruments, their balance sheets and managing down to zero?

“I think that’s something we can do more work on.”

NOTE: This article was produced with the help of AI.

Photo by RODNAE Productions on Pexels.com

(Corrects headline to remove “distracts” and context for Barcelona and ….adds explanatory comments)

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