Towns and cities need to prepare for financial risk of climate change

WSP’s Katherine Maxwell explains why towns and cities need to prepare for financial risk of climate change as much as businesses.

Katherine Maxwell
16 November 2022

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The impacts of climate change present a real financial risk to the global economic system, affecting company revenue, expenditure, assets, liabilities and capital financing. 

The financial cost of climate change will be discussed during COP27, with Pakistan’s estimated $40bn damage from this summer’s floods ringing in delegates’ ears.

To mitigate the impact of climate change on the financial markets, the Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015 by the Financial Stability Board (FSB) to develop financial risk disclosures that would provide lenders, regulators and insurers with climate-related information. 

By 2017, the TCFD had released a series of recommendations. To date, many private sector organisations have voluntarily embedded TCFD recommendations into their financial decision-making, and the UK government has begun a programme of mandatory climate-related risk reporting for private sector financial entities.

Why apply the TCFD recommendations to towns and cities? 

Like private financial institutions, towns and cities also need to integrate climate change considerations into their capital planning, strategic and budgetary decisions. 

This is particularly evident as municipalities start to implement their own climate action plans – financing climate actions is critical for cities to meet net zero targets. 

Though the TCFD recommendations were initially developed for the private sector, they are also widely applicable to the sub-national governments. 

Embedding climate impact considerations into all budgetary decisions will enable them to address climate risks and opportunities, such as funding to mitigate damage to critical infrastructure. 

In addition, it ensures a comparable and consistent way for municipalities to provide climate risk information for the global economic system that aligns with the requirements of investors, insurers and lenders.

How can we encourage them to adopt the TCFD recommendations? 

Earlier this year, the Carbon Disclosure Project (CDP) platform integrated TCFD recommendations, translating disclosure questions into a standardised questionnaire for municipalities. 

In addition, the C40 Cities Climate Leadership Group has recently published guidance for global municipalities on how they can disclose cities’ climate-related financial risk. 

These mechanisms for reporting have one key difference: they are aimed at a wider audience, including local stakeholders and residents, not just private financial stakeholders. 

However, only a handful of cities globally have revised and piloted TCFD recommendations into their annual reporting. 

In 2018, though, three of Canada’s largest cities – Vancouver, Toronto and Montreal – published progress against TCFD recommendations in their financial reporting, linking this to their climate action plans and adaptation strategies. 

However, if we want to scale up sub-national TCFD reporting, communicating the benefits of disclosure will be critical to accelerating their uptake. 

This may be challenging though; reporting requirements could be perceived as another bureaucratic burden at a time when cities are already cash strapped and coming to terms with the long-term economic effects of Covid-19.

Embedding TCFD into current reporting systems (e.g. CDP and C40 Cities) is one approach to encourage uptake. 

A formal revision of the TCFD framework for public sector organisations, alongside guidance on how these could be embedded within local climate action plans and financial reports, would provide much needed practical support for cities. 

Without this, there is a risk that recommendations are translated slightly differently between municipalities, which reduces the likelihood of data comparability between cities.

The benefits

Applying TCFD recommendations to towns and cities ensures that climate risks are incorporated into their capital planning and budgeting. 

This strengthens municipal resilience by reporting on material climate-related financial disclosure, incorporating a climate lens on financial decisions and ensuring there is a clear understanding of climate information within municipalities. 

Most importantly, the TCFD recommendations can accelerate a municipality’s goals of reducing carbon emissions and enhancing climate resilience to the future impacts of climate change. 

Shining a spotlight on the climate-related financial implications of climate change is an effective way to mainstream climate considerations into municipal budgetary processes, paving the way to a resilient and low carbon economy. 

This is on the agenda at COP27 and with many communities now on the frontline against our changing climate, there is no time to lose in factoring in the climate to decisions which impact infrastructure, property and people.

Katherine Maxwell is net zero cities lead at WSP.