28 Jan The Opportunity Offered by TCFD and Climate Disclosure
BY JAMES BYRNE, DIRECTOR OF ESG, CVCC
We hear a lot of clamour about climate related reporting but what does it actually mean practically to companies that are already busy enough just trying to survive?
First of all, it’s worth quickly recapping where climate reporting came from. In 2015 former governor of the Bank of England Mark Carney help set up the task force on climate related financial disclosures or TCFD. This was in response to the G20, that wanted to initially understand better the financial risks posed by climate change.
Mark Carney’s then summarized the importance of climate related disclosures in his famous “Tragedy of the Horizons” speech set the tone for the TCFD recommendations. He spoke eloquently of the need and the difficulty of preparing for future risks that lie just beyond the horizon of business as usual. These climate related risks are hard to tackle due to inaction caused by lack of certainty of future climate scenarios.
The hefty sounding TCFD framework may seem a bit dry to the casual observer. However, there is much more to climate disclosure than reporting facts and figures and adding a column to a risk management table. Climate related disclosures actually give a company anywhere in the world a relatively simple way to recalibrate their approach to business and make their organizations more resilient for future climate related economic shocks.
With the climate quite literally changing, the risks to current business models are changing too. Climate risks are increasingly having a greater impact on the world economy. The Covid-19 pandemic shows us how outlier risks can suddenly become hugely impactful and the World Economic Forum (WEF) discusses the link between pandemics and climate change very convincingly. This means businesses must change how they do business, or at least understand the risks and have contingency plans at the ready.
If companies are well governed, climate change will be raised and addressed at companies where it poses a material risk or opportunity
Sonya Likhtman, Associate for Hermes EOS decision making
What this means in practice is that if you really want to be in business for the long term, you simply have to look at what you do through a climate risk focussed lens. This evolution of risks is part and parcel of what is called the climate transition, which means a transition to low and zero carbon business models. This transition is a huge opportunity for companies to find better ways of doing business that can weather climate related risks as they occur and even profit from doing so by being prepared to capitalise on new low carbon technologies. Companies that don’t address climate risks, will not survive the transition, and even if they do, they are not likely to thrive. That’s why climate disclosure isn’t simply a box ticking exercise, its crucial for reaching the goals of the Paris Agreement and future proofing the economy.
The 2015 Paris Agreement on Climate Change signalled a new era of business influenced by changes in climate and related regulatory changes says Deloitte which are now going mainstream fast. The current pandemic has certainly hammered the importance of preparedness, but in the scurry to stay afloat it is important these businesses reflect and learn lessons and become stronger in the long term. In fact, in the UK for instance, the Chancellor, Rishi Sunak, has announced that Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures will be fully mandatory across the economy by 2025. In the US, in 2019 Senator Elizabeth Warren submitted S. 2075, or the “Climate Risk Disclosure Act of 2019,”. It directs the SEC to “require an issuer of securities to annually disclose information regarding climate-change related risks posed to the issuer, including an in issuer’s strategies and mitigate these risks.”
Reporting on climate risks is becoming increasingly important for resilient companies as well as for their shareholders and other stakeholders. We must make sure that this development is consistent and remains ultimately dedicated to sustainable value creation.
Philippe Lambrechts Secretary General and Member of the Board of the Federation of Enterprises in Belgium.
The TCFD framework.
This is where the TCFD framework and recommendations came in, to help companies formulate their responses to climate change in ways relevant to each sector and business type.
Set up in 2015, the TCFD, is overseen by The Financial Stability Board and chaired by Michael Bloomberg (founder of Bloomberg L.P.). The same year it released the first climate-related financial disclosure recommendations. The Task Force is composed of 31 members from across the G20 and represents both preparers and users of financial disclosures. The TCFD is chaired by Michael R. Bloomberg, founder of Bloomberg L.P.
The recommendations cover governance, strategy, risk management and climate related metrics and targets. They are designed to help companies provide better information to support informed capital allocation. They also help better inform investment, credit, and insurance underwriting decisions. This in turn ensures stakeholders can more easily understand the “concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”. These risks are split into two types, physical and transition risks.
Physical risks are those posed by climate change, such as flooding that could impact a business directly (an acute risk that could happen once or more but with adverse financial effects), or higher global or regional temperatures that would force a business to spend more on energy for air conditioning for instance (a Chronic risk which isn’t going to go away). To comply with the TCFD reporting recommendations companies will need to assess physical risks using at least two different temperature and climate scenario predictions. These risks and associated mitigation measures need to reference the temperature scenarios identified in an IPCC special report on the impacts of global warming of 1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways.
QUOTE “Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset” Bank of England Governor Mark Carney Speech 2019
Transition risks include all other activity that responds to physical risks. This can be legal or policy changes that could impact a business, such as a carbon tax. It can also be risks posed to businesses using fossil fuel from the rise in renewables, which could see greener competitors sweep aside business that have not pivoted in time to lower carbon operations for instance.
If you need help to get started on identifying climate related risks that will matter to your business, just get in touch. We can help you create a truly climate resilient company and tailor solutions quicker and efficiently by leveraging our unique pool of reporting experts at the forefront of sustainability and ESG reporting.