TCFD: Time is running out to take action on climate change
Businesses are heading towards mandatory disclosure of climate-related financial disclosures.
We have never seen a greater sense of urgency when it comes to climate change.
The Intergovernmental Panel on Climate Change (IPCC) predicted in 2018 that we only had 12 years to avoid unprecedented climate disaster – critical action is needed to limit global warming to under 1.5 degrees.
Businesses have a major role to play in the path to global decarbonisation. It’s been over two years since the Financial Stability Board (FSB)’s Taskforce for Climate-related Financial Disclosures (TCFD) published their recommendations for voluntary climate-related financial disclosures, however, we have not seen enough of a response from industry. Mark Carney, the Governor of the Bank of England has now warned businesses that there is only two years to agree rules for reporting climate-related financial disclosures before regulators implement their own mandatory standards. Carney states that businesses now need to be trialling TCFD reporting in their next two annual reports.
Businesses, government, investors and other key players such as major NGOs and standard setters need to take note. But what do the TCFD recommendations mean in practice for companies and will they have the desired impact?
What is the TCFD?
The TCFD, driven by Mark Carney and Michael Bloomberg, the former Mayor of New York, aims to support climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers, and investors.
What are the key requirements of the TCFD?
Organisations are asked to disclose on the impact of climate-related risks and opportunities on the organisation's business, strategy, and financial planning, and around the organisations governance around climate-related risks and opportunities.
Another key aspect is around scenario analysis, which is on the resilience of an organisations strategy, which takes into consideration of difference climate related scenarios, including a 2°C or lower scenario. This includes understanding the physical and financial impacts of these scenarios on the business.
Why the TCFD is key to tackling climate risk
At Emperor, we think the TCFD is the first step in the future of corporate climate-related reporting. It is likely to form the foundations from which corporate disclosure and performance relating to climate change is benchmarked.
Why? It’s already been implemented into CDP’s (the global environmental disclosure platform) climate change questionnaire. This means that organisations are asked on how climate-related scenario analysis has been used to inform business strategy, as well as what impact climate-related risks and opportunities are having on the organisation's business and financial planning. In 2018, almost 7,000 companies reported on climate change to CDP – these companies will have needed to report on how they have considered climate-related risks to reach the highest CDP scores, which are commonly used by ESG investors as part of their analysis.
The UK Government has also set out expectations in its Green Finance Strategy for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022, further suggesting mandatory TCFD reporting is likely. The PRI (Principles for Responsible Investing) has also made TCFD-based reporting mandatory for PRI signatories in 2020.
Beyond that, we think TCFD will lead to much greater comparability between climate-related reporting and may even contribute to the merging of financial and non-financial reporting to create a whole new way of assessing risk and corporate value creation.
However, although there is a growing understanding that companies will need to start reporting to the TCFD, finding where to start can be difficult.
How companies should approach the recommendations
1. Understand where you stand
Review the core elements of the recommended Climate-Related Financial Disclosures against your business. Look at your current business disclosures and conduct a gap analysis to understand where your business stands.
2. Define your ambition and set a plan
How ambitious do you want your strategy to be? Ensure that your business is clear on what you want to achieve, and develop climate-related metrics and targets in line with your leadership aspirations. A key step is understanding the transitional and physical risks associated with climate change across your businesses value chain, related to a set of different climate-related scenarios, including a 2 degrees or lower scenario.
3. Set a roadmap
Now that you understand where your business stands, and what the ambition level is, close the gap with a roadmap. The roadmap will look to building key processes, such as governance and risk management processes, and developing new policies and procedures in order to reach identified targets and strategic objectives.
Carney has made it clear there is a ticking clock for companies regarding the TCFD recommendations. Pressure over climate change is only going to grow, and how companies respond and engage with their stakeholders will be a crucial area moving forward. Companies would be well advised to be proactive and start implementing the recommendations now, before they come back to bite.
To find out more about TCFD and what you can do to get started on taking action, get in touch with Yvonne at [email protected].