TCFD is beginning to spur regulation, and the signs are it will become mandatory – meanwhile there is an increasing appetite among investors for companies to come clean, writes Mark Hillsdon

The mandatory disclosure of climate change risk is a topic that just can’t be ignored.

It’s been discussed at a global level by the G20 Financial Stability Board, is covered at a European level by the Non-Financial Reporting Directive, and has recently been championed by the UK’s Environmental Audit Committee (EAC), too. Its aim is to bring a greater transparency to company reporting, ultimately giving investors the information they need to make better-informed decisions on where to deploy their capital.

“Investors are looking for companies who are leading the way on climate-related financial disclosure,” explains Joe Pigott, an associate director at the Carbon Credentials consultancy.

They want to invest in businesses that have come clean on the environmental risks they are facing, he says, and, importantly, have strategies for how they are going to cope over the long term.

In the UK, June saw the publication of EAC’s Greening Finance: embedding sustainability in financial decision making, with committee chair Mary Creagh MP commenting: “We need to fix the incentives in our financial system that encourage short-term thinking. Long-term sustainability must be factored into financial decision making.

Our ultimate mission is to ensure that environmental and natural capital is valued the same way as financial capital

“Climate change poses financial risks to a range of investments – from food and farming, to infrastructure, construction and insurance liability ... We want to see mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long-term sustainability, not just short-term returns.”

The report also recommends that the new rules on climate change disclosure should be in place by 2022, with the likelihood that they will be guided by recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

“The TCFD is starting to spur regulation,” says Simon Messenger, managing director of the Climate Disclosure Standards Board (CDSB). “It’s voluntary right now, but all the signs are that it will become mandatory fairly quickly.”

TCFD is making climate change an issue at the highest level of all companies. (Credit Jo Crebbin)

The task force was established in December 2015 by Bank of England boss and head of the G20 Financial Stability Board, Mark Carney, and former New York mayor and UN special envoy on climate change, Michael Bloomberg.

Its aim is to encourage businesses from all sectors to disclose their strategies for dealing with the impacts of climate change, voluntarily integrating this information into their financial filings and existing reports. It also recommends environmental disclosure on four key areas – governance, strategy, risk management, and metrics and targets – in order to bring greater global standardization to climate reporting.

Importantly, the recommendations look to draw on existing climate change reporting frameworks, and according to Messenger, TCFD is not asking companies to reinvent the wheel, but rather reposition what a number of disparate institutions have been doing for decades.

Responsible investors are more careful about the way they invest and demand more transparent disclosures

“What the TCFD is trying to do is ensure that climate change’s expotentiality is priced correctly,” he says, “(and) that it’s integrated into the wider processes and standard business management.

“Our ultimate mission is to ensure that environmental and natural capital is valued the same way as financial capital.”

“TCFD is a set of recommendations, it's not a reporting requirement,” explains Pigott, who works predominantly with clients in the real estate sector around making disclosures. “The premise of TCFD is really to allow investors greater visibility.”

Responsible investors want transparency about climate risks. (Credit: Aleksandra Madejska/Shutterstock)

“Responsible investors are more careful about the way they invest and demand more transparent disclosures,” says Hakan Lucius, head of corporate responsibility at the European Investment Bank (EIB). “(They) base their investment decisions not only on financial criteria, but environmental, social and governance ones as well.”

Jakob Thomä, managing director of the 2 Degrees Investing Initiative, a global think tank on climate change and the financial markets, agrees, while warning that: “There is a demand for information, but that demand is not indiscriminate, and I think the key challenge is going to be to make sure that this information actually does become meaningful and impactful.

“The market is still finding itself,” he says. “People are still trying to figure out what information they want.

Globally, 72% of large- and mid-sized companies don’t acknowledge the financial risks of climate change

The latest TCFD figures show that over 290 companies have expressed their support for the recommendations, with a combined market capitalization of over $6.6 trillion. The list ranges from major financial players such as Morgan Stanley and BNP Paribas, to retailers like Marks and Spencer and Tesco. Forty-seven other organizations, such as trade associations, governments and central banks have also expressed their support.

However, A KPMG report last year found that globally, 72% of large- and mid-sized companies don’t acknowledge the financial risks of climate change in their annual reports. And in May this year, another EAC report found that while 15 of the UK’s 25 largest pension funds were either committed to or considering TCFD, the other 10 stated they had no plans to follow the guidelines, suggesting there is still much to do.

One business that has committed to the recommendations is Ørsted (formerly Dong Energy) which has gone through a fundamental transformation from a black to a green energy company, explains senior sustainability advisor, Christine Sobieski.

Ørsted's transition to offshore wind helped integrate climate risk into its business model. (Credit: Ørsted)

“A decade ago, we were one of the most coal-intensive utilities in Europe, with profits coming mainly from our upstream oil and gas business,” she says. “Now we plan to end the use of coal entirely.”

Today, around 90% of the company’s investments are directed towards offshore wind, while the remaining 10% go mainly to the green conversions of power stations.

This transition means that considering climate risks and opportunities have already started to become integrated into Ørsted's business model and its reporting. However, says Sobieski: “There is currently no established practice on implementing the TCFD recommendations, so we are getting started well aware that this will be a continuous process. My advice to other companies and investors will be to also get started so that we collectively start building an established practice.”

Scenario analysis focusses on one specific question: how your business model compares to a two-degree scenario

One of the challenges to implementing TCFD, she says, has been the central concept of scenario analysis, a forward looking risk assessment that encourages businesses to think about all the possible impacts of climate change on their operations.

Thomä describes scenario analysis as the “crux of the recommendations … (it) focusses the conversation on one specific question, which is how your business model compares to a two-degree scenario”.

However it’s a process that can be daunting to smaller businesses, he concedes. “There is always the pattern of disclosure where large companies have resources to make them look good, and smaller companies don’t.”

An issue is how to include disclosures in existing reporting structure. (Credit: sasirin pamai/Shutterstock)

The worry is, he says, that if these smaller businesses don’t do anything to respond to the recommendations, and move up to level one, then there is no pressure on ‘the leaders’ to innovate and move up to level two.

The CDSB has helped to develop the TCFD’s Knowledge Hub, which provides tools, case studies and examples of best practice, including the practical steps businesses can take to implement a scenario analysis.

It is also working on developing software analytics that can run a scenario analysis at the push of a button. “We need to get to a stage where the benefits outweigh the costs,” says Messenger.

Traditional financial reports have always been backwards looking. Now it's saying how do you see yourself in 20 years?

The other big issue that businesses implementing the recommendations are facing is how the information on disclosures is included in their existing reporting structure. Integration is key, says Pigott, with climate change disclosure not simply an appendix, but something which is a part of existing annual reports.

“I don’t see it as an additional burden, I see it as actually providing a purpose to the reporting,” he says. “It will show that the climate-related risks and opportunities to your business have been understood and are integrated into your assessment of the company's future performance.”

Speaking at Ethical Corporation’s Responsible Business Summit Europe in June, Tim Mohin, chief executive of the Global Reporting Initiative (GRI), said that the advent of the TCFD will only increase demand for sustainability information. “Mainstream investors are becoming interested in this because it shows where value exists in companies,” he said, concluding that: “it’s not about the report, it’s about what we do with this information to make the world a better place.”

The report wants climate change disclosure rules to be in place by 2022. (Credit: Vladimir Melnik/Shutterstock)

“Traditional financial reports have always been backwards looking,” says Messenger. “Now it's saying it's not just about what's happened in the last few years, but how do you see yourself being positioned in 20 or 30 years’ time.” It’s only by doing this, he says, that businesses will be able to address the huge changes that could impact upon them, from increasing resource scarcity to the effects of a carbon tax.

It has also switched the traditional methods of reporting, says Sobieski. While traditional sustainability reporting is mainly concerned with the impact that the company has on the environment and society, TCFD flips this by looking instead at the impact that the environment, and specifically climate change, has on the company.

“This is what makes TCFD directly relevant to investors and what makes it fit to integrate into existing company processes,” she continues. “It helps to avoid the TCFD becoming an isolated sustainability project – but instead something that lives and breathes in the relevant departments in the business.”

TCFD is making management of climate change an issue for the most senior governance of all companies

But having hovered around the threshold for so long, can the TCFD recommendations finally help sustainability to established itself in the boardroom, too?

As Jane Stevensen, Task Force Engagement Director at CDP, wrote in Ethical Corporation last April: “TCFD’s role as a vehicle for change should not be underestimated. It is making management of climate change an issue for the most senior governance of all companies and creating a need for those at the top to be well versed on climate risk and opportunity.

“If the business community is going to go beyond taking a skin-deep approach to combatting climate change, then prioritising climate reporting needs to come from the top. Management of environmental issues can no longer be the sole responsibility of sustainability teams. TCFD makes it clear that climate-related disclosure must be truly embedded in companies’ strategic priorities.”

Mark Carney's support for the recommendations will resonate in boardrooms. (Credit: Twocoms/Shutterstock)

Understanding the impact and influence of shareholders is becoming increasingly important, with boards increasingly held to account on the environmental performance of a company by well-informed shareholders. Increased transparency and information will help boards engage with investors on the resilience of their strategy and avoid disputes at AGMs.

The fact that the recommendations are being led by industry, rather than NGOs and government bodies, will also resonate in the boardroom, says Pigott, as will the fact that they are backed by big hitters like Carney and Bloomberg.

As organizations, we need to be making sure that we're not managing stranded business models

Looking at risks and opportunities isn't new, he continues, but what TCFD can do is drive this thinking into the boardroom, so it's in the real decision-making heart of the company.

“What we should be doing is more than just analyzing current risk and opportunities. As organizations, we need to be making sure that we're not managing stranded business models,” he says.

“Are we a business that can operate in 30 years’ time? Are we recognizing the challenges that are going to come?... That conversation cannot happen in a separate department ... that needs to be by the people that run the business.”

Main image credit: khak/Shutterstock

The impact of the TCFD's will be a key focus at this year's 12th Annual Sustainability Reporting & Communications Summit - taking place in London on 10-11 October. The event will feature CEOs and Senior speakers from the likes of; Pirelli, GRI, Abbott, BHP, Allianz, Syngenta, CDP, Aviva, LEO Pharma, Allianz, IIRC, AstraZeneca, WBCSD and many more. Click here for more information

TCFD  Climate-related financial disclosure  Mark Carney  EAC 

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