Towards better TCFD disclosure Towards better TCFD disclosure

How to improve your organisations disclosure on climate-related risks

It’s difficult to predict and appreciate the full impact climate change will have on the world. From shrinking glaciers, to loss of animal and plant species, to accelerated sea rises, to more intense heat waves – the array of effects is large and scary. One thing is clear though, these issues are not as far away in the future as we used to think and they are creeping closer geographically. This year’s Global Risks Report shows that five out of the top five global risks most likely to happen in the next ten years are environment-related. And two of the five most impactful risks are climate-related (the third being biodiversity loss).

For businesses, the discussion of climate risks and how they are affected has only really properly kicked off in the past few years. However, it is crucial that in the next 10 years we see them take giant leaps forward when it comes to understanding, responding to and communicating their exposure to climate-related risks.

 

What is TCFD?

Climate change and its effect on business is a complex topic and decisions within businesses and by those who evaluate them are being made without fully understanding the implications. The Taskforce for Climate-Related Financial Disclosures (TCFD) is a framework hoping to bridge this gap for financial markets whereby companies measure the risks from climate change to their business by considering physical and transitional risks and translating that into decision-useful forward-looking disclosures. By providing this information in financial terms, investors, lenders, insurers and other stakeholders will be able to make adequately informed decisions. The TCFD does this by breaking up their disclosures into the following four areas:

  • Governance: How the organisation is managing climate-related risks and opportunities.
  • Strategy: The organisation’s actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning.
  • Risk management: How the organisation identifies, assesses and manages climate-related risks.
  • Metrics & targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.  

However, the level of uptake is slow and there are a number of challenges businesses continue to face in providing a successful TCFD disclosure. Our advice? Don’t wait, get going. Read on to find some of the key barriers we often hear about in disclosing to TCFD and our thoughts on solutions...

 

 1.     Getting buy-in from the Board and management

Decisions from the top are needed for companies to be able to truly integrate sustainability considerations within the business. However, getting buy-in from the Board can be challenging. Especially when many times members in Boards are not educated on climate risk as a topic and do not deem this to be as important as perhaps other areas of the business linked directly to regulatory compliance or financial gains.

TCFD can provide a financial business case to the Board as part of the disclosure includes the impacts of the risks on the business’ financial planning. However, this presents a classic chicken and egg problem. Fully embracing TCFD will likely generate information in a format that will compel boards to act on climate change more urgently. But boards – and wider senior management – may not want to put aside resources for this and may be nervous about publicly disclosing the outcome.

Presenting a compelling business case internally should get the attention of higher management. It doesn’t have to be a thorough, fully fledged detailed disclosure with complicated risk tools and intricate metrics. Instead, a high-level analysis using the framework as a guide can help highlight risks to the firm. Ultimately, shining a light on any critical risks is then likely to compel the Board towards action (in the short-term) and therefore position the business for more thorough TCFD disclosure in the future. Inclusion of impacts in financial terms (even if estimated) should also add weight to the business case.

 

 2.     Understanding the financial implication of climate risks to the business

Companies have traditionally viewed climate change as a separate issue to their business but one that they have a responsibility to address as a responsible citizen and to protect their reputation. Coupled with this challenge is that climate change risks are quite recent, complex, less understood and long-term in nature.

The first step is to frame the problem right. Understand that climate change is not a siloed CSR issue. It is an issue with significant financial risks and opportunities to the business. This needs to be viewed not as what the business can do for climate change, but what climate change can do to the business. For example, physical risks like increase in droughts can damage crops and increase prices for a food producer. Or increase in flooding can damage houses and increase housing prices to the real estate sector. Transition risks can come in the form of a carbon tax on business. Or difficulty in obtaining investments as investors divest from polluting sectors with the move towards a low carbon economy. All of these risks are very real and come with a price tag.

 

3.     Integration into the wider corporate risk framework

In order to integrate climate risks into the company’s broader risk framework, a company needs to have a thorough understanding of the exposure of the business to climate change. The good news is that one of the recognised tools used for dealing with highly uncertain long-term risks is scenario analysis, which is part of the disclosure.

Scenario analysis has been used for many years in financial and geo-political contexts. Within the context of climate, having a view of what the world will look like in 10-20 years’ time and how the business will be affected as a result, can help inform the strategic implications to the business and how well equipped it is to tackle climate change. This is the most important part of the disclosure because, whilst it can’t predict the future, it can help inform the business strategy by quantifying potential exposure to the business from transitional and physical risks.

It’s also the area where most companies struggle with the most, whether they are just starting or have been disclosing to TCFD for a number of years. Starters have trouble finding where to start and setting up the right processes to follow, whereas those farther along the journey experience difficulties with selecting the right scenarios, how to develop realistic scenarios, understanding what a 2˚C or lower scenario means as well as how it’s applied to their business and quantifying risks in financial terms, to name a few. This can be daunting, but this doesn’t need to be done overnight. The TCFD recommends 5 years to implement all its recommendations. Start with the parts of the disclosure that make sense to tackle first – gaining understanding of where the business stands with TCFD, identifying high level risks. The strategy, scenario analysis and embedding of risks into financial risk framework will take a bit longer.

Many times, this kind of expertise doesn’t exist in-house and companies are not expected to deal with this big task on their own. There is external support available and businesses should make use of third-party consultancies that assist companies to address climate risks and opportunities.

Sector collaboration can be another great way to drive effective disclosure. For example, The UNEP FI brought together 39 global financial institutions and climate risk experts for a yearlong collaborative effort to improve the methodology of financial assessments of transition risk. The output is a report detailing valuable tools to improve the risk methodology and climate scenario assessments conducted by the financial industry.

Existing reporting frameworks, standards and memberships can also be a helpful and supportive guide for companies to disclose to TCFD. IIRC, CDP, CDSB, GRI and SASB have come together to create the Better Alignment Project, a two year project to align reporting standards with the TCFD. So if a company is already disclosing to any of these reports, there are resources to see how aligned they are and existing gaps. UN PRI also makes it mandatory for signatories to report on their governance and strategy climate-risk indicators from 2020 onwards. They provide climate scenario tools to help signatories with their disclosure. WBCSD is also onboard and is making it mandatory for members to disclose to TCFD. They also provide support with the implementation of the recommendations through “Preparer Forums” for priority sectors and industries: oil and gas, electric utilities, chemicals, construction, automobiles and food, agriculture & forest products. 

 

4.     Engaging the right people

This isn’t a one-person, one-department or CSR-only job. Within the business, companies should begin to engage with all the relevant departments (risk, finance, sustainability, strategy). This will ensure this area gets more traction, increases chances of this going up in priority in the corporate’s Board agenda and can lead to greater integration of climate risk into wider corporate strategic, financial and risk planning process. In order for other departments who don’t work with sustainability in their day-to-day to truly embrace the spirit of TCFD it is important to build a powerful argument. Get them truly engaged by compiling proof points around areas like your competitor actions around TCFD, mandatory requirements going forward, an initial high level analysis on the risks that might come to light and what the implications would be if the company was forced to disclose them without sufficient strategy and action behind them.

 

5.     Getting the communication right

Alongside the disclosures being developed is the challenge of where to position them so that the right investors and stakeholders can find them. There are a variety of options and approaches taken ranging from inclusion in the Annual Report, inclusion in the Sustainability/ESG report, a TCFD index, or a longer TCFD report that provides a more detailed narrative. It is likely that in the first years the communication is more limited and this can therefore sit in the Annual report and Sustainability report as a table or brief narrative. However, with time and more detailed analysis, this will most likely start to develop into a standalone section, report or document of its own. The Annual Report should therefore serve to summarise key information to readers with clear signposting to other documents for stakeholders who want to read further. The Sustainability Report and company website can be used for supporting background information or disclosing broader impacts that address the needs of other stakeholders. 

Getting the communication aspect right is also about demonstrating effective use of the framework to assess risks to the business. If there are certain sections of the disclosure that the business is not reporting on yet, the company should be transparent about this and providing a future plan of action for disclosure.

But reporting is also about the communication of the climate-resilient message to mainstream investors. Companies should engage with investors to get feedback on what they want to see, what’s decision-useful information for them and where they are looking for it.

 

Where we fit in

At Salterbaxter, we strive to integrate ambitious sustainability into brilliant businesses, and we’ve been producing award-winning annual, sustainability and ESG reports for more than 20 years.

How we can help in navigating TCFD:

  • Climate strategy development, peer benchmarking, current state gap analysis with recommendations for improvements
  • Advisory around how best to communicate TCFD disclosures and where it fits within wider reporting activities
  • Stakeholder engagement to bring audiences and investors on board

For more information on TCFD or if you have any questions, we’d love to hear from you. Please do get in touch at laura.perez@salterbaxter.com

To register your interest in our CONNECTED video conversation series, contact michelle.obee@salterbaxter.com

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