The Task Force on Climate-related Financial Disclosures (TCFD) is an international framework that provides guidance for companies on how to disclose climate-related financial risks and opportunities. These disclosures provide critical information to lenders, insurers, investors and other financial institutions about the financial impacts of climate change to inform decision-making that takes these critical impacts into account and provides a pathway to quantify the benefits, risks and opportunities for climate related interventions.
According to TCFD Chair, Michael Bloomberg, Government, company leadership and regulators are increasingly supporting TCFD and it is now being recognised as a global benchmark standard of disclosure with these parties’ announcing policies, partnerships and support for the increased tempo of climate related financial disclosure.
Climate related financial disclosure falls under the intersection of the broader categories of Environmental, Social and Governance (ESG) that inform Corporate Social Responsibility (CSR). ESG considerations should be fully integrated into a company’s business strategy to ensure it carries out its stated commitments, provides transparency to stakeholders through periodic reports and is pro-active in seeking to transition its business operations to more sustainable practices as soon as practicable. This approach demonstrates a genuine and sustained commitment to crucial issues such as climate change, biodiversity, and human rights with the financial impacts of climate action quantified for more informed investment, risk management and value return to stakeholders who wish to act in the interests of the sustainability and climate.
Integrate the rules into your operations
The TCFD regulations dictate that all sustainability objectives should be integrated into an organization’s strategy, it should include an ESG risk assessment process, and develop appropriate metrics to measure effectiveness in managing compliance objectives. Examples of these objectives would include an assessment of carbon emissions, human capital management, business model alignment to ESG values, water stewardship and social governance transparency that takes into account the financial and social impacts of these practices. Understanding the specific requirements of the frameworks requires insight into carbon emissions and where they sit Scope 1, 2 and Scope 3 emissions.
Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain.
The focus on Scope 3 emissions provides critical impacts for climate, with companies accounting for water-related risks to its operations, assets and supply chains such as water scarcity, droughts, floods, and water quality degradation. The variety of areas covered by the standard helps to formulate a detailed and easier compliance document for a real action plan.
It is incumbent upon organizations to implement comprehensive sustainability frameworks that take into account all three scopes and develop infrastructure that aligns with their wider CSR values.
Climate scenario analysis
Climate scenario analysis is a key aspect of determining climate-related risks and opportunities and helps financial institutions set their climate goals. This analysis provides a comprehensive understanding of the potential impact of climate change on a company’s operations and financial performance. Here you can follow these 6 steps to run a climate scenario analysis:
- Define the scope of the analysis: Determine what aspects of the organization will be included in the analysis, such as operations, assets, investments, and supply chain.
- Select climate scenarios: Choose the most relevant and credible climate scenarios, such as those provided by international organizations or scientific bodies, to use in the analysis.
- Assess the impact of the scenarios: Analyze the potential impact of the selected scenarios on the organization’s operations, assets, investments, and supply chain.
- Develop mitigation and adaptation strategies: Based on the results of the analysis, develop strategies to mitigate and adapt to the potential impacts of the climate scenarios.
- Incorporate results into decision-making: Use the results of the analysis to inform decision-making, such as investment decisions, risk management strategies, and sustainability goals.
- Regularly review and update: Regularly review and update the analysis to ensure that it remains relevant and accurate.
It is essential to note that a climate scenario analysis requires input from expert analysts as unprecedented climate events are accelerating in number and magnitude. Unfortunately, planning does not fall within the existing assessment scopes. At a minimum, the assessment should include a company’s finance, operations, and sustainability teams, as well as external experts, such as climate scientists and financial analysts. Additionally, the analysis should be based on the most up-to-date and credible data and projections, including data from scientific bodies, governments, and international organizations.
Strategic review and action plan
An internal strategic review of scenario analysis is required in order to develop an action plan that incorporates pro-active strategy and stable corporate governance in the face of accelerated climate related risks and unprecedented climate phenomena. While TCFD regulations can encourage companies or government to create frameworks with data that enable comprehensive and consistent sector-specific modelling, it is only in the implementation of a proportionate action plan that risks can be addressed and financial impacts mitigated.
To assist with action planning in the UK, companies face new standards, policies and requirements, as the “Business, Energy, Industrial Strategy (BEIS) are implemented to meet the TCFD’s four pillars of:
- Governance: your governance procedures for climate risk and opportunities
- Risk: how you identify, assess and manage the climate risks and opportunities
- Strategy: the risks and opportunities and their impact on your business, and an analysis of your strategic resilience
- Metrics and targets: your targets, how you’re measuring progress, and how you’re getting on.“ (KPMG) .
Complying with the climate related requirements is crucial however, there may be instances where deviation from these regulations is necessary for financial reasons. In such situations, it is imperative for the company to clearly communicate the reasoning behind their departure, indicating a responsible and sustainable approach to compliance that balances business strategy and facilitating a gradual transition.
To effectively fulfill TCFD-based disclosure requirements, including the reporting of Scope 3 emissions that fall outside of direct control, it is imperative for companies to establish effective communication and collaboration with their supply chain. One approach to achieve this is by engaging with suppliers and aligning their sustainability practices with the company’s objectives through the implementation of targeted emissions reduction initiatives and regular performance assessments. This can include setting emissions reduction targets, promoting the adoption of energy-saving practices such as renewable energy projects and energy-efficient equipment, and monitoring progress to ensure continued alignment with the company’s sustainability goals.
In conclusion, compliance with TCFD regulations is imperative for companies to stay abreast of evolving regulations and to exhibit their dedication to critical stewardship issues such as climate change. This regulation will assist companies in formulating a well-defined action plan to address the risks associated with severe weather conditions and rising sea levels, transition risks such as the shift to low-carbon energy sources and a low-carbon economy, and liability risks such as lawsuits resulting from climate change impacts. On the other hand, opportunities include investments in low-carbon technologies and infrastructure, increasing market demand for environmentally friendly products and services, and cost savings through energy-efficient operations and practices.
