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TCFD: because climate change is not just an environmental problem

Marit van Rheenen

Marit van Rheenen is an Associate Director for the Upstream Sustainability Services team, the centre of sustainability excellence within JLL based in London. As a specialist in risk management services Marit works with a number of investment management companies, helping them to not just analyse and mitigate risk, but to capitalise value propositions that arise whilst doing so. Marit has over 10 years of international experience embedding sustainability in building engineering, property development and real estate investment.

Extreme weather, drought, flooding, disease, social disruption and environmental refugees – hardly sounds like a recipe for a thriving business environment does it? Climate change is threatening to undercut the foundations of healthy economies – making it not only an environmental problem, but a business one too.
In response to an increasing need to better understand the financial impacts of climate change, the Taskforce on Climate-related Financial Disclosures (TCFD) has developed a first of a kind reporting framework. The framework provides recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. The objective? To make the effects of climate change routinely considered in businesses and investment decisions, leading to smarter and more efficient allocation of capital, and helping to smooth the transition to a more sustainable, low-carbon economy.[1]
 

Growing support emphasizes drivers for change


Emphasizing the fact that the disruptive force of climate change can no longer to be overlooked, the initial TCFD report was supported by over 100 chief executive officers. Just over a year later, in September 2018, TCFD reported more than 500 supporters. The companies represent a broad range of sectors with a combined market capitalization of over $7.9 trillion[2] ; huge potential to drive positive change.
To enable businesses to respond effectively, the Taskforce structured its recommendations around four core elements of how organizations operate:

  • Governance: disclosure of the organization’s governance around climate related risks and opportunities.

  • Strategy: disclosure of the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. To assess the potential impact, organizations should take into consideration different climate-related scenarios, including a 2°C or lower scenario.

  • Risk management: disclosure on how the organization identifies, assesses and manages climate-related risks.

  • Metrics and targets: disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.


The climate-related risks to be reported upon in these four core elements are divided into two categories which have the potential to affect an organisation’s supply chain, operations, transport needs and employee safety:

  1. Risks related to the transition to a lower-carbon economy, including policy, litigation or legal, technology and market risks.

  2. Risks related to the physical impacts of climate change. Physical risks can be event driven (acute floods or hurricanes) or longer-term shifts (chronic or sustained higher temperatures) in climate patterns.


Crucially, the Taskforce recommends organisations assess and report on the opportunities that can result from the efforts to mitigate and adapt to climate change. These benefits are numerous and include, resource efficiency, energy cost savings, an improved competitive position, access to new markets and better resilience.
 

Push towards legislation


In late May 2018, two-thirds of G20 member states - accounting for 85% of the global economy - begun to implement these recommendations. The Taskforce’s recommendations promote voluntary, consistent climate-related financial disclosures. However, as companies are facing increasing pressure from investors and shareholders, mandatory implementation of the TCFD recommendations might not be far away.
The European Commission has put together an action plan to transform the reporting regulations of financial practices within the European Union.[3] In the UK, the Environmental Audit Committee (EAC) called on the UK government to set a deadline for all UK listed companies and large asset owners to report on climate related risks and opportunities in line with TFCD recommendations (on a comply or explain basis) by 2022.[4] So far, the UK government has resisted this recommendation, relying on voluntary reporting, however the French government has made climate risk reporting obligatory by adopting the Energy Transition Law in 2015. Listed entities with material exposure to climate change risk across a range of countries are therefore likely to be facing changing reporting requirements soon.
 

TCFD and EPRA go hand in hand


TCFD is innovative and collaborative, making it easier for organisations to report and derive business value. The Taskforce has sought to align its recommendations with existing reporting standards and benchmarks such as CDP, GHG Protocol, GRESB, GRI, IIGCC, IPIECA and the SASB. Importantly, organizations already reporting climate-related information under other frameworks will be able to disclose under TCFD immediately and are strongly encouraged to do so.
TCFD recommends the disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. More specifically:

  • Disclosure of the metrics used to assess climate related risks and opportunities

  • Disclosure of Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.

  • Description of the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.


TCFD provides illustrative examples on the metrics that one could report upon, but no mandatory set of metrics is given. This gives organisations the opportunity to build upon their existing reporting structure, and the EPRA sBPR performance measures covering greenhouse gas emissions (GHG-Dir-Abs, GHG-Indir-Abs and GHG-Int) provide a framework for companies to disclose their Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions in line with both TCFD and sector best practice.
 

The risks are real – and so are the opportunities


While the transition to low-carbon energy is under way, there is still a long way to go to decarbonize the world economy. It is likely that even with the best of efforts, companies will experience some disruption from unavoidable climate change– and many have yet to wake up to the reality of this threat. Equally, many companies are unaware of the opportunities to create long term value and out perform their competitors by integrating climate change related impacts into their decision making.  Forward-thinking companies are therefore realising that clear and tangible action on climate change is now  essential to their long-term resilience and the TCFD framework provides the perfect starting point for businesses to achieve this change.
[1] Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)
[2] Task Force on Climate-related Financial Disclosures: Status Report (September 2018)
[3] Two-thirds of G20 member states implement TCFD recommendations on sustainable finance, Novethic
[4] Mandatory climate risk disclosure for UK companies and pension funds?, Lexology