The requirement to disclose climate-related financial information, aligned with Task Force on Climate-related Financial Disclosures, or TCFD, comes into force today. Following a 12-month grace period, around 1,300 of the largest companies registered in the UK will now be mandated to report on their climate-related financial information; considering the risks and opportunities faced as a result of climate change.
The TCFD should be seen as an opportunity. Business leaders may be tempted to view climate risk as a problem for the future; rising seas, mass extinction and extreme weather conditions – the physical risks that came with the temptation to view climate change as a challenge for tomorrow’s leaders.
What the TCFD has exposed for companies who have already engaged is the near-term impact of transition risks; think new legislation, consumer sentiment, development of low-carbon technology and investor expectations. Effectively, they’re the business-related risks that follow social, economic and political trends related to a low-carbon and more climate-friendly future.
Risilience has found that the value of businesses failing to take climate action could be eroded by as much as 30% over the next five years, depending on company profile and how aggressively they tackle climate change. With that in mind, companies have a choice; create a TCFD report to place a tick in that box or use the TCFD framework to formulate a strategic plan.
What the deadline means
Established by the Financial Stability Board (FSB), the Task Force offers: ‘recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks – risks related to climate change.’1
The framework focuses on four core areas; governance, strategy, risk management, and metrics and targets, and, whilst this provides an indication of breadth, the guidelines do not stipulate depth of scope, leaving a deal of room for interpretation.
The hope of the FSB, by mandating this deadline, is for the widespread uptake of the TCFD that will, in turn, become integrated into companies’ strategic planning processes to provide wider understanding of the climate-related financial implications for businesses and investors, alike.
Not all TCFD reports are created equal
Corporate net-zero and greenhouse gas reduction commitments, whilst not compulsory, are coming under greater scrutiny. Increasingly, pressure is being applied to companies to have credible decarbonisation plans in place – not only to mitigate climate change on the global scale but also to demonstrate a company’s resilience to climate-related transition risk and ensure the business is financially viable in a low-carbon economy.
This is happening in parallel with the introduction of regulations increasing costs to penalise carbon emissions, as demands from shareholders and investors intensify with the expectation that businesses should be responsible stewards of the environment.
TCFD offers a solid framework for businesses to demonstrate that fiscal viability and social responsibility. The challenge can be understanding just how far to go.
A ‘light’ version of a TCFD report is one that simply responds to the legislation’s four pillars to avoid superficial penalties but smart businesses will see this exercise as an opportunity, not only to create a climate strategy but also unearth the benefits associated with taking action.
We can take the lesson from the nineties when early changemakers saw the internet economy coming. Today we have the green economy, which is gaining momentum, so the choice is whether to identify and grasp the opportunities that it creates or wait until it erodes your business model and, ultimately, the bottom line.
Investors and consumers are watching
The ‘low-carbon economy’ presents pressures from several directions that squeeze margins and force change on companies. Investors and shareholders, increasingly, have their own expectations.
For example, in 2020, asset-investment-management firm Blackrock called on companies to disclose climate-related risks in line with the TCFD – and this is not an isolated incident. In 2021, The Investment Association, a trade body with £8.5trn under management, announced its intention to flag companies in high-risk sectors that failed to comply with the TCFD legislation – both actions from major, global investment players that should keep any CFO up at night.
Of course, consumers are also applying pressure to the bottom-line as they demand more sustainable products and practices but refuse to take the hit at the checkout. Research carried out by YouGov found that only a little over half (57%) of consumers surveyed would pay more for sustainable goods in the more climate-mature UK market, falling to as low as 27% in Japan.
The common thread is a desire for transparency. Whilst there is no stipulation as to where the TCFD report needs to be published, when executed well, there should be no reason to hide it away.
Brands can use the TCFD report not only as a framework for disclosure but as a comms opportunity to promote their positive, climate-related activity – placating their harshest critics. It can also become part of larger reporting initiatives, such as sustainability reports, and be signposted in the company’s annual report.
As businesses come to terms with the stark and immediate reality of transition risks; and face up to the expectations levied by legislators, investors and consumers, the TCFD presents an opportunity for companies to fully understand, and act upon, the internal and external pressures faced as a result of climate change – challenges that don’t sit and wait in the future, but, instead, must be tackled in the here and now.
