Planning for climate risk - 3 tips for TCFD alignment

Climate change poses significant financial risks and opportunities for the global economy, both now and in the future. Earth’s rising temperature is increasing the frequency and ferocity of natural disasters, disrupting ecosystems and human health, and causing unforeseen business losses while threatening assets and infrastructure.

To adequately prepare for climate-related risks, financial markets need comprehensive, reliable ESG (Environmental, Social, Governance) information to analyze value shifts, the effect of regulations on industry costs, the implications of a low-carbon economy, and the impact of new technologies.

In 2015, the Financial Stability Board created the Taskforce on Climate-related Financial Disclosures (TCFD) to increase and improve reporting of climate-related financial information. TCFD provides key guidance on what companies and investors should be focusing on to minimize climate risk, accelerate environmentally friendly governance, and transition to low-carbon operations.

The 2019 TCFD progress report found that many companies confronting climate-related issues integrated TFCD disclosures into their annual and sustainability reports. Despite this good news, TCFD is urging companies to increase alignment with climate-related goals through enhanced disclosures and decision-useful information related to climate risks, strategies, and governance frameworks.

For companies wondering where to start, here are three tips on how to improve your ESG reporting, align your organization with TCFD disclosures, and improve climate-related information.

1. Follow the TCFD core disclosure roadmap

In an effort to promote market transparency and stability, TCFD developed recommendations for effective climate-related disclosures that support better-informed investment, credit, and insurance underwriting decisions. These recommendations also help ensure stakeholders are cognizant of the financial sector’s exposure to climate-related risks and carbon-related assets. Published in 2017, the recommendations focus on governance, strategy, risk management, and metrics and targets.

Governance
Companies should strive to disclose the organization’s governance around climate-related risks and opportunities using these tactics:

• Describe the board’s oversight of climate-related risks and opportunities
• Describe management’s role in assessing and managing climate-related risks and opportunities

Strategy
Companies should strive to disclose 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 using these tactics:

• Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term
• Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning
• Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario

Risk management
Companies should strive to disclose how the organization identifies, assesses, and manages climate-related risks using these tactics:

• Describe the organization’s processes for identifying and assessing climate-related risks
• Describe the organization’s processes for managing climate-related risks
• Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management

Metrics & targets
Companies should strive to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material using these tactics:

• Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process
• Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks
• Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets

2. Know the seven principles for effective disclosures

TCFD encourages organizations to consider seven core principles when developing climate-related financial disclosures. These disclosure principles are mainly consistent with internationally accepted ESG reporting frameworks and applicable to most industries. The principles are designed to help organizations make clear connections between climate-related issues and their governance, strategy, risk management, and metrics and targets. The seven TCFD principles for effective disclosures are:

1. Disclosures should represent relevant information
2. Disclosures should be specific and complete
3. Disclosures should be clear, balanced, and understandable
4. Disclosures should be consistent over time
5. Disclosures should be comparable among companies within a sector, industry, or portfolio
6. Disclosures should be reliable, verifiable, and objective
7. Disclosures should be provided on a timely basis

3. Reporting framework alignment

While TCFD provides a roadmap, companies that choose to solely provide TCFD-related information through standalone reports instead of using a reporting framework end up doing their investors a disservice. Without a common reporting framework, investors cannot make apples-to-apples comparisons on sustainability information and data.

While ESG reporting and disclosures frameworks remain far from standardized, many reporting frameworks are showing high levels of alignment with TCFD recommendations. The Corporate Reporting Dialogue (CRD) released a report stating the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) have collaborated to assess and incorporate alignment with TCFD’s disclosure principles, recommended disclosures, and illustrative example metrics.

Utilizing a leading, standardized reporting framework that shows strong alignment with TCFD disclosures ensures investors understand what critical climate actions companies are implementing and enables them to make accurate, meaningful industry-wide comparisons.

TCFD-aligned companies have a clear advantage

From blazing wildfires on the West Coast to hurricanes in the Gulf of Mexico to pollution poisoning in Louisiana, we're witnessing a constant onslaught of environmental disasters that are wreaking havoc on lives and livelihoods. With climate-related threats rising, it’s only a matter of time before climate-related disclosures become mandatory for companies throughout the world.

For example, the Canadian government announced that companies seeking COVID-19 relief must disclose their environmental impacts based on TCFD guidelines. Also, the U.K. government announced that all companies must be TCFD-compliant by 2025.

As we mark the five-year anniversary of TCFD’s introduction, it’s become clear that all companies should commit to more robust disclosure, both in quantity and quality. Without common frameworks and a commitment to standardized disclosures, investors are unable to make fair industry comparisons or fully informed decisions. Luckily, TCFD-aligned disclosure is becoming mainstream and companies sharing this crucial information with financial decision-makers will have a significant business advantage.

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

Download guide

Helee Lev

Helee joined our team in 2012, overseeing strategic account management, new business, and industry alliances. In 2015, she participated in raising $5M of venture capital funding. She leads sales, business development, and Conservice ESG's strategic consulting group.

LinkedIn