Reporting the risks – a key to climate change resiliency
Green transition 9 February 2020 Sarah Winne
With climate change comes an array of related risks that governments, the public and businesses all need to understand. The international Financial Stability Board has established a task force to support businesses in assessing and disclosing these risks. Sarah Winne, lead consultant in Ramboll, explains why the initiative can prove instrumental to businesses and the surrounding societies.
Climate-related Financial Disclosures 101
Climate change is a reality. It’s a difficult reality to grasp, but at this point we must accept that a certain level of climate change, at least, is inevitable.
While many businesses are taking steps to reduce their contribution to climate change, they also need to factor in how climate change will affect them.
This is where the Task Force on Climate-related Financial Disclosures (TCFD) enters the picture. The TCFD was established by the Financial Stability Board in 2015 to raise awareness of the importance of understanding and disclosing climate-related risks.
In short, the TCFD provides recommendations and support, aimed at businesses, with guidance on how to disclose risks relating to climate change. The ambition is to help ensure that financial disclosures relating to climate risk are comparable, consistent, reliable, clear and efficient – to ensure the disclosures are useful for subsequent decision-making processes.
The recommendations are centred around four themes: governance, strategy, risk management, and metrics and targets. The guidance focuses on providing 11 recommended disclosures under these four headings in order to provide information on how organisations think about and assess climate-related risks and opportunities. In the first instance, the disclosures can be fairly qualitative and high-level, but the aim is to improve them over time to increase their usefulness.
Who should use it?
The TCFD recommendations are relevant to borrowers, lenders, asset managers and insurers across all sectors and jurisdictions. In particular, organisations with public debt or equity are encouraged to implement the recommendations to foster better investment, lending and underwriting decision-making, whilst asset managers or owners adopting them can demonstrate their understanding of their climate risks.
The hope is that the TCFD can help bring stability to financial markets by encouraging businesses to recognise the risks of climate change and report on their preparedness.
How to go about it
Financial institutions and some businesses are generally well-prepared to report in line with the TCFD recommendations, and many have already started.
In the first instance, the information to complete recommended disclosures can be at least partially covered in Sustainability Reports, Carbon Disclosure Project (CDP) questionnaires or Annual Reports. Collecting existing information and putting together qualitative reviews is a good place to start and should enable businesses to set the wheels in motion for more comprehensive climate risk reporting.
What’s the outlook – and why is it important?
At the time of writing, more than 800 companies have expressed their support for the TCFD recommendations, and that number is growing. This is good progress compared to 2017, when the recommendations were first launched and the TCFD had just over 100 supporters.
What’s more, TCFD-aligned reporting may very well become mandatory in the near future. At the launch of the Green Finance Strategy in July 2019, for example, the UK announced that all listed companies and large asset owners will likely be expected to disclose in line with the TCFD by 2022.
With such a pledge to support the TCFD recommendations and report on progress, it will be interesting to see if other countries follow suit.
Whilst other reporting mechanisms, such as the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI), cover carbon reductions and sustainability issues more broadly, the TCFD recommendations provide a needed focus on climate-related risk.
And a fundamental part of preparing for the future – and enabling sustainable business operations – is truly understanding the risks of climate change. This understanding is key to real change, and a consistent approach to disclosing these risks is a much-needed first step.
The TCFD’s success is reliant on wider uptake as well as continual improvement of the quality of climate-related financial information.
Ultimately, the TCFD needs to be broadcast more widely, with the aim of ensuring that reporting high-quality climate-related financial information boosts capital flow, rewarding the businesses that operate sustainably.
Available resources to get you started
There are support tools available to help firms get started. The TCFD Knowledge Hub, for example, helps firms implement the recommendations by providing case studies, guidance, and tools. The TCFD Good Practice Handbook also provides good practice examples drawn from across the G20 to demonstrate TCFD implementation.
Support from environmental consultants is also available, through services such as scenario analysis, developing climate risk management strategies and collecting data for metrics and indicators. For businesses with large portfolios of assets, support with assessing physical climate risks is particularly useful to understand and interpret the complex climate data.
Recent reports on TCFD progress emphasise that although disclosures can initially be simple, they do need to be accurate. Involving a third party of climate risk experts, who can provide climate, environmental, economic, management consulting and engineering expertise, can ensure quality and help to achieve the long-term TCFD objectives.
For now, reporting in line with the TCFD recommendations is not mandatory for most companies, but there are strong indications that it may become so in the near future. Furthermore, signatories to the Principles for Responsible Investment will be required to report on TCFD-aligned indicators by the end of 2020.
Companies recognising the pressing issue of climate change is a positive first step; working to reduce emissions and become climate resilient is vital for limiting global warming to 1.5 degrees C. Assessing, understanding and mitigating climate risks, through support from the TCFD, will enable the private sector to continue to develop robust climate strategies.
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