Uncluttering the reporting landscape with TCFD recommendations

Quick Read:

• Growing investor scrutiny continues to push businesses into a chaotic and convoluted reporting landscaped with no clarity on the what’s and how’s of strategic discussions on their approach towards climate change reporting;
• The TCFD recommendations are a universal set of financial disclosure guidelines designed to enable systematic and comprehensive reporting on climate change related business risks, and their subsequent strategies;
• Better informed and impactful business valuation by mainstream investors is the final culmination of the Task Force and its recommendations;
• Need to steer the conversation from whether businesses should accept the TCFD recommendations to how to ensure their successful integration into their annual business and financial filings.

Responsible business practices and an elucidation of business performance on environmental, social, and governance parameters is no longer just a cause for passionate idealistics driven by good karma and make-a-difference zeal. On accounts of transparency and accountability, businesses are finding themselves at the receiving end of local and international pressures to discuss and deliberate their strategy to address the most pressing and rattling challenge of our times – the Climate Change.

Climate Change linked risks are increasingly being viewed as a make or break opportunity for businesses to either flourish or perish away. Nevertheless, amidst the growing investor scrutiny, the clarity on the what’s and how’s of these strategic discussions remains chaotic and convoluted.

Sensing this unwarranted roadblock, the Task Force on Climate-related Financial Disclosures (TCFD) were introduced by Mark Carney, Governor of the Bank of England and Michael Bloomberg, at the G20 Summit in 2015. The TCFD are a universal set of financial disclosures designed to enable systematic yet comprehensive reporting on climate change related business risks, and their subsequent strategies. Bridging the gap between the businesses and the investor communities, the Task Force is aimed to help the latter gain a better insight into their investee’s business response to climate change, and thus make a sagacious investment decision.

Let’s see how the TCFD works and how it helps unclutter the reporting mess.

The TCFD Way

Unlike the plethora of reporting formats and recommendations, the TCFD does not only highlight the impact of business activities on the environment; it also focuses on the impact of environment on a business as well. Better informed and impactful business valuation by mainstream investors is the final culmination of these reformed disclosure diktats.

The TCFD streamlines disclosures within the annual filings on four key areas:

1. Governance

A commentary on a business’ governance i.e. management & the Board’s role in assessing and thus, managing their exposure to climate change linked risks and opportunities.

2. Strategy

Business’ subsequent approach to address actual and potential climate related risks and opportunities, and the latter’s impact on the business, its corporate strategy, and financial planning thereof. Here, businesses are also encouraged to assess their business resilience in conjugation with different climate-related scenarios.

3. Risk Management

As the word says, it’s the discussion on existing risk management procedures i.e. identification, assessment, and management upheld by the business with specific reference to climate change, and with further integration to the organisation’s overall risk management framework.

4. Metrics & Targets

An elucidation of metrics and targets employed by the business to measure, assess, and manage climate change linked risks and opportunities for corporate strategy formulation. Here, the businesses are recommended to disclose information on their Scope 1, Scope 2, and if relevant Scope 3 GHG emissions and the related risks.

The TCD leverages the existing modalities within business processes without creating an additional reporting burden. They are flexible and voluntary (except for PRI signatories who will be mandated to report on the strategy and governance indicators come 2020), yet fully equipped to enhance a company’s resilience towards climate change.

 Why does it matter?

Reporting on climate change resilience is often viewed by companies as an opportunity for them to disclose their direct or indirect impact on the environment. For instance, the routine environmental reporting by around 6,500 companies on the well-acknowledged and accepted Carbon Disclosure Project.

However, the need is for the companies to understand how, where, and when climate risks can open an unwarranted vortex of unpredictable strategic and operational risks for them. While, there are many reporting formats that aim to help companies better adopt integrated reporting, which is slated to cut the clutter from their annual filings; what they miss by a wide margin is the investor’s increasing need for not only greater clarity and transparency, but also the business case of climate change.

According to the European Asset Allocation Survey, 2018, the number of investors upholding climate change linked risks and opportunities in their investor agenda increased from 5 per cent last year to 17 per cent in 2018.

Investors acknowledge that companies are increasingly being exposed to a range of physical, regulatory, and marketplace risks linked to exacting climatic uncertainties, something that can be detrimental to their business viability. And, these risks are expected to get aggravated a lot sooner than expected due to a rapid transition to a low-carbon economy. And, amidst this growing critique, businesses are often found to go out on a limb without clear and standardised reporting requirements.

The TCFD offers that much needed respite in the form of a voluntary framework supporting consistent disclosures on physical, liability, and transition risks associated with climate change.

It offers businesses an opportunity to exhibit social consciousness of a business while taking relevant issues head-on and demonstrating ability to manage and adapt to climate change. In the eyes of the investors, it gets viewed as a proactive publication of financial data pegged to a climate change risk profile, which paves the way for a valued long-term partnership.

Nonetheless, an effective adoption of the TCFD recommendations demands internal collaboration amongst different departments (viz. finance, risk, investor relations, legal, and sustainability) to create an environment that fosters integrated thinking and holistic implementation of climate change strategic decisions.

Our take on TCFD

The TCFD is not touted as the be-all and end-all solution to the existing reporting woes. According to the TCFD 2018 Status Report, the climate-related financial disclosures are still found to be in the nascent stages of adoption.

While, the businesses are gradually moving toward reporting on climate related information, only a handful of the assessed companies taken from the pool of largest companies in eight specific groups including Banks, Insurance Companies, Asset Managers, Asset Owners; Energy, Transportation, Materials & Buildings, Agriculture, Food & Forest Produce are able to report on their direct or indirect climate impact.

Even fewer companies are able to elucidate their business resilience under different and exacting climate change scenarios.

Therefore, an integration of the Task Force’s recommendations into existing financial and annual reportings along with ESG criteria needs a better understanding and development of:

• a sound leadership to propel a wider acceptance of climate change issues into corporate strategy and financial analysis. For tactical measures, incentivisation of board members and the management is suggested to be taken first as a reputational issue for them and the business alike, and later as a strategic move.
• integrated risk management systems evolved to move beyond management of conventional risks toward risks and challenges that come with transition to a low-carbon economy and business models.
• a clarity on climate risk assessment and scenario analysis to address the TCFD recommendation – ‘describe the potential impact of different climate scenarios, including 2 degree C scenario on the organisation’s business strategy’. And, this translation of outputs of climate change scenarios into concrete business and financial impacts requires a thought out strategy.

To conclude, the TCFD recommendations are designed to offer a clear and comprehensive direction to the otherwise muddled reporting landscape. They uphold the accepted view on disclosure practices i.e. the Context matters. The TCFD aids in internalisation of varying context inherent to sectors and organisations and serves as a single vernacular of climate change linked risks and opportunities while cutting the clutter out of reporting landscapes. Therefore, the need is to steer the conversation from whether businesses should accept the TCFD recommendations to how to ensure their successful integration into their annual business and financial filings.