Consensus that climate-related disclosure supports good business practice in the age of climate change is rarely disputed. The mandate drives transparent and effective engagement between investors and the businesses they invest in, highlighting their exposure to climate risk – both transition and physical – as well as upsides and opportunities emerging from a low-carbon future.
TCFD has become a global standard for climate disclosure and is increasingly a requirement across several key global jurisdictions, becoming embedded in regulatory and investor expectations. While many companies have completed a TCFD report, the quality of information featured is highly variable, with many firms not offering investors and other stakeholders decision-ready, climate-risk data. Viewing TCFD as a box-ticking, compliance exercise misses an opportunity to engage at a more meaningful level that can catalyse business transformation to bring a range of benefits, including preferential access to capital as the market for green finance matures.
TCFD reporting covers four core areas in which companies must disclose their approach to understanding and managing the impact of climate change on their financial performance; governance, strategy, risk management, and metrics and targets.
While regulation, investor pressure and consumer sentiment are driving business leaders to progress sustainability efforts, marrying the transition to a low-carbon economy with more immediate pressures on the business requires strategic equilibrium. Common challenges perceived by business leaders trying to align the transition to net zero with other business priorities include:
- Exposure – publicly disclosing numbers can be a daunting prospect and there is a sense from some business leaders that being first to share numbers or disclose too much could leave them exposed to competitors – or even land them on the wrong side of regulation. Business leaders can find it challenging to strike the right balance between transparent reporting and overexposing their vulnerabilities.
- Time horizons – to many, climate change is perceived as a long-term concern and so remains secondary to more immediate pressures. This ignores the visible signs of climate change today and, in particular, the significant near-term transition risks that are already beginning to bite. Firms must take the long view in their strategic planning to shape a resilient business model but struggle to justify the long-term returns on today’s investments.
- Risk quantification – companies find it challenging to identify and quantify their climate-related transition risks and are challenged to find the data required for accurate risk assessments. Climate risk is a complex domain, with the need to translate scientific expertise – from meteorology to economics and policy – into business-relevant information. Sustainability managers are often responsible for TCFD reporting but are new to risk-management methods, such as scenario analysis and risk analytics. What’s more, climate change affects all aspects of a company value chain and so requires engagement from an array of functions across the business.
Businesses taking an analytical, science-led and data-driven approach to TCFD reporting will open a gateway to developing a robust and authentic roadmap to net zero. In the Risilience paper: ‘Why a science-led TCFD report is good for business’, there are practical steps offered to address common challenges of disclosure reporting including:
- creating a digital line of sight that enables key stakeholders to view scenarios for low-carbon transition and physical risks throughout the entire value chain, across a five-to-20-year horizon
- narrative mapping the business to the different dimensions of risk
- translating science into business impact by providing metrics enabling decision-makers to see the financial cost and impact of different scenarios.
Businesses that successfully embed climate-related disclosure into financial and strategic planning are aware that climate risk is a commercial priority as much as it is an environmental one. There are sound reasons and potential rewards for businesses prepared for the low-carbon economy.
A new report: ‘Sustainability superpower UK: the £70bn economic prize from becoming a world leader in sustainable development and energy security’, penned by former government economist Chris Walker for the UK Business Council for Sustainable Development, claims the move to net zero presents the UK with a once-in-a-generation economic opportunity. This emerges as more than £70 billion of economic benefits a year if the UK adopts a bold strategy of going ‘beyond net zero’ to become a world leader in clean energy.
Taking the right approach to TCFD reporting brings opportunity to secure valuable insights across a business. Implementing a high-quality TCFD framework, that shows understanding of climate risk and quantifies risk and opportunity, demonstrates to investors, regulators and consumers that a company takes climate change seriously and is protecting the business in its preparations for the low-carbon future.
- Download the Risilience report: Why a science-led TCFD report is good for business, or get in touch to learn how we can help you develop and action a credible net-zero plan.