TCFD: Four letters that investor relations cannot ignore

The importance of the Task Force on Climate-related Financial Disclosures cannot be underestimated.

“Climate change is not only an environmental problem, but a business challenge as well”
– Michael Bloomberg, Chairman TCFD

Why TCFD?

Climate change is real. Not only is there clear consensus in the scientific community, the World Economic Forum also lists Extreme weather events andFailure of climate-change mitigation and adaptationas two of the top 5 global risks in its 2018 Global Risk Report. Support to combat the impacts of global warming and climate change has also been growing. At the Paris Agreement in 2015, 195 states pledged to limit the global temperature rise to well below 2ºC. At the One Planet Summit last year, public and private sector leaders came together and made a number of ambitious but firm climate finance commitments.

So how does all this impact businesses now and into the future? With trillions of dollars of invested capital at stake, this is also a question that investors are increasingly asking too. In turn, businesses and investor relations professionals are increasingly having to understand how climate change – long-term, unpredictable and has multi variables – translate into tangible and quantifiable financial figures.

If your organisation is likely to be impacted by climate change, whether directly or indirectly, or your investors are increasingly asking questions about how you manage impacts of climate change, or you would like to attract investors who see sustainability / climate change as important issues, then TCFD is particularly relevant to you.

What is TCFD?

The Task Force on Climate-related Financial Disclosures, or TCFD, is an initiative led by the private sector that seeks to bridge this gap. Convened by Mark Carney and chaired by Michael Bloomberg, TCFD published its recommendations at the end of June 2017 to help companies identify, analyse and measure their exposure to climate-related risks and opportunities. Recognising that there is already an abundance of sustainability standards and frameworks, TCFD did not want to reinvent the wheel, but rather focus on recommendations that enabled businesses to provide consistent, comparable and reliable information for the financial community to make informed decisions.

TCFD’s key recommendations are broken down into 4 key areas and have been developed to be applicable to organisations across most sectors and jurisdictions, with the ultimate aim of being disclosed in their mainstream financial filings.

Governance – the pre-requisite and a critical element required for any organisation to consider the impact of climate change on the business; sets out management’s oversight approach
Strategy– disclosures around the impact of climate-related risks and opportunities to the business’s strategy and its resilience, and how the strategy may need to be adapted as a result
Risk management– disclosures on how the business identifies, assesses, manages and integrates climate-related risks into its risk register. Risks are classified as:
> Physical risks – the physical impacts of climate change on the business
> Transition risks – these arise from the need to mitigate and adapt to climate change, including the transition to a low-carbon economy

Metrics and targets– disclosures on metrics aligned to the business’s strategy and risk management, since it can only manage what it can measure

TCFD also recommends the use of scenario analysis, a methodology that helps organisations explore, analyse and strategise for a range of plausible long-term future scenarios.

Why it matters for Asian businesses and investor relations

As at the end of March 2018, TCFD had received public endorsement from more than 300 organisations (almost three-fold increase since its launch). Support is strong, wide-ranging, and growing. Some examples are listed out below.

Reporting frameworks:

Global Reporting Initiative (GRI), SASB and IIRC
CDP has mapped TCFD recommendations to its own climate questionnaire for 2018
UN Principles for Responsible Investments (UNPRI) has also incorporated TCFD disclosures into its own reporting principles and modules

Investor groups:

The Asia Investor Group on Climate Change published its report on how investors can integrate climate change into their investment strategy in Dec 2017
Climate Action 100+, a five-year initiative led by investors aims to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures, already have almost 280 investors signed up, representing almost US$30 trillion worth of assets

Notable investors and organisations:

Some of the world’s largest investors and banks, including Blackrock, Vanguard and DBS, have issued public statements highlighting the significance of managing environmental, social and governance risks on organisations
Swiss Re has pledged to stop investing in organisations that derive more than 30% of their revenues from thermal coal
The European Commission as part of its sustainable finance roadmap

With growing interest in and demand for climate considerations from the financial community, the importance of TCFD cannot be understated. Businesses need to act, and they need to act quickly.

As businesses in Hong Kong and Asia face unique climate-related challenges, and as investor relation professionals have to increasingly handle sustainability questions from investors, TCFD offers a practical framework to communicate its climate-related information to its stakeholders. We look forward to exploring these recommendations in more detail in the next article, including where and how to disclose in a practical and relevant manner, and how to navigate scenario analysis.