With the climate crisis as one of the most important challenges of our time, both the public and private sector need to urgently do what they can to build a better, more sustainable, future. As temperatures rise, we face a cascade of dire consequences—from increasingly catastrophic weather events to disrupted ecosystems to extreme social and economic shocks. To support a world where humanity can thrive, climate change must be a top priority on the corporate agenda.
Pressure from investors is increasing towards companies to have better climate information, regulatory pressure for improved climate disclosure is also increasing and on a day-to-day level, physical climate impacts continue to have real implications for businesses. The imperative to act is now even stronger. That’s making it critical that companies fully understand the implications of climate change for their business and have a climate strategy in place to address these challenges.
As a response to a growing demand for disclosures on the impact of climate change on organizations, the Financial Stability Board (FSB) introduced the Task Force on Climate-related Financial Disclosures (TCFD).
The TCFD recommendations are a set of well-balanced disclosure guidelines that are changing the way organizations manage climate risks and opportunities and has the potential to be more than a reporting framework. It provides consistent, decision-informing, and forward-looking information on the material impacts of climate change. The recommendations can assist corporate leaders in future-proofing your business, drive strategic change and provide a confidence boost for stakeholders.
Using the TCFD’s framework to enhance your organization’s climate-related risk processes and understanding the disclosure quality of climate-related financial impact is a sensible way to start thinking about how your business can strategically deal with climate change risks and opportunities.
To help you on your way to developing a climate strategy, Finch & Beak has developed a checklist with questions informed by the TCFD recommendations to assist you in assessing your company’s climate strategy:
The starting point of the strategy is getting a thorough understanding of the company’s climate-related risks, opportunities and financial impacts, ideally by using scenario analysis (see question 2). The following should be clearly pictured and translated into (monetary) impacts:
One of TCFD’s recommended disclosures focuses on the resilience of an organization’s strategy, considering different climate-related scenarios, including a 2° Celsius or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks.
The goal of performing the scenario analyses is to understand where company strategy may be affected by climate-related risks and opportunities, and how the strategy might change to address such potential risks and opportunities.
Reporting the outcomes of scenario analyses publicly in turn assists investors and other stakeholders in better understanding:
According to the TCFD, financial impacts of climate-related issues on an organization are driven by two main elements. Firstly, the specific climate-related risks and opportunities to which the organization is exposed. Second, the company’s strategic and risk management decisions on managing those risks (i.e., mitigate, transfer, accept, or control) and seizing those opportunities. Four main categories were identified by TCFD through which climate-related risks and opportunities may affect an organization’s current and future financial positions:
For each category, companies should be able to express the financial impacts. This should take into account aspects such as carbon pricing, cost structure, and flexibility to adapt. Besides, the company is to describe expected changes in the valuation of organizations’ assets and liabilities, and to the profile of an organization's debt and equity structure.
Which interventions is your company implementing to manage the risks and to seize the opportunities?
Investors, policy makers and other stakeholders are increasingly expecting companies to be transparent on their climate strategy and its outcomes. The wider alignment around TCFD creates an appropriate vehicle for enhanced climate-related reporting – which is ideally integrated in mainstream financial reporting.
At Finch & Beak, we work towards further development of the understanding of climate-related risks, using the TCFD as a guidance.
If your organization requires support on integrating the TCFD framework or strengthening your climate strategy reach out to Josée van der Hoek, Director at firstname.lastname@example.org or call +34 6 82 04 83 01.