Leveraging TCFD to Strengthen Your Climate Strategy

Five questions aligned with TCFD to develop the right climate plan
Leveraging TCFD to Strengthen Your Climate Strategy
Publ. date 18 May 2022
Climate change requires urgent action. It’s the next high-impact, high-probability risk facing organizations, and needs to be on the radar of forward-thinking business leaders. Future-proofing an organization requires a strong climate strategy and using the TCFD recommendations to understand and manage climate-related risks and opportunities is a great starting point. This article suggests five questions, aligned with TCFD, to ask when developing a climate strategy.

The importance of a climate strategy

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.

Using TCFD to align your climate strategy

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.

Five questions to help you assess your climate strategy

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:

1. Does your company have a well-articulated view on its climate-related risks and opportunities?

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:

  • Physical risks: associated with physical impacts from climate change, which can be acute or chronic
  • Transition risks: policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change
  • Opportunities: for example resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain

2. How is your company using scenario analysis?

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:

  • the degree of robustness of the organization’s strategy and financial plans under different plausible future states of the world;
  • how the organization may be positioning itself to take advantage of opportunities and plans to mitigate or adapt to climate-related risks; and
  • how the organization is challenging itself to think strategically about longer-term climate related risks and opportunities.

3. Is your company able to express the financial impact of climate-related risks and opportunities?

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:

  • Income statement: (1) revenues and (2) expenditures
  • Balance Sheet: (3) assets and liabilities, and (4) capital and financing

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.

4. What actions is your company taking to manage risks and leverage opportunities?

Which interventions is your company implementing to manage the risks and to seize the opportunities?

  • Science-based (net-zero) emissions reduction targets
  • Climate-related management incentives for executives and broader staff
  • Impact valuation and internalizing externalities, for example through internal carbon pricing
  • Upstream: decarbonizing the supply chain, shifting to renewable raw materials
  • Operations: e.g. reduction of emissions/energy/water use/waste generation in the production process
  • Downstream: producing products that help customers avoid emissions and are designed for re-use, recycling or biodegradation
  • Drafting plans for physical climate risk adaptation

5. How is your company (publicly) reporting on its strategy and outcomes?

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.

Finch & Beak provides TCFD and climate strategy support

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, contact Johana Schlotter at johana@finchandbeak.com or +31 6 28 02 18 80

Photo by Monstera on Pexels

About Nikkie Vinke

Seasoned advisor in ESG benchmarking, sustainability strategy and stakeholder engagement. | nikkie@finchandbeak.com

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