In 2009, as the increasingly warm winds of change blew across G20 nations, the Financial Stability Board (FSB) was reformed. Charged to keep global financial markets stable after the worst shocks in a lifetime, the board were intrepidly looking forward to other incoming, systemic threats - climate and environmental change. Increasing temperatures, intensifying natural disasters, ecological degradation and humanitarian crises have been destabilising businesses and corresponding financial markets at an alarming frequency.
To attempt to quell climate-related shocks, the FSB laid out global guidance from its Taskforce for Climate-related Financial Disclosure (TCFD) – a playbook to improve and increase reporting of climate-related financial information.
It aims to join the dots between these risks and the often inconsistent and limited information available to appraise companies’ exposure to them.
These risks, and opportunities, can be seen as physical - from the events described above. These could impact manufacturing, labour markets, security of supply, and distribution, to name a few. Any opacity around the stability or mitigation of such risks is not taken lightly by insurers and investors alike. If a risk cannot be understood, no matter how dicey or benign they seem, stakeholders will be perturbed enough to vote (downhill) with their feet. Further, sudden manifestations of these risks could cause sharp falls in asset prices, uncertainty, and corresponding volatility in both local financial markets and the global economic network.
These risks can also be categorised as those related to the transition to a lower-carbon economy.
Changes in consumer demand, regulatory costs, and disruptive technologies could all expose businesses that have not invested in lower-carbon economy initiatives - resulting in lower returns for investors and further reticence in the global financial system. But, for those organisations focused on climate change mitigation and adaptation solutions, there lies a huge opportunity for investment and growth from such transitional changes.
Organisations are being recommended, and in due course, will be commanded as to how they should report on these risks and opportunities being presented to their business. This guidance boils down to ensuring that the correct information on climate-related risks and opportunities is available across the investment chain. This will allow for accurate pricing and transparent communication to allow for efficient capital allocation. If organisations can demonstrate understanding around the weaknesses in their strategy, and present tangible measures to mitigate and consistently hit the targets set – not only will their business be more resilient, but so will the risk appetite of their lenders, insurers and investors.
The taskforce hopes that capital will be deployed more effectively, enabling a clean, inclusive and resilient recovery. Further, there is hope that investment will thus be driven into more sustainable initiatives and technologies that continue to mitigate climate risk and ultimately reduce it altogether.
More than 1500 organisations in both public and private sectors have endorsed the recommendations, and HM’s Treasury has concurred, making the guidance a pivotal part of the UK’s green recovery plans. They’ve stipulated that the organisations fitting into any of the seven selected categories below will be required to make a significant proportion of the TCFD aligned disclosures by 2023, but with full compliance necessary by 2025.
(See HM Treasury’s complete roadmap here)
- Listed commercial organisations
- UK registered companies
- Banks and building societies
- Insurance companies
- Asset Managers
- Life Insurers
- FCA regulated pension schemes
- Occupational pension schemes
Governance: organisations are to disclose their high-level governance arrangements around climate-related risks and opportunities. How is the board overseeing these? How are the management team assessing and managing them?
Strategy: What are the current and potential impacts of these risks and opportunities on the organisation’s businesses, strategy, and financial planning?
What specifics has the organisation identified over the short, medium, and long term? How resilient is the organisation’s strategy when considered in multiple climate-related scenarios?
Risk Management: How is the organisation identifying, assessing, and managing climate-related risks? How are these processes integrated into the organisation’s overall risk management?
Metrics and Targets: What metrics and targets are/will be used to assess and manage climate-related risks and opportunities? What are the organisation’s Scope 1, Scope 2 and Scope 3 greenhouse gas emissions and their related risks? What targets has the organisation set to manage their performance against/for climate-related risks and opportunities?
The analysis doesn’t stop there.
Unlike other initiatives, as the TCFD’s disclosures are forward-looking, organisations can conduct scenario analyses to test the strength of their business model. These provide the opportunity for considering how the future of their organisation could look if certain trends continue (rising temperatures, for example) or if they meet certain targets. This analysis provides an extra level of detail, a far more rigorous assessment for their stakeholders to consider.
Responding to TCFD can understandably feel overwhelming, in particular to SME’s without huge finance and compliance departments to shoulder the load. Consultants can provide expensive and drawn-out guidance without interconnecting a set of disclosures with tangible business actions and outcomes.
This is because reporting disclosures and providing scenario analysis are only two sides of the TCFD trifecta. Translating risk mitigation and transformation opportunities into the financial implications for the organisation is the key to actionable insight (and stakeholder satisfaction!). Before making commercial decisions, investors, lenders and insurers (and clued-in consumers) will want to understand how these disclosures will impact the organisation’s ability to meet future reporting earnings and cash-flow targets realistically.
Our offering here at Spherics provides an agile, practical solution to help you to collect the data you need to make your disclosures for TCFD (and all the others!). It’s super quick, easy (and safe) for us to link up to your accounting software and fill in any gaps using accredited external data sources. (take a look at our methodology here) This output can then feed into your wider risk and financial management strategies – freeing up the resource for you to act on the insight gained throughout the TCFD process.
If you’d like to know more, drop us a message in the chat, or email us directly at the below address.