It has been over three years since the Financial Stability Boards’ Taskforce on Climate-related Financial Disclosures (TCFD) released its recommendations and we continue to see growth in the number of organisations committing to TCFD aligned disclosures. The overall goals of TCFD are to:
- support companies to assess and manage climate risk in a structured way and build busines resilience over time; and
- encourage the disclosure of decision-ready information to enable market players to price climate risk appropriately.
While it is still early days, the TCFD has been successful in establishing a globally accepted framework applicable to both corporate and finance sectors. It is also becoming a reference point for governments and regulators with progressive climate agendas who are moving to embed recommendations into policy and guidance and mandate TCFD disclosures through legislation (for example in New Zealand and the UK). The Australian Sustainable Finance Initiative (ASFI)’s Australian Sustainable Finance Roadmap (released this month) will likely support further uptake, with a recommendation that by 2025 large financial institutions and ASX300 companies report according to TCFD on an ‘if not, why not’ basis.
The continued growth and value in TCFD commitments is in part due to the formal bridge it establishes between risk assessment, strategy stress-testing and financial disclosures, which can evolve in the following ways:
- Standalone climate risk assessments – Organisations often start their climate risk journey with a stand-alone climate risk assessment to identify and assess climate related risks and opportunities and identify forward-looking risk management actions where warranted. This process looks at climate change both as compounding existing business risks and a source of new risks and opportunities.
- Integration of climate risk into business-wide risk processes – This can require additional effort to review and adjust risk processes to adequately deal with the systemic and interconnected nature of climate change, the uncertainties both in terms of timing and extent of impact, and the need to consider timeframes beyond typical business planning horizons. Integration can strengthen governance with the raising of relevant risks to board-level risk committee discussions.
- Implications for strategy – Climate risk has implications for an organisation’s ability to achieve its strategic objectives, hence it is imperative that risk and strategy become linked. To achieve this, the TCFD recommends the use of scenario analysis to stress test strategy across a range of plausible climate futures, with the ultimate objective of identifying opportunities to adjust strategy to make it more resilient to whatever may come, be it an orderly low carbon transition or business-disrupting changes in weather patterns.
Irrespective of where you are on the TCFD journey, Point Advisory can help support the internal thinking necessary to meet TCFD recommendations.
This article was written by Sue Lacey, Principal – Climate Change and Energy.