Five top tips for adopting TCFD-aligned climate risk reporting for your organisation
edie recently hosted a 45-minute online masterclass on reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), featuring experts from Inspired Energy and British American Tobacco. Here, we round five of the key takeaways.
An ever-increasing number of businesses are reporting in line with the TCFD’s recommendations, designed to help them assess and reduce climate risk at all parts of the value chain while helping investors and other key stakeholders make informed decisions. As of October 2020, 1,500 organisations had pledged their support to the framework – up 85% year-on-year.
But full alignment with the recommendations remains rare. The TCFD has tracked just a 6% improvement in reporting quality since 2017. This is concerning given that reporting in line with the framework will soon become mandatory.
With this in mind, edie’s recent Masterclass webinar provided professionals with the insights and inspiration they need to get to grips with TCFD-aligned reporting. Hosted in association with Inspired Energy, the free session took place on Wednesday 23 June 2021, and is now available to watch on-demand. There was a wealth of information for all organisations working to align with the TCFD framework, regardless of where they currently are on that journey.
Here, edie pulls out five of the top tips given by the speakers during the session.
1) Understand whether your organisation needs to disclose, and when
As Inspired Energy’s chief executive Mark Dickinson explained during the session, TCFD-aligned disclosure is soon to be mandated in the UK and in other G7 nations. While some leading organisations have already started disclosing voluntarily, he explained, many are now looking for practical advice purely for compliance.
He outlined how the mandate in the UK, which will come into effect in either April 2022 or 2023 subject to consultation, will apply to all premium listed companies; all AIM-listed companies with 500 or more employees; and all private companies and LLPs with more than £500m in turnover and/or more than 500 employees.
From 2025, the mandate in the UK will be expanded.
2) Start with what you are already disclosing
British American Tobacco’s (BAT) global environmental risk and performance manager Garry Bridgwater began his presentation with an outline of the key disclosures organisations must make to claim they are TCFD-aligned. The framework covers governance, strategy, risk management and the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
By looking at what is already included in annual filings, organisations can identify where measurement and reporting “needs to be tightened up”, Bridgwater said. For BAT, this was, initially, on the strategy side. It has since set out commitments to achieve climate-neutral operations by 2030 and a climate-neutral business value chain by 2050.
“It became very apparent, right at the beginning, that we needed to do a lot of research to understand what exactly we needed to undertake; how we were going to undertake it; and, most importantly, who was going to be actively involved in order for us to achieve our objectives,” Bridgwater said.
Inspired Energy’s Dickinson urged listeners to take data from existing Streamlined Energy and Carbon Reporting (SECR) for Scope 1 (direct) and Scope 2 (power-related) emissions and from the Greenhouse Gas Protocol for Scope 3 emissions. This can streamline the TCFD process.
3) Don’t be afraid to seek help externally
The TCFD itself has only been running for six years and has predominantly been voluntary rather than mandatory, so most organisations will not have a professional in-house who specialises in reporting. Both of our Masterclass speakers emphasised the importance of finding a good external partner and/or robust training provider if this is the case.
Bridgwater said: “I must admit that, when we first started, we had no idea what TCFD was for and how it was going to interact with us.”
He explained that engaging with an external consultancy had helped the business break down the TCFD alignment process and plan for each phase. BAT used three phases in-house – gap analysis, materiality assessment and scenario analysis. Scenario analysis assesses material risks and opportunities to an organisation at various warming trajectories. BAT then completed an extra level of modelling for supply chain risks. All together, these phases took the best part of two years.
Inspired Energy’s Dickinson added: “I understand that when you’re an organisation the size of BAT, there’s a lot of resources in-house and good access to finance to be able to deliver these things. At the smaller end, though, we’re seeing a general fear of TCFD as something that is, perhaps, complicated, expensive and hard to start.”
Dickinson cited a UK Government estimate that the average large business could spend £88,000 annually on TCFD disclosure processes but said he believes the process can be made more cost-effective for most.
4) Understand that TCFD goes beyond physical risk
When assessing the outcomes of its TCFD reporting, Bridgwater said, BAT split the top-line findings into physical risks, transitional risks and opportunities.
Issues such as water stress and extreme weather events are classed as physical risks. Transition risk covers increased operating costs resulting from increasing energy prices, contraction of insurance markets and new policies, such as carbon pricing and mandates on sustainable products and services.
On the flipside, BAT also identified potential new streams of capital as investors increasingly look to support businesses with a strong track record on climate change and as customers seek alternative products. Operating costs could also fall as energy efficiency improved and more low-carbon energy is procured.
Other benefits, identified by Inspired Energy, include improved data management and measurement and improves supply chain management. Indeed, a recent CDP report found that, globally, poor environmental disclosures could leave businesses unprepared for $120bn in additional costs over the next five years.
Dickinson implored viewers to assess the broad array of benefits beyond good PR. He said: “A lot of people advising on TCFD at the moment may be working for communications companies. They’re effectively looking at it from the perspective of turning [reporting] into a message. In actual fact, what we should do is disclose where we are and – what’s really important – how that changes over time.”
5) When conducting scenario analysis, choose the scenarios carefully
The TCFD’s 2020 status report revealed that scenario analysis has proven one of the most challenging facets of the framework for organisations to adopt. This is perhaps because they are unsure of which scenarios to use.
BAT, Bridgwater explained, uses a ‘climate change inaction’ scenario based on policies already in place. As per the UN’s most recent Emissions Gap report, this will likely result in warming of 3.4C. BAT also uses the Paris Agreement’s ‘well below 2C’ pathway.
The TCFD requires you to use at least two scenarios, one of which should have a temperature pathway of 2C or lower. Bridgwater said the two scenarios BAT uses is also used by peers and key investors and that there are already good climate data sets for them. In both scenarios, the firm mapped risks in the short, mid and long-term in terms of likelihood and severity.
Find out more in the edie Explains: TCFD guide
The 45-minute Masterclass forms part of an ongoing Masters series from edie and Inspired Energy on the topic of the TCFD.
The second component of this series, a free, downloadable guide answering frequently asked questions relating to TCFD-aligned disclosures, is now available here. This 10-page edie Explains guide features an expert viewpoint from Inspired Energy’s director of client management (ESG) Rosemary De Vos on the need for clear and consistent climate disclosure.