Can TCFD recommendations communicate a business response to the ‘climate emergency’?

TCFD uses scenario analysis to map company performance against various global warming trajectories

In recent weeks, the narrative on climate change has shifted. Driven by high-profile protests and schools strikes and the evergreen allure of a Sir David Attenborough documentary, climate change has evolved.

No longer a vague concept that had little impact on the UK, climate change is now the zeitgeist of the modern era. The UK government has been firmly in the crosshairs of climate protestors, which in turn, created a symbolically historic moment last week, as parliament declared a “climate emergency”.

The climate emergency is the realisation that current efforts to limit global warming are utterly insufficient. And while policymakers have been the subject of the ire from protestors, the business community is not immune.

Surveys suggest that the majority of consumers are seeking ways to lower their individual climate impacts, either through low-carbon actions or from products and services from businesses that have a good track record when it comes to climate change.

The necessity of businesses transitioning to a low-carbon business model directly impacts bottom lines and is clear for all to see. What isn’t so well-established is how businesses can showcase their transition – not just in a way that appeases consumers, but also generates widescale understanding of climate impacts from all stakeholders and all areas of the business.

Beyond a tick-box exercise

At edie’s ENGAGE event last Friday (3 May), a panel discussion focused on how businesses could better communicate their role in combatting sustainability through an array of reporting frameworks.

According to the World Business Council for Sustainable Development’s (WBCSD) managing director, redefining value & education, Rodney Irwin, businesses need to avoid using frameworks for “box-ticking” purposes, instead focusing on the importance of climate change and what failing to act would mean for the business.

“Of the major challenges the world faces, climate change is by far the single biggest issue we need to address,” Irwin tells delegates at the conference. “It’s impacting society and influencing natural capital to a huge expense and is having huge impacts on manufacturing downfalls. We know that it is having an impact on financial capital.

“It’s not just about carbon disclosure, it’s persuasive in all impacts of our life. Climate change is the cheekbones of which we all hang. We would advocate that businesses need to take the information that they use to manage the business, apply that judgement and then focus on your external disclosures. If you fail to do that, then everything is more noise, because we’ll be assuring stuff that is not needed. Control what you think is material and stop being a victim of box-ticking.”

The WBCSD’s Reporting Exchange programme states that there is now a total of 182 frameworks across 60 major nations that sustainability professionals can follow when creating a sustainability report. Of these, 81% are ‘mandatory’ in some form. It would be understandable if a business were to treat this complex navigation as a tick-box exercise. However, with the sustainability report acting as the main communication for a business’s sustainability strategy, the messaging, materiality and journey all have to be prominent throughout.

At the same time, more businesses are now integrating their sustainability data into annual financial reports, to better highlight the importance of sustainability to the entire business strategy. What this creates is a lack of space to articulate both data, stories and impact at a time when consumers and stakeholders are demanding them.

The TCFD transition

Joined by speakers from the International Integrated Reporting Council (IIRC) and Carbon Credentials, Irwin noted the interest that the TCFD had generated amongst those in the reporting sphere.

The recommendations of the TCFD focus on the development of a voluntary framework for companies to align climate-related risks with financial filings, to give investors greater transparency when backing businesses financially. As the framework requires sign-off from the board, it also makes the entire company aware of the risks and opportunities posed by climate change.

With more than 100 businesses, including Unilever, Barclays and HSBC, all committing to implement the TCFD’s recommendations to disclose climate information as part of mainstream financial statements, the way businesses report on sustainability progress is changing. 

Integrated reporting is the most common way to communicate sustainability impacts alongside financial data. The IIRC is a global coalition of regulators, investors, companies, accountants and NGOs, aiming to promote “value creation “as the next evolution of corporate reporting. The Council’s policy and communications manager Juliet Markham claims that the introduction of TCFD has actually created alignment across the various organisations that promote reporting frameworks.

However, Markham notes that the TCFD recommendations mainly focus on climate change and that some corporations could be missing out on stories and data that showcase strong environmental performances across resource use or social sustainability.

“The TCFD is great and the IIRC completely supports it, but it is just climate change and we need to be thinking about how we take all the value creation drivers into an integrated report,” Markham says. “Don’t put all your eggs I that basket and think about what your team is doing in other areas.

“The IIRC is the umbrella that brings all of that together. Focus on climate, of course, but don’t forget what else is important to your efforts of value creation. There are trade-offs you’ll find every day that need to be considered.”

The WBCSD’s Irwin argues that the TCFD recommendations will account for all areas of value creation, largely because climate change cuts through all areas of a business, from natural capital to operations and the built environment, both of which could be impacted by flooding, for example.

Identifying climate risks is futile. Climate change is happening now, businesses need to understand how exposed they are to the consequences, not evaluate whether it is a risk. @wbcsd @edieconference #engage19

— Julia Giannini (@JHGiannini) May 3, 2019

Teething issues

But while the reporting community is in agreement about the transformational potential of TCFD in communicating climate risks, there are still some teething issues regarding implementation.

The TCFD’s 2018 Status Report, which was presented to the Financial Stability Board (FSB), provides an overview of the disclosure practices of nearly 1,800 companies.

The Status Report found that the majority of companies are already disclosing certain climate-related information in a way that is aligned with the TCFD recommendations. The TCFD welcomes this trend, noting that companies have had a “very limited” timeframe to align internal practices since the Task Force’s first report in 2017.

However, the report claims that companies have the ability to adopt more of the TCFD’s recommendations. Notably, very few companies were found to disclose the financial impacts that climate change has on a business, while disclosure is still most prevalent in traditional CSR reports, rather than integrated into financial filings.

There is a belief amongst those working with the TCFD that the recommendations are making businesses take notice, as Irwin explains.

“We’re having different conversations with different people, like CFOs, and suddenly there’s a different narrative,” Irwin adds. “The fact these reports are being submitted to G20 finance ministers is making businesses sit up and take notice because this could become regulation and you’ll want to get in ahead of the curve.”

“The TCFD has hit a cord, but there are challenges. Your business needs to know what is going on and have the courage and the leadership to disclose that.”

Scenario analysis

If the recommendations were to become legislation, it’s likely that investors will accelerate their approach to portfolio and asset management, favouring businesses that have long-term sustainability plans in place.

However, the TCFD recommendations can also create a stronger narrative for businesses to communicate with consumers on how the company is expected to perform in the future, based on mitigation approaches to climate change.

One of the key recommendations of the Taskforce is that of “scenario analysis”. The concept of scenario analysis is that it encourages businesses to explore uncertainty to create a “well-established method for developing strategic plans that are more flexible or robust to a range of future states”. Through the analysis, businesses should evaluate a range of climate-related scenarios, including a 2C scenario to explore physical, strategic and financial risks and opportunities that could emerge. Scenarios should act as a hypothetical construct, rather than a forecast, but should be plausible, relevant, consistent and distinctive examinations of risks that challenge current consumptions on the future.

Investors have already been implored to explore scenario analysis. The Institutional Investors Group on Climate Change (IIGCC) has released a guide for businesses looking to adopt a scenario analysis approach to climate risk, in line with the recommendations of the TCFD. The guide aims to support investors in using scenario analysis to understand how different climate scenarios could affect future returns and identify new investment opportunities.

But for businesses, scenario analysis is viewed as an ideal “storytelling tool” that can be used to map and articulate how an organisation is responding to the climate emergency and what that means for the company’s performance.

Carbon Credentials, a consultancy with expertise in compliance to science-based targets and emissions data management, was at the ENGAGE event and the company’s associate director Joe Pigott notes the importance of scenario analysis in creating business action plans based on scientific data and climate change impacts.

Three key recommendations from Joe Piggott @CCESltd to get started with @FSB_TCFD #climatedisclosure:
1. Do a gap analysis
2. Report something
3. Embrace scenario analysis#engage19 @edieconference pic.twitter.com/sc7NmfAFwp

— Fiona Quinlan (@FLQuinlan) May 3, 2019

Pigott notes that scenario analysis starts with creating “greater rigour in the use of data sets and modelling”, which can then be used to create the “qualitative scenario narratives” desired by the TCFD. However, once the results have been produced, companies must then act on them, using the data to identify realistic management approaches that are embedded in the company.

A key benefit of scientific data – and, indeed, science-based targets – is that it showcases the business response to climate change. Solutions will be more ambitious and actually aligned to trends aimed at mitigating climate change. The whole approach is a welcome transformation from the traditional approach of setting carbon targets based on arbitrary numbers that ‘look nice’ and highlight a dedicated business approach to playing a part in combatting climate change.  

In a time where the Intergovernmental Panel on Climate Change’s (IPCC) landmark report outlining the severity of various levels of global warming is being referenced by politicians, financial institutions and 16-year-old climate activists, scenario analysis and the broader TCFD recommendations can ensure that businesses are ready for the oncoming climate disruption. It also means that questions and scrutiny from a range of stakeholders, be it investors, consumers or staff, can be answered with a detailed response outlining how a company is ready to respond to the climate emergency.

Matt Mace