TCFD Disclosures
TCFD Disclosures
Why TCFD? What does it contain? How can it help create a greener and equal future?
First of all, we pay tributes to the Queen, on her death, and congratulate King Charles III on his accension to the throne.
This issue of the Helix newsletter has a significant contribution from Saranya Asokan. You can connect with her on LinkedIn here.
The Task Force on Climate-related Financial Disclosures (TCFD) is a group of international financial regulators and central bankers who are working together to develop recommendations for how companies should disclose climate-related risks.
What sets the TCFD apart from other frameworks is how focused it is on E part of ESG and allows companies to report both risks and opportunities across the entire operations, right from management oversight to specific actions taken at a product or process level to improve efficiencies. Similar to comparing corporations based on financial metrics, TCFD has made recommendations on climate-related metrics and targets which require scenario and trend analysis over short, medium and long term, making them forward-looking in nature. Metrics like capital deployment, and internal carbon prices, capture the financial impacts of moving to a low carbon economy while GHG emissions, physical and transition risk related metrics capture the preparedness or vulnerability of the company. These metrics can provide insights to stakeholders, rating agencies and analysts to understand an organization’s transition pathway and potential changes to revenue and profitability.
TCFD started as voluntary disclosures recommendations but has gained traction since and now forms the basis for mandatory disclosure guidelines adopted by national regulators across the globe including UK, Canada, Singapore, Japan and New Zealand. The UK is the first G20 country to make it mandatory for publicly quoted companies, large private companies and LLPs to disclose climate-related risks, which are in line with TCFD, enforceable from 6th April 2022. This would cover over 1,300 companies and financial institutions and includes many of the UK's largest traded companies, banks, insurers and private companies with a minimum of 500 employees and £500 million in turnover.
A key challenge when it comes to climate related disclosures is the diversity of standards, with convergence on a common set of principles, far from being a reality. However, a major step in the right direction towards this is the coming together of 5 major framework and standard setting institutions-Carbon Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) to form a comprehensive reporting system as published in the Statement of intent to work together towards comprehensive corporate reporting in September 2020. The goal is to create a comparable, globally agreed set of sustainable topics and related comprehensive reporting systems which can complement the existing financial disclosures. In December 2020, the group published a prototype climate-related financial disclosure standard to provide a starting point for integrating financial accounting with sustainability disclosures which connects sustainability matters with the creation or erosion of enterprise value. E.g., a company will have to report its carbon emissions and also the impact of remediation actions on the statement of profit and loss. Some other challenges as highlighted in theTCFD’s summary of responses on metrics and targets relate to lack of availability of data, accepted methodologies and tools and lack of internal expertise.
But what if there are no mandatory disclosure requirements? How can corporations still be encouraged to publish disclosures? Expect the regulators to continue looking at other disclosure opportunities and advocate for continued public availability of corporate disclosures. With institutional investors, asset owners, financial institutions, rating agencies and market regulators all pushing for disclosures, it is going to be inevitable in the future for companies, especially when it comes to raising capital with both banks and capital market participants. Another way would be to create perhaps a sense of competition between corporations which nudges them to commit to net zero goals and establish leadership within their domains. One such campaign is the Race to Zero, a UN backed global campaign that brings together leadership across business, cities, regions and now covers 5k+ businesses spanning 120 countries and represents 25% of global CO2 emissions and 50% of GDP. The application to join the Race to Zero circle is reviewed by the Expert Peer Review Group (EPRG) to ensure that the minimum criteria is met before joining. The applicants are assessed based on their pledge for net zero targets in alignment with Paris climate agreement, the plan of action within 12 months of joining the campaign, immediate actions to be taken and publish the progress against interim and long term targets at least annually.
How to Prepare for Climate Change in Your Business?
Climate change is a global problem that needs to be tackled by all countries. The impact of climate change on public listed enterprises is significant. It can affect the company’s operations, financial performance and even its long-term viability. Public listed enterprises need to prepare for climate change in order to mitigate the risks and stay competitive in the future. They need to make sure that they are not wasting time on skill sets that they don't have and instead focus on what they are best at - creativity and emotions.
Organizations can combat the effects of climate change on their operations through the following:
Developing resilient organizational cultures that are able to adapt to a changing environment.
Building resilience and increasing adaptation capabilities through climate change adaptation strategies.
Engaging in collaborative efforts with stakeholders.
Utilizing technology, however this is currently limited due to higher costs of developing new technology.
Implementing change through bottom up functions.
How to find money to fund low carbon tech/ carbon capture?
The carbon removal obligation is one of the policy tools that governments are considering. It will require companies to pay for the carbon they emit. The money raised from this will be used to fund low carbon tech and carbon capture projects. This policy is a good way to find money for low carbon tech and carbon capture projects because it will provide funding for these projects without any additional cost on the taxpayer. The idea behind this tax is that it will make fossil fuels more expensive, which will incentivize people to use less of them. This in turn will reduce the amount of CO2 emissions in the atmosphere, which would help combat climate change. In order to reduce their obligations, companies would invest in low carbon tech as well as fund innovations in carbon capture as a mechanism to improve their future profitability. This is a subtle but powerful method to nudge high carbon industries to allocate capital towards R&D in these areas .The carbon tax is not an international solution. It could be used in one country and not others, which would make it very hard to implement at a global level. A carbon tax is also no substitute for a cap-and-trade system that uses tradable permits to reduce emissions. The United States has been experimenting with higher minimum wage rates as a policy to reduce inequality. If these two policies are implemented, the potential for an increase in the price of carbon might be reduced.
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