Climate reporting rules: get them before they get you
20 November 2019 - By Ian van der Vlugt
In his speech at the TCFD Summit in Tokyo on 8th October, the Governor of the Bank of England, Mark Carney, warned that if companies do not agree on rules for reporting climate risks within two years, regulators will draw their own and make them compulsory.
While some of the TCFD recommendations have been readily adopted by companies, others seem to have been left on the wayside in corporate disclosures; among them, linking back to financial implications of risks, conducting scenario analysis to build resilience into strategies, and identifying opportunities that can effect transformative changes to business models. These are also the more challenging aspects of the TCFD, as they get to the reality that business-as-usual is itself a risk with far reaching ramifications. And that is a hard pill to swallow.
That said, there are many reasons for companies to start on this journey, least of all to avoid the red tape that’s been threatened.
Here are five reasons why it’s in organizations’ interests to get a head start and embed solid and consistent ESG reporting practices.
Investors are increasingly demanding this information
Carney said there was an appetite among investors to support companies that understand their climate risks, following research that showed they were likely to expand at a faster rate. Three quarters of investors surveyed in the 2019 TCFD Status Report are now using TCFD disclosures when investing.
Research by the Bank of England and PwC finds a positive correlation between companies’ stock price and the number of TCFD disclosures they make. “This could be because investors reward companies that are leaders in managing climate-related risks or simply because TCFD adoption identifies companies that are more naturally disposed to longer-term strategic thinking and planning,” said Carney.
As the realities of climate change continue to unfold, both through transition and physical risks being manifested, we can expect more and more investors to integrate climate and other ESG issues into their investment models. The capital markets will then effectively be selecting winners and losers – and nobody wants to be on the losing team!
Finally, a framing of sustainability my CFO can understand!
Just as nobody likes losing, nobody enjoys working in a vacuum either. And let’s face it – many sustainability teams are left to their own devices with limited budgets and no input to strategy.The TCFD presents an opportunity to break down internal silos and connect the dots between sustainability, risk and finance. And it provides everyone with a common vocabulary to draw from in terms they can understand. Ensuring all business departments involved are united in purpose, this strengthening of internal business processes is paramount to effecting change – and change is what’s needed.
Transparency breeds action
We cannot know what a company’s doing unless they tell us. Or we consult our local soothsayer. Transparency allows for an understanding of business processes, and companies cannot shy away from demonstrating where they are on the journey, even if it's not yet where they want to be. Brushing an issue under the carpet does nothing to resolve it, and being honest about struggles often opens the door to new solutions.Openness is just as beneficial to the company internally as it is to its external stakeholders; it allows the organization to recognize areas where it needs to improve, and it demonstrates their willingness to do so. Our reputation report shows that there is often a correlation between lack of corporate transparency and poor issues governance.
The means to an end
While the largest banks and energy companies have made progress in reporting on climate risk, progress is uneven across sectors.
The TCFD Good Practice Handbook recently published by CDSB and SASB says that “While companies acknowledged exposure to risks related to climate, as well as strategies to mitigate such risks, disclosures often did not directly explain the process by which companies assessed and determined the materiality of such risks to their business. In some cases, the metrics and targets reported did not relate directly to the risks or opportunities identified by the company in its strategy and risk management disclosures, leading to uncertainty about what risks the company viewed as material.” As a result, organizations can find themselves accused of greenwashing.
This is where platforms like Datamaran can help. Datamaran gives companies the tools to identify and monitor their material issues in a way that is comprehensive, consistent and data-driven.
Technological risks, opportunities… and disruption
Even if the TCFD has brought a forward-looking approach to climate reporting, and there is a marked increase in climate-related reporting, most companies are still far from implementing strategic climate-related programs.
New technologies and continuous innovation will play a critical role in facilitating the low-carbon transition. Some of the most successful system shocks in the past few years have resulted from disruptive technologies being brought quickly to scale, such as the move to ride sharing with apps like Uber and Lyft. But displacing old systems and rapidly deploying new technologies can have a huge impact on our socioeconomics. And companies need to be poised to quickly react to, adapt to or adopt technological advancements. Or choose to be on the side of innovation and realign their business models to advancing new climate-oriented products and solutions themselves.
With the number of mandatory climate regulations almost doubling over the last five years compared with the five before, we’re heading inexorably towards mandatory reporting. With two years in which to get their houses in order before regulators start to enforce their own rules, companies now need to start taking charge of their reporting practices and instigating the required systems and processes while they still have control. Get them before they get you.
TCFD: An update on corporate disclosure following the second status report
In June 2019, the TCFD released its second status report, indicating increased adoption of its recommendations.
To coincide with its release, we are updating our previous analysis into the extent to which this adoption has been reflected in supporters’ corporate disclosure.
The analysis shows that, whether they’re supporters or non-supporters of the TCFD, companies are now talking about climate change more than ever before. More in detail, climate change is predominantly discussed through a risk rather than an opportunity lense – with 54% of FinServ TCFD supporters referring to the topic in relation to risk and 20% in relation to opportunity in 2018.
To read the full report, please fill in the form on the right.