Who’s afraid of the TCFD?

9 December 2019 - By Alex Voskou

Despite gathering support, the TCFD recommendations still seem to strike fear into many organizations, who view them as complex and hard to adopt. But in framing previously non-financial issues in financial terms, the TCFD is becoming more and more prominent in non-financial reporting

Investors are increasingly aligning towards companies that understand their climate risks, meaning it’s more important than ever for organizations to get a firm grip on the framework. Three quarters of investors surveyed for the TCFD Status Report 2019 indicated that they are now using the TCFD disclosures when investing.

Mission: Impossible? The reality behind the TCFD

On Thursday 28 November, we hosted our live webinar, Mission: Impossible? The reality behind the TCFD, to discuss the challenges of the TCFD recommendations and how adopting them is a lot easier than many companies think.

With our expert speakers Francisco José Alvaro Tomas (Director, Reputational, Environmental and Social Risk – Responsible Business, BBVA), Martina Macpherson (Senior Vice President, Strategic Partnerships and Engagement, Moody's Investors Service), Charles Gooderham (Partner, ERM) and our moderator Ian van der Vlugt (Director of Product, Datamaran), we asked some searching questions about TCFD adoption. Are the TCFD recommendations really that hard? Why are some companies hesitant to adopt? What has worked for companies that have already started on this journey of reporting their climate risks and opportunities?

The journey

“We are all on a road,” began Francisco José Alvaro Tomas. “We now say in the bank that all roads lead to Paris [referring: to the Paris Agreement goal]. The TCFD recommendations are a very important element of this.” So important, in fact, that BBVA has decided to publish a specific report to go with the TCFD recommendations. In future, its strategy is to integrate the TCFD report with the rest of its public reporting. “We want to make the TCFD recommendations business as usual,” continued Francisco José.

The biggest hurdle they’ve faced in adopting the TCFD recommendations? “Data, data, data and scenarios.” For whichever pillar of the TCFD, whether it’s metrics or risk management, the most challenging thing is the data.

TCFD recommendations and framework

The TCFD Framework (source: TCFD Recommendations Report)

The lack of standardization makes scenarios difficult to build,” he added. Martina Macpherson concurred: “There is confusion around alignment, momentum, discrepancies of information. But there’s clearly a momentum of sustainable finance and ESG taking off across the investor value chain.”

A change of emphasis

So the appetite is there – but the emphasis has changed to an “increasing focus on the type of disclosure,” said Martina. Companies were originally focused on building alignment around the framework. Now they’re aiming to see a broader alignment on the type of disclosures and metrics being utilized. It’s no longer about aligning yourself with a particular framework in order to be seen doing the right thing. It’s about actually doing the right thing, as much from a business perspective as from a sustainability perspective.

Market momentum in ESG is risking

Investor & Policy perspective on climate-related disclosure (source: Moody's Investors Service)

There’s been a change in how information is collected, monitored and reported, as well as an alignment in frameworks. At the same time, we’re seeing a move from voluntary to mandatory regulations. It seems only a matter of time until. ESG reporting becomes mandatory.

Embedding the TCFD

“People start off with the attitude ‘this is just another ESG reporting initiative,’” began Charles Gooderham. “Moving quickly beyond that is important.” 

So where’s the best place to start? ERM is just starting to think about scenario analysis sector by sector, analyzing the climate-related drivers that will be material to each. “Most companies making TCFD disclosures report on climate change. What’s missing is the financial implication,” said Martina. Linking impact to revenue helps to frame non-financial issues in a way that makes sense to the business. In Francisco José’s words, “Transforming carbon into euros or US dollars.”

Charles discussed a six-step plan for embedding the TCFD recommendations, for which understanding your key stakeholders in the business and ensuring you have a materiality process are absolutely essential:
Planning for Effective Implementation diagram

"Planning the effective implementation of the TCFD recommendations: six steps (source: ERM) 

What’s clear is that ESG is becoming business as usual. Investment managers are increasingly engaged in the topics.

Mission: difficult, but not impossible

When it comes to changing established internal processes, “Maybe it’s not Mission: Impossible, but it’s indeed a difficult task,” said Francisco José. Implementation planning isn’t easy, nor is bringing together disparate functions such as sustainability, risk and finance to talk about common problems and opportunities together. TCFD adoption has to be a one-team exercise.

But responsible businesses not only understand their duty to the world around them, but also feel the pressure of external stakeholders. Rather than being crippled by this pressure, it’s important to pass it on to internal stakeholders. You need to convince your colleagues internally that the effort is worth it. As the old saying goes, nothing worth having comes easy. But as more and more companies are showing, adopting the TCFD recommendations is more than possible.


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