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The TCFD: A new perspective of materiality and risk management

20th June 2018 - By Elina Yumasheva

Established in 2015 by the Governor of the Bank of England Mark Carney in response to G20 request to better understand the financial implications of climate change, The TCFD (Task Force on Climate-Related Financial Disclosure) now has over 200 signatories.

In less than three years, the TCFD recommendations have certainly gained traction among the biggest industry players as the TCFD signatories now account for $44 billion in average market capitalisation per company according to Datamaran’s earlier analysis.

While the Task Force has a clear purpose to bridge the gap between the corporate and finance communities by inviting companies to disclose how climate related issues can impact their business, the implementation aspects are open to interpretation.

What do the new TCFD recommendations mean for business? How long will it take before they become a new standard? Where does it fit compared to other non-financial disclosure standards, such as the Sustainability Accounting Standards Board (SASB) or the Global Reporting Initiative (GRI), as well as industry initiatives, such as Climate Action 100+ or United Nations Environment Programme - Finance Initiative (UNEPFI)? What is their real impact on business? What are the challenges associated with identifying, assessing and reporting on climate-related risk?

To answer these and other related questions, Datamaran ran a live webinar discussion with ABN AMRO, NRG Energy, ING, Zurich Insurance and Bloomberg sustainability leads.  

A new perspective of materiality and risk management

Many companies see the TCFD as a way to analyse and improve business resilience and not a pure sustainability exercise.

Linda Freiner, who is Global Head of Sustainability at Zurich Insurance said that the TCFD and associated analysis of climate-related risks and opportunities is something the company’s board risk committee is overseeing. “The way that the Task Force is structured flows from governance to strategy to the risk and opportunities. And it makes the framework very different from any other types of sustainability reporting as it looks both at the risks and the opportunities” – she explained.

Echoing Linda’s perspective, Leon Wijnands, Global Head of Sustainability at ING has taken the TCFD recommendations to the next level. He shared an example of how the bank has already started integrating climate risks into their lending products. ING launched a product, in which credit rating is positively linked to their CO2 performance. Leon also explained that they see the Task Force recommendations “as an opportunity to make it a discussion topic in the boardroom of our clients”.

ABN AMRO’s Head of Advisory, Reporting and Engagement Tjeerd Krumpelman said that they see the TCFD as a logical next step from a materiality analysis to an integrated thinking. 

Internal dialogue and stakeholder engagement

Bruno Sarda, Vice President of Sustainability at the US based energy company – NRG Energy – suggested that they also use the recommendations to engage their key stakeholders (supplier base, investors, customers): “We are trying to engage [our stakeholders] in a dialogue to understand what may or may not be helpful in terms of our climate-related disclosure.”

Speaking of their investors: “Being very transparent about where we are and how we are decarbonising our portfolio play into our investor sentiment and confidence” – Bruno explained.

​The role of the new forms of technology

The conclusion is however that there's no a “one size fits all” way of disclosing climate-related risks and opportunities,. Bruno suggested that having a tool such as Datamaran that is fluid enough to help NRG Energy generate the views into data as well as gathering information specific to particular stakeholders is a way forward.

Linda also emphasised the role of technology in managing non-financial risks. Zurich Insurance moved from a traditional three-year basis materiality analysis to an on-going risk monitoring powered by Datamaran, as she is convinced that the insurance sector has to be at the forefront of analysing and managing climate-related risks. “For us availability of data is something that is really changing the game and to be able to analyse non-financial risks on an ongoing basis is critical for our business and our customers” – she summarised.

The future outlook

According to the The World Economic Forum’s (WEF) Global Risks Report 2018 four of the top five risks are societal or environmental and include extreme weather events, water crises, natural disasters and failure of climate change mitigation and adaptation. Material issues have significant implications for a company’s risks and opportunities, making them critical elements for decision making and strategy setting.

Since 2010, there has been an increase of more than 20-fold the number of recorded non-financial regulations. There are now more than 4,000 non-financial regulatory initiatives – current and draft – that need to be considered. The TCFD recommendations are just one of the many businesses need to get to grips with. And this trend looks set to continue.

Do you need to get a handle on the material issues in your business?

Would you like a faster, cost-efficient and more objective way to monitor and assess material risks? Take a look at the seven tips to the perfect materiality analysis.

Whether you have done your assessment before or only thinking of starting your first one, you will certainly find these seven easy steps useful.