In one of the most emblematic speeches (“Breaking the tragedy of the horizon – climate change and financial stability”) in the corporate world, Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board stated that climate change threatens financial resilience and long-term prosperity, but that once the financial community acknowledges climate change as a defining issue, it will probably be too late. Since that speech in 2015, Carney has been leading efforts to create solutions. Together with Michael Bloomberg, former Mayor of New York, he announced the creation of the Financial Stability Board Task Force on Climate-related Financial Disclosure (TCFD).The final recommendations report and supplemental materials were published on 29th June 2017.
What is the TCFD?
TCFD is a voluntary, market-driven initiative which outlines a set of key recommendations that aim to enhance companies’ climate-related disclosure information in their already existing financial and non-financial filings. These recommendations will enable companies to assess key risks and opportunities arising from climate change. At the same time, more transparent, reliable and comparable information will enable investors and other stakeholders to make better-informed decisions when interacting with companies.
TCFD has taken climate disclosure one step further than existing frameworks, but what differentiates it from its predecessors?
1) Emphasis on financial disclosure
TCFD recommendations emphasize the financial implications of company actions. Examples include the financial impact that a long-term climate change mitigation strategy has on the company’s expenditures and the impact on company assets from climate-related risks. The focus on financially-relevant information allows for greater comparability which helps investors and other stakeholders to understand risks and opportunities across industries and portfolios.
2) Scenario Analysis
The scenario analysis methodology, outlined in TCFD’s report, is TCFD’s main differentiator. Companies are expected to devise scenarios according to the risks and opportunities that they have identified, based on an accurate and scientific approach. The scenarios act as projected “eventualities” enabling the company to identify expected impacts on key financial figures (revenue, equity, assets, etc.) linked to potential climate risks or future opportunities. Scenario analysis is not a forecasting tool. It cannot predict the company’s business future, nor can it determine the future value of assets and revenues. The principle behind it is to assess the most high risk business eventualities that a company might encounter under different climate change scenarios. Effective scenario analysis can provide a balance of quantitative and qualitative data, enabling both companies and investors to gain valuable insights about the future of the business.
3) Company-led initiative
Unlike other disclosure frameworks, TCFD is company-led. The members of the Task Force represent global and publicly-listed companies including banking institutions, insurance firms and consumer product companies. It is hoped this structure will enable more companies to experience the practical benefits of adapting their business to climate change, as better disclosure of decision-useful to investors will have capital market consequences. Companies with better disclosure on TCFD recommendations will meet investor needs more closely, leading to increased investor confidence and improved access to capital.
So, is TCFD just another tick-box exercise on a long to-do list for companies or is there something more here?
TCFD is far more than a disclosure framework. In comparison to other climate disclosure frameworks it stands out as being the most advanced company-led initiative. Its overarching goal is to incentivise companies to consider climate change as a serious business issue and showcase more transparent climate-related financial disclosures. TCFD provides best practices to help companies understand climate-related risks and impacts. In addition, it aims to safeguard investment portfolios from climate risks and as a result increase investor confidence and enable better-informed investment decisions based on decision-useful information. TCFD is not just another task on companies’ to-do list. It is a framework to help companies enhance their sustainability strategy, seek out new opportunities for value-creation and allow markets to become more efficient and economies more stable.