The push for an international agreement on reporting climate change risk according to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations is gaining momentum, with the United Nations, International Financial Reporting Standards Foundation, and G20 calling for adoption of the framework.
TCFD compliance is a significant undertaking for many companies, but the process presents the opportunity to improve climate change risk pricing and risk management generally, gain wider access to capital, and better meet investors’ demands.
Organizations that do not take action regarding the TCFD recommendations risk having their exposure to climate change estimated by another party, likely to their detriment, while those adopting a proactive approach will undoubtedly reap benefits.
The TCFD was established in 2015 to promote more targeted and standardized climate-related reporting for use by companies, banks, and investors in providing information to stakeholders. The intention is that increased awareness of the financial implications of climate change will lead to more sustainable business models and solutions.
As Michael Bloomberg, who chairs the TCFD, said:
“The risk climate change poses to businesses and financial markets is real and already present. It is more important than ever that businesses lead in understanding and responding to these risks — and seizing the opportunities — to build a stronger, more resilient, and sustainable global economy.”
The TCFD advocates making 11 recommended disclosures around four core elements of climate-related risks:
One of the task force’s key disclosure centers on the resilience of an organization’s strategy, when different climate-related scenarios are taken into account. This includes a 2°C or lower scenario, where energy use and emissions are consistent with limiting the global average temperature increase to 2°C above the pre-industrial average.
Countries and regulators globally support the idea of making the TCFD recommendations compulsory. So far, 12 countries have endorsed the TCFD framework and eight are in the process of making it mandatory (see figure A). Additionally, the International Financial Reporting Standards Foundation is establishing the International Sustainability Standards Board (ISSB) which will be aligned with the TCFD. This board could significantly widen implementation of the recommendations.
The framework known as the Taskforce on Climate-related Financial Disclosure, or TCFD, is shifting from a voluntary approach to being the main regulatory response to climate risk.
As of August 18, 2021. Map includes select countries that are moving to make climate reporting under the TCFD framework mandatory rather than voluntary.
Sources: Allen & Overy; S&P Global Sustainable1; TCFD.
Organizations across all sectors will ultimately be affected. However, the largest organizations and those with the most material climate risk are being targeted first. A company is likely to be impacted via two main channels:
The TCFD recommendations may become mandatory for certain companies. The TCFD has so far highlighted the following sectors as key: agriculture, food and forest products; energy; materials and buildings; transportation; and financial. Countries are adopting rollout strategies targeting these sectors first.
Action on the TCFD recommendations may follow after a company has voluntarily backed the initiative. Nearly 60% of the world’s 100 largest public companies support the TCFD, among more than 2,700 supporters worldwide.
Companies have declared support for a number of reasons, including pressure from investors, lenders, underwriters, and supply chain partners and also to increase their understanding of climate risks and opportunities within their business.
The Financial Stability Board (FSB) reported that global economic losses resulting from weather-related catastrophes rose from US$214 billion in the 1980s (in 2019 prices) to $1.62 trillion in the 2010s, approximately trebling as a share of global GDP.
Public and private financial markets are already taking climate risks into account and pricing them accordingly, and alignment with the TCFD recommendations will enable them to do this further. Benefits to be gained from the process, especially if an organization goes beyond simply compliance, include:
Establish a risk management framework, as well as corporate risk and sustainability risk policies and procedures. Benchmark corporate practices against environmental, social, and governance (ESG)- related guidance.
Map both physical risks resulting from climate change and the risks associated from transitioning to a reduced carbon economy. Benchmark likely outcomes with those of competitors.
Quantify the financial impact of climate-related risks by sector and by geography, and analyze supply chain risk. Create resiliency through emergency response planning for physical risks and consider risk transfer options.
Establish relevant metrics for risk evaluation. These metrics could include revenues, expenditures, impact of climate change risk on assets, and capital financing. Undertake carbon footprint modeling.
Marsh’s key services include physical and transition risk modeling, embedding of climate risk in enterprise risk management (ERM) frameworks and assistance in articulating climate risk analysis, ambition and resilience strategies for reporting requirements, including TCFD.
If you have questions on the TCFD recommendations, please contact your Marsh advisor.