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Climate change risks and opportunities

Disclosure coming of age

Having worked in the climate change, energy and reporting space for many, many years we have seen the evolution from ad-hoc and inconsistent focus and reporting to a more nuanced appreciation of the complexity and impact of climate change issues.

Some organisations are further ahead than others and the leaders are integrating their climate change response through the alignment of their sustainability strategy with their business strategy and looking at current decisions based on the future. However not everyone is on the same page.

The increased appreciation of the complexity of climate change issues, coupled with the lack of consistent reporting and global transparency led the Financial Stability Board to establish the Taskforce on Climate-related Financial Disclosures (TCFD)[1] in November 2015 to look at the risks, opportunities and financial impacts of climate change and establish a disclosure framework to assist organisations better understand the issues and report them to their stakeholders, particularly investors.

The Final TCFD Recommendation Report [2] released on 29 June 2017 is recognition of the multi-faceted and pervasive impact of climate change on all organisations. It reflects the fact that climate change presents risks and opportunities for companies and that these can (and most likely will) have financial impacts.

The TCFD Report defines climate-related risks as Physical Risks and Transition Risks. Physical Risks include both short-term and longer impacts such as increased incidence of adverse weather as well as impacts from sustained increases in temperatures; and Transition Risks relate to the policy & legal framework, technology impacts; market and reputation issues. For example, transition risks may manifest themselves through stranded assets or impact the ability to go-ahead with planned projects, thereby jeopardising growth plans. The risks can be significant for organisations and will impact different sectors and organisations differently depending on the location of your assets and business strategy.

While much of the external commentary and focus has been on dealing with the risks of climate change, the TCFD importantly highlights the opportunities that can present themselves from responding to climate change. This can include development of new products or services; adopting new technologies or business practices to save energy (and costs) as well as opportunities in new markets or in ways to improve resilience.

It is therefore vitally important that organisations view climate change through a risk and opportunity lens in order assess the true financial and non-financial impacts.

Assessing the impact of climate change risks and opportunities is becoming non-negotiable as investors and other stakeholders expect Boards and Executives to actively assess and respond. Back in February 2017, Geoff Summerhayes of APRA stated that climate risks need to be considered as part of prudential risk management in the financial sector[3] and calls like this from regulators are expected to continue. And in May 2017, a shareholder resolution at Exxon Mobil calling on management to produce a report detailing the implications of a 2 degree scenario received 62% support.[4]  The TCFD recommendations are clearly aligned to the increased expectations of stakeholders and provide the framework for organisations to get on the front foot and explain how they are assessing and managing climate-change risks and opportunities.

The key objective of the TCFD is to bring consistency and transparency to the disclosure of climate-related impacts. The principal recommendations of the Taskforce provide a disclosure framework that covers:

  • Governance 

              Disclosure of the governance framework around climate-related risks                          and opportunities

  • Strategy

              Disclosure of actual and potential material risks and opportunities on                        the organisation’s business, strategy and financial plans

  • Risk Management

              Disclosure of how the organisation identifies, assesses and manages                          climate related risks

  • Metrics & targets

              Disclosure of the metrics and targets are used to manage the                                        material climate-related risks and opportunities

Source: TCFD final report

Within the report, companies are strongly encouraged to take into account different climate-related scenarios including a 2 degree or lower scenario as part of assessing the resilience of the organisation’s strategy to climate related risks and opportunities.

Importantly, the focus on governance indicates that responsibility for TCFD disclosure rests with the Board and Executive, particularly the CFO and Audit Committee given the finance-related aspects of the disclosures and the continuous disclosure obligations that listed companies operate under.

The TCFD has been developed as a multi-stakeholder taskforce and it is expected that adoption of the recommendations will be market-led and major companies are already leading the charge with over 100 CEO’s signing a public commitment of support for the voluntary recommendations[5]. Adoption is expected to grow such that climate-related financial disclosures become normal business practice. As adoption grows and companies become more sophisticated there is the opportunity to leverage big data in this area to identify new opportunities and responses.

Following the release of the recommendations companies should:

  • Review the Final TCFD Report recommendations against your current practice and disclosure to identify gaps
  • Review your governance, strategy and risk management processes to assess how well climate-related risks and opportunities are considered
  • Develop and assess (to the extent not already done so) the impact of a 2 degree scenario on your organisation
  • Engage with your key stakeholders including investors to understand their perspectives
  • Determine your external reporting strategy and the potential linkage or integration with the Annual Report, Sustainability Reports or alignment of the TCFD disclosures with Integrated Reporting
  • As you develop your disclosures consider an independent assessment of assurance of the information
  • Consider the application of big data and data science as part of your response to unlock opportunities (see here for some global ideas)

For a detailed review of the TCFD recommendations please also see the Deloitte global publication here.