TCFD rules are not just about climate risk disclosures, but an opportunity to use scenario analysis to fine tune, pivot or even reset business strategy towards net zero, writes Carbon Intelligence director Will Jenkins
From 6 April 2022 large UK companies and financial institutions will be required by law to include in their financial reporting climate risks and opportunities, as outlined by the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
The TCFD’s purpose is to promote greater transparency in climate-related financial risk disclosures allowing investors, lenders and other stakeholders to have a greater understanding of how climate risks and opportunities affect the value of companies and investments.
But to view TCFD solely as a disclosure framework risks missing the point. It is also a strategic planning tool designed to drive the internal change in these organisations that allows better decision making in the context of climate risk and the transition to net zero.
So, if you are a CEO or board member thinking that TCFD is a data collection and box ticking exercise to be completed by the finance, investor relations and legal team, before adding the required minimum information to the annual report, think again.
The TCFD framework recommends that separate disclosures are made across four pillars: governance, strategy, risk management and metrics and targets. It is under the ‘strategy’ pillar in particular that TCFD’s potential to identify business strategies that respond positively to the risks and opportunities of climate change can be realised.
Under this pillar one of the TCFD’s recommended disclosures is to: “Describe the resilience of the organisation’s strategy, taking into consideration different climate related scenarios, including a 2C or lower scenario.” This is the scenario analysis step, and delivering this thoroughly is key to unlocking the strategic opportunities TCFD presents, because effective scenario analysis informs successful business planning.
However, the Financial Reporting Council LAB report of October 2021 stated that scenario analysis and reporting remains an area of weakness where more needs to be done by companies. According to the FRC: “Reporting on scenarios remains a key area of investor interest, and an area of weaker disclosure. Some companies disclose climate change scenarios that may affect viability, but detail is scarce.”
This is unsurprising because high quality scenario analysis requires a cross-business approach, clarity on the future goals of the business, value chain knowledge and climate change scenario expertise. No small task, but the following are some principles that can help company boards get this scenario analysis right:
Scenario analysis is a collaborative effort and it is important to mobilise experts from across the business into an effective team considering all aspects of e.g. the impact of extreme weather events on operations, customers, colleagues and finance
It requires clarity on the assumptions around the future direction of the business
The finance team are critical stakeholders in this process to link back to impacts on the financial statements
Be ready to educate colleagues who are required subject-matter experts but with less sustainability experience
Choose scenarios specific to your company and sector that test the resilience of your strategy against a range of uncertain futures. Take into account potential variations in the pace of policy change e.g. global net zero by 2050 or a delayed transition
Ensure that the selected scenarios are verified with reliable data that can provide a benchmark for future reporting
Take into account value chain geography for differing potential climate trends posed in each geography
Consider both single or multiple adverse weather events
Each scenario can then be applied to the existing business model and the impact on revenues, expenditures, assets, liabilities, and capital & financing assessed. This establishes the exposure to climate related risk or opportunity, what responses could be deployed, and the response effectiveness.
In a recent TCFD project Carbon Intelligence supported soft drinks company Britvic to understand how projections and trends show that climate change will impact critical areas of its business. Scenario analysis covered the potential impact of water availability on production and of crop yield changes in Britvic’s key ingredients. Transitional impacts were also investigated, such as potential consumer preference change and changes in energy pricing, both for Britvic’s own operations and as a cost pass-on from energy-intensive areas of the supply chain. Understanding the financial impacts of key climate risks and opportunities has mobilised senior leadership at Britvic to highlight the criticality of its net zero strategy as well as how interdependent climate and sustainability is with continuous planning, decision making, and business resilience.
So, TCFD is not only about climate related risk disclosures, but an opportunity to use scenario analysis to fine tune, pivot or even reset business strategy for economic success in the context of climate change and the transition to net zero, and that has to be a good thing.
Will Jenkins is director at Carbon Intelligence.