A historic shift in the guidelines for mainstream financial reporting is currently underway, driven by the need for more effective climate-related disclosures. This shift has been driven primarily by the financial community, which is increasingly requesting information on climate-related risks and opportunities to support effective decision-making.

For example, investors, lenders and insurers are increasingly interested in consistent data to “promote more informed investment, credit and insurance underwriting decisions.” While organisations across a variety of industries may perceive an increased reporting burden, the additional effort may be offset by multiple benefits, including:
1. Increased understanding of climate-related risks and opportunities;
2. More robust risk management processes and informed strategic planning; and
3. Improved access to capital via increased investor confidence in risk assessment/mitigation processes.

Based on the belief that climate change represented a systemic threat to the global financial system, in 2015 the Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD). Led by Michael Bloomberg, former Mayor of New York City, the Task Force included members from global banking institutions, insurance companies, institutional investors, industrial and consumer products companies and experts on financial accounting and public disclosure.

The TCFD published guidance in 2017, with four broad ranging recommendations, focusing on central themes of corporate organisation: i) governance, ii) strategy, iii) risk management, iv) metrics and targets. These recommendations, although aimed at investors, have wide ranging implications for all business – including how we should be thinking about climate resilience and mitigation through design.

To help our clients understand the guidelines, we’ve drafted a whitepaper summarising the guidelines which also provides some practical next steps. This is part of a wider workstream in helping our clients to be Climate Ready. In brief, we suggest the following key steps for understanding risk and opportunity at the corporate level;

STEP 1: Identify the risks and opportunities. To comply with the TCFD recommendations, organisations must understand both the transition risk and the physical risks from the impacts of climate change to which they are exposed. The first step should comprise a risk and opportunity assessment of the business.
STEP 2: Understand how your current business processes consider climate risk. Work with internal teams to understand how risk is currently managed within the organisation and to what degree climate risks are assessed.
STEP 3: Develop a strategy to embed and manage climate change risk. Understand how risks are addressed within your organisation and who manages them. Work with current risk assessors and managers as well as senior management to ensure that all levels of the organisation are involved in developing and embedding a risk management strategy.
STEP 4: Develop suitable metrics to measure performance. You may already be collecting useful data; for example, many organisations calculate GHG emissions. It is not yet standard practice for organisations to collect data on the physical risks of climate change, but this can be a KPI for many strategies.
STEP 5: Report. Include identified risks from climate change and indicate management strategies in financial reports
STEP 6: Update and improve (iterative). The challenge of assessing and addressing risks from climate change will not be easily resolved for most organisations. The improvement process will require sustained long-term effort.

This blog was written by Daniel Watson, Associate Director, Environment & Sustainability

 Application of Climate-related Financial Disclosure Recommendations



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