Business Regulation » TCFD: Why climate risk should be on every CFO’s agenda

A year ago, financial heavyweights Mark Carney and Michael Bloomberg put forth the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), placing climate risk management on the agenda of CFOs and boards across the world.

TCFD has made a substantial impact after just one year. Already, more than 250 companies with a market cap of over $6.6 trillion (including more than 160 financial firms responsible for assets of over $86.2 trillion) have publicly expressed support for the initiative.1 Steadfast backing for TCFD was demonstrated last December, when the global head of investment stewardship at BlackRock sent letters to the corporate governance teams of more than 120 companies urging them to assess the risks posed by climate change to their business operations in-line with TCFD recommendations.

In conjunction with this, the financial community is starting to become much more aware of the material financial risks climate change poses. As a result, we are seeing a rising number of shareholder resolutions on climate change, such as the recent challenge made to Royal Dutch Shell by 60 large investors, such as Aegon and NEST.

A Carbon Disclosure Project (CDP) report released in March, surveyed more than 1,600 companies and found that nine in ten companies now disclose their Scope 1 and/or 2 carbon emissions and eight out of ten disclose at least one Scope 3 category. Likewise, 90% of companies that fall under the EU Non-Financial Reporting Directive now have board oversight of climate-related matters.

Meanwhile, with the integration of TCFD within CDP’s annual climate change questionnaire sent to companies worldwide, the process of data disclosure has been streamlined for businesses. Consequently, it’s expected that over 6,000 companies will report their climate risk in a standardised way this year. This would represent over 50% of global market capitalization and would be a huge step forward.

Words are not enough

While the public support expressed by companies for TCFD has been impressive, the onus is now on corporations to do more than just pay lip service. And that may well fall to CFOs. Without prioritising climate reporting at the highest level, the business community will be failing to go beyond taking a skin-deep approach to combating climate change.

Although CDP’s report showed that a majority of organisations have oversight of climate issues at board level, translation to action is lacking with only one in ten companies currently providing incentives for board members to manage climate-related risks and opportunities. It’s time for companies to put their money where their mouth is.

Taking responsibility for climate action has not yet been linked to boards’ or the management teams’ remunerations. This needs to change. Management of environmental issues can no longer remain the sole responsibility of sustainability teams. FDs and other board members need to take the next step and embed climate-related disclosure into their strategic priorities.

It is not only companies that need to prioritise climate. The investment community is increasingly disclosing climate data. Major investors such as Amundi, BlackRock and Citigroup all back TCFD. Like the companies in their portfolios, they will be reporting on how they deal with climate-related governance, strategy and risk management, all of which are growing in importance to pension funds and other asset owners.

And then there are the banks – pressure to address Scope 3 emissions is increasing. Developing a methodology to measure and report on financed emissions for all elements of a bank’s portfolio is critical in meeting the recommendations set out by the TCFD, for dual purposes of managing the climate risks within banking portfolios and understanding how they are contributing to the climate goals of the Paris Agreement.

The path forward for TCFD

TCFD has made giant leaps in its first year, but there is still a long way to travel before every company and investor discloses in-line with its recommendations.

However, if the last few months are any indication, the pace of take-up is accelerating rapidly. In March, the pan-European stock exchange, Euronext, announced it would adopt TCFD’s recommendations. A month later, Mark Carney revealed that the work of TCFD would continue into the Japanese G20 presidency in 2019, with the support of two new initiatives to measure progress on company and investor support.

The disclosure of climate impact, risk and opportunity is increasingly becoming the foundation of both investment accountability and opportunity. While TCFD offers recommended climate-related disclosures, CDP provides companies with a roadmap to forge these disclosures. Climate-related risks and opportunities identified in CDP submissions can serve as the foundation of a scenario analysis. And closing gaps in reporting governance and strategy to CDP will fill voids in TCFD disclosure for companies. By committing and taking action to meet CDP’s disclosure expectations, companies can kill two birds with one stone – tackling TCFD recommendations and playing a leading role in combating climate change.