The Task Force on Climate-related Financial Disclosures has released updated guidance to help firms approach climate change risk management and mandatory disclosures. Sonia Shah looks at what firms can do to achieve best practice. 

The Task Force on Climate-related Financial Disclosures (TCFD) has updated its guidelines on climate-related metrics, targets and transition plans. Following on from its 2017 report, the focus has shifted to developing appropriate metrics for use in disclosures and to track progress.

The path towards mandatory climate risk disclosures

In the UK, HM Treasury has proposed a phased rollout of mandatory TCFD-aligned disclosures for financial services firms, to be effective by 2025. Their roadmap reflects the UK’s commitment to the Paris Agreement and the UN 2030 Agenda for Sustainable Development and ensures appropriate information is available for all investors and stakeholders. Most notably, it now offers clearer guidance on Scope 3 emissions and the associated risks for a company’s value chain and transitional risks. This is because the TCFD believes that reporting around Scope 3 emissions has matured enough to justify being introduced into disclosures.

While some firms are not yet in scope for mandatory climate-risk disclosures, it will take time to embed the necessary processes. Early action will support a smoother transition to meet regulatory expectations, in line with TCFD best practice.

The TCFD’s updated guidance builds on its previous publications. Its ‘Illustrative Implementation Journey’ is outlined below.

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Source: TCFD Proposed Guidance on Climate-related Metrics, Targets and Transition plans

This model outlines implementation goals and suggests how firms can meet best practice while aligning to the organisation’s individual ambitions in a sustainable way.

Understanding risks and opportunities

The task force has extended its guidance by outlining the climate risks and opportunities that firms would need to assess so that they can embed effective risk management frameworks. This assessment informs firms on how to realise their climate ambitions based on their individual goals and metrics. Defined ambitions could be measured based on variables such as a firm’s industry commitments, regulatory mandates, or shareholder actions but would need to be in line with a high-level climate strategy to meet best practice. This would involve a clear scope for a firm’s mitigation, adaptation, and transition plans adjusted according to their wider business blueprint.

The TCFD provides guidance for firms to define their climate metrics concisely and accurately in order to adjust their targets and monitor progress. This involves using climate-related scenario analysis to understand how the company performs according to potential risks in future. These targets also allow firms to establish and prioritise climate initiatives that will actively contribute to their long-term business goals and current operational plans.

Setting ambitions for climate change risk management

Scaling metrics according to a defined time horizon will help firms measure their financial impacts for reporting. This structure provides the clearest measurement for climate-related information in the long term and is a good way to track progress and goals. To achieve this, the TCFD provides a template to monitor time horizons effectively by disclosing their historical data first, covering prior data and comparing it to their present financial standings. This would then follow on with current financial statements outlining reports from the past 12 months. Providing this financial information could help firms incorporate impacts into their business strategies, such as estimated forward-thinking assumptions and climate-related financial revenues.

This data would assist firms in mapping out their forward-looking time horizons. Future periods are based on a variety of methodologies: ranging from scenario analysis to climate-related commitments. This information would be reported based on prediction ranges and assumptions about the future of the market and how climate risk may affect that.

Defining climate strategy and metrics

Effective metrics are an indicator of climate-related data risks and opportunities for a firm, making it essential for measuring progress against climate targets over an extended period and implementing long term plans to meet best practice. As such, the TCFD has proposed six core principles to help firms create their climate risk metrics.

Decision-useful

Firms can understand the impacts of climate risks and opportunities over a specific period better by exploring their climate-related metrics and basing them on the company’s specific circumstances.

Understandable

Climate-related metrics must be coherent and concise. TCFD intends metrics to be a resource that provides greater context around management choices for setting clear objectives for their goals and internal processes.

Verifiable

Metrics can be used as a tool to support internal controls such as assurance and verifying data.

Objective

Bias and value judgement may cloud the intention of metrics and stop firms from forming an objective performance brief. The task force suggests avoiding personal worldviews or outlooks when developing and disclosing metrics.

Trackable over time and consistent

TCFD recommends firms calculate and disclose their climate-related metrics annually to allow for comparative trend analysis.

Aligned with TCFD pillars

A company’s governance, strategy and risk management processes would correlate with climate-related metrics and support disclosure in line with best practice.

Long term metrics help firms create a clear strategy and plan ahead using up to date and reliable management information. Achieving this through detailed and consistent climate metrics is also vital for meeting best practice risk management and disclosure.

Climate-related financial impacts

A firm’s finances are a factor that can be shifted based on climate-related information, potentially altering metrics and financial impacts. This is why disclosing climate-related metrics and finances through accurate time horizons is necessary for firms to monitor how their accounts may be affected. Consideration of climate-related impacts could be incorporated into a firm’s business planning: such as increased revenues from forward-looking estimates and coherent business strategies aligning with the target end-state. This planning also allows firms to measure financial impacts based on their performance and prepare for losses against potential climate risks, such as floods and physical damages.

Targets aligned with climate ambitions

Measuring targets that are aligned with a firm’s climate ambition involves a range of factors. The TCFD recommends that organisations consider their targets based on where they currently are as a business, the target end state, and, most importantly, how they will get there. Recognised metrics will help firms adjust their climate-related targets through quantifiable data that would be easily tracked and measured based on long term aspirations.

Considering a firm’s strategy and business goals, climate-related targets can be set to support these broader objectives. Adjusting climate targets to match these organisational goals would involve staying up to date with scientific developments, which will feed into scenario analysis and improve climate change risk management. The use of external data will be developed over time and evolve in response to scientific developments, which can be leveraged for annual reports — in line with TCFD-guidance.

Transition planning

Embedding climate-related risks and opportunities into a firm’s infrastructure involves transition plans for how the strategy will be actioned. A transition plan requires a perspective on how risks will be reduced across the organisation and seek efficient opportunities associated with climate-related issues.

A clear plan also helps market participants price climate risk and opportunities based on carbon-related assets over time. This would be necessary for regulators to create a comparability framework across industries and assess and manage systemic risks. The TCFD also recommend that firms uphold transparency when integrating transition planning into their climate strategy, setting out their goals and performances. This involves highlighting financial goals, tracking performance against targets, and monitoring the impact of climate risk on financial results.

Reporting and disclosing

It’s important to consider disclosure of the transition plan itself and how key principles are relayed. The task force acknowledges that climate-related transition plans should be disclosed as part of the wider firm strategy and coincide with their individual long-term goals. Transition plans will also outline how firms will meet their goals while reducing financial risks and maintaining a sustainable business model. As such, disclosures need effective oversight from senior management, with board level approval prior to publication.

What can firms do now?

To be ready for future climate risks and regulatory changes, firms need to start preparing today. The updated TCFD guidance will help firms progress in their climate change risk management by disclosing how they can reach their individual company climate targets and build a sustainable model. Being consistent and efficient in maintaining and reaching climate goals will reduce risk aversion and encourage firms to leverage new opportunities. This can be achieved by following best practice, maintaining regulatory expectations, and staying up to date on emerging guidance.

For more guidance on how you can realise your ambitions in climate change risk management, please contact Sonia Shah.

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