TCFD and me: Why it matters

Climate change risks may seem too colossal and global for most businesses to be relatable, especially for non-publicly traded companies. Soon enough, however, all businesses will need to take stock and internalize business model impacts of climate change—the transition risks and opportunities— and climate change impacts on business—the physical risks of rising temperatures and related severe weather events. The good news is that mechanisms, standards, and software are coming soon to help businesses make these internal assessments and plan their preferred futures. Such resources are likely to be aligned to a climate risk framework called the Task Force on Climate-Related Financial Disclosures (TCFD).

What is TCFD?

The G20 Financial Stability Board established the TCFD in 2015 to provide investors with insight into the concern that businesses were not thinking about climate change as both a financial risk and an opportunity. The framework for climate scenario analysis centers around four pillars and associated recommendations and is aimed squarely at the private sector to help shake them free of potentially sleepwalking into disaster without considering the impending transition and physical risks of climate change. No matter the business model or type, TCFD forces companies to imagine different futures through various scenarios, and what roles they might have. The four pillars and recommendations are:

• Governance: what is your business’ structure to evaluate climate risks?
  • Describe the board’s oversight of climate-related risks and opportunities
  • Describe management’s role in assessing and managing climate-related risks and opportunities
    
• Strategy: how are you connecting identifiable risk and opportunity impacts to your business?
  • Describe the climate-related risks and opportunities the organization has identified over the short-, mid-, and long-term
  • Describe the impact of climate-related risks and opportunities on the organization’s business, strategy, and financial planning
  • Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including temperate rise of 2° or lower scenarios
    
• Risk Management: how are you planning to manage climate risks?
  • Describe the organization’s processes for identifying and assessing climate-related risks
  • Describe the organization’s processes for managing climate-related risks
  • Describe how the processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management
    
• Metrics/Targets: how will you measure success or failure?
  • Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process
    • Examples: reduced emissions, reduced fossil fuel consumption, reduced water use, reduced waste, supply chain management, policies on business resiliency plans, etc.
  • Disclose scope 1: direct emissions, e.g., fuel combustion systems, cars, appliances; scope 2: indirect emissions, e.g., purchased electricity, heat, steam; and, if appropriate, scope 3: use of company’s product/service (a company’s value chain) greenhouse gas emissions and the related risks
  • Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets

Will the TCFD apply to me?

Right now, TCFD is a voluntary framework in most jurisdictions and aimed most directly at publicly traded companies; however, privately held companies should not rest on their laurels. Soon-to-be mandatory climate disclosure requirements will begin at the top of the corporate “food chain,” but those requirements will no doubt make their way down into all business practices regardless of type and size. To stay competitive, maintain resilience, and increase commercial advantage, the TCFD framework helps businesses shift mindsets to evaluate comprehensively a changing climate and a transforming economy. Think of it this way: in the 1990s, when the internet and email were first gaining traction, everyone eventually had to learn how the technology could improve business models and help with operational efficiencies. Those who slow-walked adoption and who could not see the relevance of the technology to business lost momentum and opportunity. Climate risks and opportunities are no different and arguably pose significantly more potent impacts. Increased severe natural disasters and disruptions from expected power outages, flooding, increased rain, droughts, fire weather, and intense and more frequent tropical storms will undoubtedly be the continued story of 2022.

A quickening pace of new technology deployments in clean energy and efficiency and new ways of doing will separate the wheat from the chaff in the business world. Demand for these new ways of doing will only increase as governments work toward their net zero targets, and as public opinion grows on the need to act on climate. Vendor and procurement preferences for low- and no-carbon products and services are only just beginning. The business opportunities are profound. According to Bank of America, there’s $150 trillion at stake, which is their estimate to get the global economy to net zero by 2050. With all of the challenges businesses are facing in 2022, the question isn’t whether your business should be part of the climate solution, but how quickly you can ramp-up to get a bigger piece of the pie by doing good for all of humanity.

What’s next?

Visioning and scenario analysis using TCFD for business leaders is what should be next. Those who see the challenges that lie ahead as opportunities to seize will position themselves as marketplace leaders, but the first step must involve dedicated time and effort to scrutinize the climate scenarios that lie ahead.

There is no doubt that in 2022 the SEC will publish definitive requirements for mandatory climate disclosures. At the global level, there will be more clarity around baseline sustainability disclosure standards. There will also continue to be a flurry of market and institutional demand for low- and no-carbon solutions.

The reality is this: there’s no playbook for navigating the uncertainty around climate impacts and businesses, but there is guidance to help businesses “stretch think” about possible future impacts. Take the opportunity to gather your best and brightest leaders now with the guidance that’s available. Take a good long look in the mirror to assess what your business looks like today and imagine what it could look like in the future.