Helping to scale the TCFD recommendations: the next steps

Leadership, integrated risk management and more experience of scenario analyses will all be needed to grow TCFD alignment

One year since their publication, the recommendations of Mark Carney and Michael Bloomberg’s Task Force on Climate-related Financial Disclosures (TCFD) has seen climate risk continue to cement itself as a key boardroom item at corporations across the world. In the last 12 months, more than 250 organisations, including investors, associations, policymakers and companies with a market cap of over $6.6trn have publicly expressed support for, or committed to, the TCFD recommendations.

It’s expected that over 6,000 companies will report their climate risk in a standardised way this year, representing over 50% of global market capitalisation.

The TCFD sets out a framework for standardised disclosure of corporate climate risk across four key areas: governance, strategy, risk management and metrics & targets. Companies and investors should be able to integrate this reporting into their mainstream financial filings. The TCFD builds on the disclosure work of CDP over the last 18 years and we may finally be reaching a tipping point where responsible investors can easily compare the climate performance of the majority of their assets and make more sustainable capital allocation decisions. It allows companies to provide deeper insights that help ensure they are building stronger and more sustainable businesses for their shareholders and consumers, who are taking more interest in this space.
Perhaps most importantly for investor relations teams – often overwhelmed by new ESG disclosure requests, new benchmarks and new frameworks – the process for reporting via the TCFD has been made easier as it has been integrated into CDP’s annual climate change questionnaire. Consequently, it’s expected that over 6,000 companies will report their climate risk in a standardised way this year, representing over 50% of global market capitalisation.

So one year on where are we with TCFD?

Getting over the barriers

Despite this encouraging support for TCFD, it is likely that we need to see even faster adoption if we are to stay on track for meeting the Paris Agreement targets. So what are the barriers to accelerating and broadening further adoption?
Research by CDP and Marsh & McLennan Companies’ Global Risk Center has identified three key challenges that must be met to enable wider implementation. These are: i) securing leadership support for a wider approach to climate risks; ii) overcoming siloed risk-management processes; and iii) limited experience with climate change scenario analyses.

1. Securing leadership support

The TCFD recommendations aim to make oversight of climate risk a clear responsibility of the board. For this to be effective however, many boards will need to look again at their remuneration and business planning structures.

Research undertaken by CDP and its sister organisation, the Climate Disclosure Standards Board, found that only 10% of companies actually incentivise boards to prioritise climate risks. In the US, according to recent NACD data, only 6% of boards view climate change as a top-five issue impacting their company in the next year.Contrast this with the findings of a recent survey by the Science-based Targets Initiative which found that among those businesses with Paris-aligned climate targets, the environment was the second biggest factor influencing business growth in the next five years.

There is a clear gulf between companies that are taking climate change seriously and those more resistant to change. Company-wide strategies, driven from the top and supported by strong leadership and governance, will be essential to shift the corporate dial.

2. Overcoming siloed risk management processes

Most businesses understand how to mitigate conventional risks, but climate risks are complex, long term and often embedded in interconnected systems dependent on other parts of the private and public sectors. Standard, siloed risk-management methodologies simply don’t work for climate issues.
Companies need to evolve new risk management approaches that look at the longer-term, and are not the sole responsibility of an individual or a single sustainability team. As one sustainability leader noted recently, “I may be just one of two people in the organisation to have heard of the TCFD recommendations”. Responding to the TCFD will require broad ownership and understanding of climate risks and opportunities and the financial impacts and input from across the organisation.

3. Limited experience with climate change scenario analyses

A key part of the TCFD recommendations is for companies to carry out climate change scenario analyses – to understand what potential risks and opportunities might be. However, too few professionals are familiar with this process. Moreover, most existing climate scenario models were developed for broad economic and academic use, not corporate financial planning. Too often existing scenarios are a ‘plug and play’ exercise that do not go into the individual detail required for each company.

The lack of historical and empirical data linking climate and economic impacts to financial outputs means that adopting scenario analyses will likely be a staged effort that takes place over time. Unfortunately, business – and particularly finance – works on a very short-term cycle. This creates a major road block for the acceleration of TCFD since the long-term horizons of climate impacts typically extend beyond the scope of business planning.

Where do we go from here?

Comprehensively assessing and reporting on climate risk and resilience presents challenges for many businesses. These must be overcome if we are to minimise the effects of climate change to the value of individual investments and the wider economy. This is why CDP has recently combined forces with Marsh & McLennan to close the so-called “implementation gap” to effectively adopting the TCFD’s disclosure recommendations. This new collaboration will leverage the organisations’ combined capabilities and expertise and offer practical guidance to businesses.

Over the next year, we expect the disclosure of climate impact, risk and opportunity to increasingly form the foundation of both investment accountability and decision-making. Supporting businesses as they step up to the challenge will be a vital part of ensuring that TCFD grows in prominence.

Jane Stevensen is the Task Force Engagement Director at CDP