One of the most significant, and perhaps most misunderstood, risks that organizations face today relates to climate change.
One of the most significant, and perhaps most misunderstood, risks that organizations face today relates to climate change. One of the essential functions of financial markets is to set prices on risks as a basis for making informed, efficient decisions regarding capital allocation.
This has resulted in investors demanding more transparency from organizations about their governance structures, strategies and risk management practices. For many investors, climate change poses significant financial challenges and opportunities, now and in the future. The expected transition to a lower-carbon economy is estimated to require around $1 trillion in investment per year for the foreseeable future, generating new investment opportunities. Without the right information, investors and others may incorrectly value assets, leading to misallocations of capital.
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. The FSB established a Task Force on Climate-related Financial Disclosures (TCFD) with the aim to develop voluntary, consistent, climate-related financial risk disclosures for companies to use in providing consistent, comparable, reliable, clear and efficient information to investors, lenders, insurers and other stakeholders.
The recommendations are structured around four thematic areas that represent core elements of how organizations operate:
- Governance - The organization’s governance of climate-related risks and opportunities
- Strategy - The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning
- Risk Management - The processes used to identify, assess and manage climate-related risks
- Metrics and Targets - The metrics and targets used to assess and manage relevant
 The Economist Intelligence Unit, “The Cost of Inaction: Recognising the Value at Risk from Climate Change,” 2015
As should be the case in any risk assessment and strategy, metrics and targets must form the foundation. Here, the TCFD refers to the solid amount of work undertaken by organizations such as CDP and the Greenhouse Gas Protocol.
Preparers of climate-related financial disclosures will assess the materiality of disclosures related to the Strategy and Metrics and Targets recommendations. Companies should provide disclosures related to the Governance and Risk Management recommendations, because many investors want insight into the governance and risk management context in which organizations’ financial and operating results are achieved.
The Task Force encourages forward-looking information through scenario analysis—a useful tool for considering and enhancing the resiliency and flexibility of strategic plans. Many investors want to understand how resilient organizations’ strategies are to climate-related risks. It is recommended that organizations describe the resilience of their strategies, taking into consideration different climate-related scenarios, including a 2°C (or lower) scenario.
Some of the potential benefits derived from implementing the Task Force’s recommendations include:
- easier or better access to capital by increasing investors’ and lenders’ confidence that the company’s climate-related risks are appropriately assessed and managed
- more effectively compliance with disclosure requirements for reporting material information in financial filings
- increased awareness and understanding of climate-related risks and opportunities within the company resulting in better risk management and more informed strategic planning
- proactively addressing investors’ demand for climate-related information, which could ultimately reduce the volume of climate-related information requests
thinkstep has been at the forefront of providing solutions (consulting services, data, software) for climate-related analyses, disclosure and strategies, having contributed to a range of relevant standards and successfully conducted a great number of projects for corporations that we are happy to share as references.
In relationship to TCFD recommendations, thinkstep provides the following support:
- Establish a baseline in an efficient and pragmatic way
- Combine product and corporate (life cycle) carbon information
- Identify hot spots
- Develop and analyze scenarios
- Analyze materiality
- Monetize climate-related risks and opportunities
- Support in the establishment of meaningful, realistic targets
- Consult with stakeholders and support with strategy development
- Provide context and incorporate it into sustainability reporting and management