Embracing TCFD – Turning Crisis into Opportunity

According to TCFD’s 2019 Status Report released in June 2019, there is a growing demand for decision-useful, climate-related financial information by investors. There are likely many factors driving investor demand, ranging from European regulations requiring certain investors to disclose climate-related information to weather-driven events resulting in significant financial impacts and leading investors to seek better information on their exposure to climate-related risks. As evidence of this demand, more than 340 investors with nearly $34 trillion in assets under management have committed to engage the world’s largest corporate greenhouse gas emitters to strengthen their climate-related disclosures by implementing the TCFD recommendations.

The TCFD enables companies to identify and disclose climate-related risks and opportunities so as to facilitate informed decision-making of investors, lenders, insurers and other stakeholders. The application of TCFD-aligned disclosure could help corporates measure and manage the transition and physical climate risks. The GRESB Resilience Module is a complementary way to understand a fund’s resilience and assist real asset managers use the TCFD framework effectively. First of all, GRESB’s Resilience Module is aligned with the TCFD, as there is a significant overlap between the TCFD recommended disclosures and the GRESB Resilience Module indicators.  Second, TCFD highlights transition and physical risks that can be mapped to the Climate Disclosure Standards Board (CDSB) Framework and Sustainability Accounting Standards Board (SASB)’s climate framework. Physical risks may include extreme weather events, such as drought or flooding, and the longer-term impact of increasing average global mean temperatures, while transition risks may include the global transition to a low-carbon economy, new regulations, and innovations in energy efficiency. These risks may have impacts across the entire structure of a business. Revenues may be affected by shifting customer demands and new regulatory requirements, while costs can be impacted by the availability and price of raw materials. Third, the use of scenario analysis is recommended under the strategy pillar of the TCFD framework. The purpose of scenario analysis is to assess how a business might perform under different future states, in this case, in response to specific sets of climate-related risks. There are two categories of scenarios, including transition scenarios (such as particular pathways of energy regulatory developments) and physical scenarios (such as particular pathways of atmospheric greenhouse gas (GHG) concentrations and their ramifications on water risk). Scenarios are not intended to represent a full description of the future, but rather to highlight the key factors of a possible future. The scenario analysis can help corporates to foresee and prepare for unexpected events, to maintain performance in the face of emergencies with flexible operation, and to become more resilient overall.

Landsec, a UK real estate management and development company, is one of the best examples of industry best practice. Following the TCFD guidance, Landsec partnered with a consulting firm to quantitatively and qualitatively model the potential environmental and economic impacts to their business under different climate change scenarios. Moreover, Landsec identified the risks and opportunities in how its business would be affected in the transition to a low-carbon economy. In response to climate-related risks and opportunities, Landsec was able to develop solutions — such as developing responsible property investment policies, energy reduction plans, and investing in renewable energy generation capacity — to improve resilience, reduce carbon emissions and reduce operational costs. Landsec’s enhanced Environmental, Social and Governance (ESG) performance was reflected in its performance on industry benchmarks, that its Carbon Disclosure Project (CDP) performance improved from A- to A from 2016 to 2018, while its GRESB score improved from 77% to 90% from 2016 to 2018.

However, a company’s journey to adopting the TCFD framework consists of different levels of challenges. The first challenge lies in inadequate support from the senior leadership. The TCFD recommendations call for enhanced governance by boards of directors and the assessment of the impact of climate change on financial performance to properly manage climate risks and opportunities. However, the support from top management is not strong enough. CDP and the Climate Disclosure Standards Board (CDSB) revealed that only 10% of companies incentivize the boards of directors to prioritize climate risks. Furthermore, according to the National Alliance for Climate Action (NACA), only 9% of boards view climate change as a top-five issue affecting their company over five years. Another challenge lies in the revision of risk assessment processes. Risk management is a key element of TCFD framework. However, climate-related risks do not align easily with the way corporate planning is conducted today. Conventional risk mitigation or management is not applicable to integrate climate-related risks in traditional risk management systems. CDP indicated that only 34% and 28% of companies are considering physical risks and transition risks, respectively. 

As a pioneering sustainability and environmental consultancy service provider, we would advise clients to establish a Sustainability Committee, preferably chaired by top management of the company. As governance is the first core element of TCFD, top management is advised to oversee sustainability risks and opportunities, including the assessment and management of how climate issues could impact daily operations. With the establishment of a Sustainability Committee, we advise companies to develop sustainability strategies to address the physical and transition climate-related risks and opportunities. Led by their Sustainability Committees, companies could also establish Sustainability Working Groups, formed by representatives from different teams, to plan and implement sustainability strategies in response to climate-related issues. After establishing a sustainability strategy, companies should set up corresponding key performance indicators (KPIs) and targets to monitor the effectiveness of the sustainability strategy. 

Although the application of the TCFD framework in Hong Kong is not as prevalent as at the international level, it is not difficult to find that there is rising concern regarding the management of climate and environmental risks to the financial sector in Hong Kong. In early May, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) initiated the establishment of the Green and Sustainable Finance Cross-Agency Steering Group (Steering Group) to accelerate the growth of green and sustainable finance in Hong Kong and support the Government’s climate strategies. With these developments, we believe there is a growing understanding of the importance of green finance and the impacts of climate change and environmental factors on investment. As such, we wish to see a growing number of corporates embrace the TCFD framework in the coming future.

TCFD (2019) The Task Force on Climate-related Financial Disclosures https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf

GRESB (2020) Resilience Reference Guide https://documents.gresb.com/generated_files/survey_modules/2020/resilience/reference_guide/complete.html#RS_alignment_TCFD

SASB and CDSB (2019) TCFD Implementation Guide – Using SASB Standards and the CDSB Framework to Enhance Climate-Related Financial Disclosures in Mainstream Reporting https://www.sasb.org/knowledge-hub/tcfd-implementation-guide/

GRESB (2017) Technical Supplement | The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Technical-Supplement-062917.pdf

Reporting Climate Resilience: The Challenges Ahead https://www.oliverwyman.com/content/dam/mmc-web/Global-Risk-Center/Files/reporting-climate-resilience.pdf

This article was written by Allied Environmental Consultants Limited.