Governance – How does the company address climate-related financial risks? This pillar asks if the board oversees climate-related financial risks and opportunities, if the right members of management are involved, and how management reports to the board on climate issues.
Strategy – What is the company’s climate-related financial risk and opportunity strategy? Some companies may evaluate their climate-related financial risks and opportunities and decide to do little. Other companies may face risks that require a strategic plan. Strategizing is smart business.
Risk management – TCFD expects companies to evaluate their climate-related risks and opportunities, and to analyse their risk exposure. They must assess severe weather, flooding, fires, and other acute events that can impact vulnerable physical facilities or operations. Physical risks include drought, poor land arability, and increased heat on outdoor workers and operations. Finally, there are the risks companies face in a low-carbon economy, such as the impacts a carbon-intensive company might face due to stakeholder and public pressure
Metrics and targets – the essence here is simple. It asks how the company measures its progress in reducing climate-related risks, very much on the basis that you can’t manage what you don’t measure.
Adopting the recommendations of the TCFD is therefore an iterative process, and full implementation can take many years, with lessons learned helping to adapt and optimise implementation plans along the way. Beyond the fundamental questions of strategy and governance, there continue to be several obstacles.
TCFDs are part of the shift toward addressing climate change on a fundamental level and complying with new or revised legal or regulatory reporting requirements. There is a high standard for delivering “effective disclosures,” with principles ranging from clear, balanced, and understandable to dependable, verifiable, and objective. Moreover, they must be consistent over time, comparable across companies within a sector, industry, or portfolio, and delivered on time.
With governance at the heart of TCFD, the best approach is to commence with ESG reporting according to an accepted framework. We find the GRI is most accepted in Europe, and the SASB in the Americas.
Similar to ESG reporting, your TCFD process also requires a materiality assessment, together with GAP analysis and peer bench marking. Naturally, your carbon footprint report must be completed too.
Climate scenario and impact analysis processes must be developed, where relevant, and risks and opportunities assessed.
As noted above, TCFD is not an instant deliverable. It takes time and board-level participation to create an effective strategic plan.