Try and make sense of this…. The G20 has asked the FSB to look at GHG emissions, so they’ve set up the TCFD which is working with CDP, SASB and CDSB on new reporting guidance – that BEIS could make mandatory.
Full marks if you got all the acronyms right, you are well up to speed. For everyone else, here’s a plain English translation.
Governments around the world are increasingly taking the risks posed by run-away climate change seriously. However they worry that the financial system has got its head in the sands, ignoring the likely impact of the big policy changes they are making in trying to shift the economy to a path compatible with 1.5 – 2 degrees of global warming. If so, current asset values could be massively overstated – anything upwards from $4.2 trillion according to one estimate – and a repeat of the global financial crash is possible when reality hits home. That matters to you and me because our pension savings are at risk.
So they want companies to start estimating the financial implications of their climate-related risks and opportunities and to disclose them in annual reports in a way that investors can act on. A taskforce headed up by Bank of England governor, Mark Carney, and former New York mayor and eponymous business data provider, Michael Bloomberg, has created a set of reporting guidelines. These are voluntary for now, but the UK’s business department is said to be supportive of adding them to the existing rules about reporting greenhouse gas emissions if the uptake is slow.
Acronyms aside, the danger is this becomes just another reporting requirement, with companies finding short-cuts to ‘tick the box’ while investors carry on as usual. Already I’m hearing groans from short-staffed sustainability departments who are looking to reduce the amount of questionnaires they complete, not add to the burden of their demands on business colleagues.
To make sense of it all, this week my colleagues at Corporate Citizenship organised a working session with the Climate Disclosure Standards Board for companies and investors. The exam question was “What do the G20’s TCFD recommendations mean for company reporting in the UK?” Some 50 people came and I was in the chair (and only occasionally getting my acronyms in a muddle).
The new guidance (download here) asks companies to look at four aspects:
- their governance around climate-related risks and opportunities,
- how climate change influences their strategy,
- what processes are used to manage the risks, and
- which metrics and targets can assess and manage both risks and opportunities.
Some of the participants at our session have made a start. They are mapping their supply chains, to see if key raw materials like forestry products from certain regions are at risk. Others are examining their property portfolios – are assets located on floodplains or in low-lying coastal areas? Should extra cooling be built in to cope with new temperature extremes? How will running costs change and margins be hit? On the other side, a few are looking at opportunities to develop new products like anti-pollution protection.
But most haven’t really started. And that’s confirmed by new research which looked at 1,700 companies across 14 countries and 11 sectors. Ready or not: Are companies prepared for the TCFD recommendations? found a gap between the way companies identify climate-related risks and opportunities, and how they are preparing to tackle them. More than eight in ten acknowledge the financial risks for their business. Far fewer are yet taking action.
So colleagues at Corporate Citizenship have devised a road map for clients to develop a plan of action over three years. A key part of that is how to assemble a team across all business functions to work through the practical implications, and how to start to understand energy transition and physical climate change scenarios without getting lost in complex and costly scenario modelling.
What’s clear is that expectations about increased disclosure for investors and others will mount and do need to be addressed. It’s also clear this will expose some tricky questions both for investors and the companies themselves about their lack of knowledge and lack of preparedness. Our roadmap will help companies map out what matters to their business, engage internally and external, plan a relevant strategy and change policies, procedures and outcomes.
And surely that’s the key point: at heart, this isn’t about disclosure, it’s about taking action to protect and enhance long value creation. (That’s a growing theme of our work about which I’ve previously written.) It’s about thinking ahead and taking sensible business decisions. It’s not about tick-box reporting.
It’s also close to home personally, as I look at my asset-backed pension scheme and wonder how much it will actually pay out when the time comes.