In 2015, at the iconic Lloyd’s of London building (pictured above), Bank of England Governor Mark Carney introduced the concept of the “tragedy of the horizon”.
He explained that, by the time climate change becomes a defining issue for financial stability, it will likely be too late to do anything about it.
It is off the back of this speech that the Task Force on Climate-related Financial Disclosures (TCFD) was set up – a working group tasked with creating a set of comparable and consistent disclosures that companies can use to demonstrate climate change resilience to their capital providers.
What does it all mean?
To slow or reverse the current rate of global warming, we’ll need a substantial shift in regulatory policy, consumer and company behaviour – all of which could threaten traditional business models.
Unlike other recent reporting developments, TCFD isn’t about your impact on the environment, it is about the environment’s impact on you. These disclosures are targeted at mainstream investors, and are intended to help them assess whether climate risk is appropriately priced in to their valuation of your company.
What are the recommendations?
Put simply, the TCFD are asking companies to make disclosures in the following areas, within their ‘mainstream annual financial filings’:
- Governance: management and the board’s role in assessing, managing, and overseeing climate-related risks and opportunities
- Strategy: approach to risks and opportunities, including how they could impact your business model
- Risk management: how risks are identified and managed
- Metrics and targets: metrics and targets used to assess strategy and risk
Importantly, these disclosures are voluntary and flexible. They aim to leverage existing processes, without creating a substantial additional reporting burden.
Why does this matter?
For some companies, climate change genuinely presents a significant risk to the viability of the business. This doesn’t just involve physical impacts – there are many additional risks from transitioning to a lower-carbon economy, and these could arise sooner than many people think.
"For some companies, climate change genuinely presents a significant risk to the viability of the business."
Acknowledging this fact, over 100 business leaders, including the CEOs of some of the world’s largest companies, have personally signed the statement of support for the disclosures.
We have already seen governments taking preventative steps, and can expect more severe regulatory reform in the near-term. A good example of this is the UK government’s ongoing anti-diesel sentiment, demonstrated by recent tax rises that have been linked to the 30 per cent year-on-year fall in diesel car sales last year. Consumers are seeking lower-carbon products, shifting demand away from more traditional products and services.
And investors are increasingly considering this. Many leading global asset managers, including Blackrock and L&G Investment Management are listed as supporters of the recommendations, and will be looking for these disclosures.
TCFD can also be used as an opportunity to demonstrate competitive advantage, by explaining how your company is proactively pursuing the opportunities of a transition to a low-carbon economy, and capturing market share through a first-mover advantage.
In response, several companies have already made these disclosures. Since the TCFD released their final recommendations in June 2017, the number of FTSE 100 supporting signatories has more than doubled to 24. HSBC were one of the first signatories and their 2017 Annual Report contains a concise and informative one-page disclosure that the task force has highlighted as good practice.
What are the challenges?
Perhaps the biggest challenge of TCFD is providing meaningful disclosure around the uncertain future impact of climate change. The second is getting the right people to engage in this discussion. Boards and management may not be aware of the taskforce, or misinterpret it as another piece of non-financial reporting destined purely for sustainability teams. This has broader, company-wide implications, and needs involvement from Boards, management, finance and IR.
"The biggest challenge of TCFD is providing meaningful disclosure around the uncertain future impact of climate change."
Should I disclose this information within my next annual report?
In short, yes. We know that the government and FRC would rather companies reported well on a voluntary basis, rather than having to force reporting through legislation.
The annual report is a document intended for shareholders, and should include material information for their investment-making decisions. If you think this information could reasonably change these decisions, then it should be included. If only a small sub-set of investors will use it, then consider placing this disclosure online, where more detailed reporting materials can also be provided, where appropriate.
Where do I start?
As with all new reporting disclosure, this will be a journey that will develop over the coming years. For now, we recommend starting with the following actions:
1. Encourage discussion at board level, and get the right teams involved.
2. Look at what you’re already saying and consider what’s missing.
3. Set out a plan to work up to full disclosure – this doesn’t all have to be in year one.
4. Avoid boilerplate disclosure. Stay strategic and material, and remember, less is more.
Good practice examples: 2017 Annual Reports
Anglo American: Includes company-specific information, such as a consideration of the financial impact of government responses to climate change, as well as which products will see a change in consumer demand as we shift to a low carbon economy. Case studies later in the report help to bring the issues and Anglo’s response to life.
Diageo: Another good example of a disclosure that focusses a material climate-related risk to the business. While not specifically structured around the TCFD’s four categories, Diageo clearly identifies and explains its response to increasing scarcity of water, an essential resource for its products. The Strategic Report also includes a useful map that sets out ‘Diageo sites located in water-stressed areas’.
HSBC: HSBC’s Strategic Report includes a clear and coherent table which follows the TCFD’s recommended four disclosure categories. The disclosure is clear and concise, easy to locate, and recognises that this is a first disclosure that will ‘evolve and expand over time’.