Reporting climate risk is a major business opportunity
All companies soon will have to account for climate risk — that was the clear message of the recommendations released in June by the G20 Task Force on Climate-related Financial Disclosures (TCFD), led by financial heavyweights Mark Carney and Michael Bloomberg. It is increasingly the message of shareholders, too.
More than 100 CEOs signed up to support the TCFD recommendations at its launch.
For example, BlackRock has made it a top engagement priority to ask companies how they are assessing the risk that climate change poses to their operations.
The U.K. government has endorsed the TCFD recommendations and France has called for them to be mandatory. As part of the We Mean Business coalition, CDP has launched a commitment for investors and companies to implement the TCFD recommendations within three years.
The commitment has received an initial endorsement from Aviva, Enagás, Ferrovial, Iberdrola, Marks & Spencer, Philips Lighting, Sopra Steria Group, Wipro and WPP. Thus, the question has become not whether to manage climate risk, but how to do it: What is the process, and what metrics and targets will companies be expected to report?
A global standard emerges
The TCFD’s core recommendation is that all companies should disclose climate-related financial information alongside their mainstream financial filings, and it has set out to advance global standardization of climate reporting. All companies and investors will report against the same four areas: governance, strategy risk management and metrics and targets.
The task force recommends that all companies disclose how their board oversees climate risks and opportunities. In practical terms, this is likely to mean reporting on how a board supervises and monitors climate-related issues.
The second recommendation requires companies to disclose the actual and potential climate-related risks and opportunities they believe will affect business strategy and the extent to which they are likely to impact revenue.
This includes undertaking "scenario analysis" for the potential impact of climate scenarios, including a 2-degree Celsius temperature rise and disclosing the impact of those scenarios on the company. Such scenario analysis could include using a 2-degree pathway for each sector as set out by the Science Based Targets initiative or using carbon pricing corridors.
Disclosing climate risk management
The third TCFD recommendation is that all companies disclose information on how climate-related risks, as well as opportunities, are integrated into overall risk management. This means reporting on the processes for identifying, assessing and managing climate risks as well as the impacts of any risks that may be material or relevant to the business.
The task at hand is to find clear, measurable climate targets that easily can be integrated into a company’s mainstream reporting. A good example of this is the Science Based Targets initiative. SBTs are a way to set meaningful carbon emissions reduction programs that align with the Paris Agreement and ensure company efforts fit into the bigger picture of climate change mitigation. SBTs also enable companies to better understand where they are vis-a-vis their competitors.
Some of the most common metrics used by companies that report to CDP that can help to form corporate environmental targets include:
- Total CapEx in low carbon investment: Providing an easily quantifiable way to measure progress towards decarbonization.
- Operational efficiency measures: Improvements in areas such as energy efficiency and water use provide a material and quantifiable way to measure progress.
- Percentage of production in water-stressed areas: An important target for companies in water-risk areas, especially in sectors with high-water use such as extractives, apparel or beverages.
The metrics and targets identified through disclosure link closely to clear business benefits including cost savings, better investor and customer relations and a healthier working environment. Most of all, they are about showing how a company is "future-proofing" its growth ahead of likely future policies and regulations to limit GHG emissions. All of this leads to better overall performance: companies on CDP's "Climate A List" outperformed the market by 6 percent over four years.
More than 6,000 companies disclosed to CDP last year with many realizing greater efficiencies, improved profitability and competitiveness from their efforts around climate change.
However, not everyone will agree on the timing or scale of what should be reported on in this area. This is a challenge that both business and regulators need to address.
Companies that disclose to us and use innovative tools such as scenario analysis, SBTs and carbon pricing benefit form better insights about the risks and opportunities they are running. These insights can be built into business strategy, which in turn leads to better decision-making and value creation for a more sustainable economy.