A flexible framework
Pitkethly argues that the reporting framework had to be flexible rather than prescriptive because companies vary enormously across sectors and will therefore be affected very differently by the two major categories of climate-related risks that the TCFD identified: the physical effects of climate-related events, and the risks (and opportunities) for their business of making the transition to a lower-carbon economy.
He believes Unilever, as a fast-moving consumer goods company with two billion customers each day in 190 countries, has more exposure to physical than to transition risk. But, even so, most physical impacts do not have a great effect, because they are localized and Unilever’s operations are dispersed so widely around the world, he says.
For companies in other, more carbon-intensive industries, such as energy or mining, the physical and transition risks are likely to be much more concentrated on particular locations and specific, major aspects of the way they operate. The TCFD’s framework tries to accommodate these differences by taking a flexible and pragmatic approach to the job of setting out the reporting framework.
An important element of this flexibility is the TCFD’s intention that companies should be able to use the framework as a starting point to develop their own approach to reporting on climate-related financial impacts, and that this should not involve excessive additional costs. The Task Force believes that the approach companies take will evolve from a more qualitative one at the beginning toward an increasingly quantitative set of disclosures as they develop their processes for climate-related reporting.
“While there will be some [additional] costs, these are largely costs that will be incurred in any event as companies meet their existing disclosure obligations. Investor demand for this information continues to grow,” says Schapiro. She also suggests that, as climate-related reporting becomes more mainstream, tools and analytical techniques will be developed that will help to reduce the compliance costs that companies face.
The role of voluntary adoption
Both Schapiro and Pitkethly acknowledge that the TCFD’s framework has some overlaps with others, including the EU Directive on Non-Financial Reporting, which came into effect January 2017, and the framework by the International Integrated Reporting Council (IIRC). However, there is little direct duplication, as both these initiatives are concerned with a wider set of issues than just climate-related financial impacts.
“I think many large companies will be well advanced in being ready to adopt the new requirements,” says Pitkethly, “which shows that the market is already moving in the direction of more and better disclosure. My only concern is that companies should have the flexibility to report their own story in their own words, and I think the TCFD framework provides that.”
Unlike the EU directive, though, the TCFD’s framework is voluntary and will depend on its acceptance by companies to achieve widespread adoption. This was why the Task Force sought such a wide range of input from companies and financial intermediaries, Schapiro explains: “We knew our approach had to be practical and pragmatic for companies, because our goal is to have them adopt it without a regulatory mandate. As a result, business input was critical.”
Pitkethly argues that compulsion would lead to “a proliferation of unhelpful, boilerplate disclosures” and that the voluntary approach is therefore best, although he acknowledges that this requires both “a push and a pull” for information; companies and their stakeholders alike need to understand the benefits of disclosure in promoting better dialogue and more efficient price discovery.
If companies choose not to engage because the framework is voluntary, he says, the solution will again be increased dialogue. The onus will be on stakeholders to ask: “Why do you believe you don’t have material risks in this area?”
Four recommendations for disclosure
Disclose the organization’s governance around climate-related risks and opportunities.
- Describe the board’s oversight of climate-related risks and opportunities
- Describe management’s role in assessing and managing climate-related risks and opportunities
Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning.
- Describe the climate-related risks and opportunities the organization has identified over the short, medium and long term
- Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning
- Describe the potential impact of different scenarios, including a 2°C scenario, on the organization’s businesses, strategy and financial planning
3. Risk management
Disclose how the organization identifies, assesses and manages climate-related risks.
- Describe the organization’s processes for identifying and assessing climate-related risks
- Describe the organization’s processes for managing climate-related risks
- Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organization’s overall risk management
4. Metrics and targets
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
- Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process
- Disclose Scope 1 (direct), Scope 2 (energy indirect) and, if appropriate, Scope 3 (other indirect) greenhouse gas emissions and the related risks
- Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets