Tackling climate change – will disclosure make a difference?

Sustainability and climate change finally made it to the top of the agenda this year at the World Economic Forum in Davos. 

From the increasingly visible impacts of climate change, to the growing youth movement, broader societal concern, and increased investor pressure, illustrated by Larry Fink’s widely reported letter on the importance of good disclosure, it’s

clear we have reached a tipping point.

Politicians, investors, businesses and regulators are all now in conversation. And while some years ago it was said that 2020 would be our last chance to act on climate, today it’s clear that there’s so much more we need to do. And business has an important role in that. 

Markets are driving businesses to think more sustainably

While political intervention in the form of widespread carbon taxes might still be some way off, markets are taking things into their own hands. In December 2015, the Task Force on Climate-related Financial Disclosures (TCFD) was established to develop recommendations for voluntary climate-related financial disclosures. These called for clear, consistent, comparable, reliable and efficient reporting. At the heart of TCFD is the belief that better access to data will enhance the way in which climate-related risks are assessed, priced and managed. It’s a belief that markets have the power to influence climate outcomes by driving much-needed changes in corporate behaviour.  Following investor pressure, Shell, for example, will this year be putting to a shareholder vote a new remuneration policy that will link executive pay to three-to-five year net carbon footprint targets. 

Since the launch of TCFD, the guidelines have been gaining popularity. TCFD’s declared supporters include companies with a combined market cap of US$7.9 trillion.[i] However its latest 2019 status report has outlined a gap between current levels of disclosure and the needs of the investor community, not to mention a wider group of stakeholders. There’s a need for more clarity on the potential financial impact of climate-related issues on businesses.  Companies must be more proactive in developing scenarios they can use to assess the resilience of their climate strategies.

Regulation won’t be far behind

Today the TCFD guidelines are still voluntary. However, that’s unlikely to last much longer. In the UK, following the launch of the Green Finance Strategy last year, the Climate Disclosure Standards Board announced that the UK expects all listed companies and large asset owners to disclose in line with TCFD by 2022. Regulation is on the horizon. The guidelines are already being integrated into EU requirements in the non-binding guidelines on non-financial reporting. Finally, the Better Alignment Project has been tasked with identifying areas of alignment between the TCFD, GRI, CDSB, and SASB. 

How are companies responding?

So far, we have seen five communication approaches in annual and/or sustainability reports depending on the maturity of the organisation’s approach to climate change:

  1.  A simple acknowledgement of the guidelines, usually included within the management statements
  2. An acknowledgement plus a commitment to respond to the guidelines in the next reporting year
  3. Limited reporting against the four disclosure areas (governance, strategy, risk management, metrics and targets)
  4. Detailed reporting against the disclosure areas, including scenario development, assumption testing, discussion of potential impacts on the supply chain, and communications. These examples usually include a road map for further disclosures
  5.  A separate document dedicated to TCF disclosure, with full details of development of a resilient climate strategy, identified climate opportunities and risks, appropriate governance structures with clearly outlined roles and responsibilities, scenario planning, metrics and performance against them.

What changes will 2020 bring?

Reporting must change. It needs to be more strategic, focused and stakeholder-driven and, most importantly, it should be led by future intentions and ambitions rather than simply reflecting on past performance. For many companies, 2020 will be their first year of reporting against the TCFD requirements. There’s an opportunity to think differently about the commitments you set, how you plan for the future, and how you communicate your message externally.

We believe 2020 is the year to grasp the challenge.  

 

Get in touch to hear how we can help.

 

 

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