Climate Change and Its Impact on Regulations – Introduction to TCFD Recommendations
Hi dear readers, my name is Shuang. As part of the sustainability family in SAP Profitability and Performance Management content development team, I have accumulated experience on sustainable finance and have been studying, among others, the impact of climate change on business.
Climate-related risk is no longer a purely non-financial risk, or at least it should not be treated as such. While research on positive relation between company’s environmental, social and governance (ESG) risk management and financial performance are continuously being published, we can spot the trends that companies tackling the sustainable issues can not only have positive long-term impacts on environment and society, but also accrue advantages and benefits for themselves. However, how should companies disclose their practices on evaluating and preparing for climate risk? Is there a reporting landscape that connects standards across sustainable and financial frameworks?
The answer is, yes! Task Force on Climate-related Financial Disclosures, commonly named TCFD, has been developed just for that.
What is TCFD
With the support from G20 members, TCFD was initially set up by Financial Stability Board (FSB) in 2015 and released in 2017 in the hope of promoting global financial stability and transparency. TCFD focuses on the effects of climate change on companies, assesses the physical and transition risks from climate change on businesses and embeds the resulting financial risk into disclosure of decision-useful, climate-related financial information. To give an example, many companies are facing increased carbon pricing, in a form of e.g. Emission Trading Systems (ETS) or carbon taxes, which is one of the transition risks of climate change. The financial implication behind that would be increased operating costs. TCFD encourages to provide this kind of information in financial terms, so that investors, lenders, insurers and other stakeholders will be able to make well-informed decisions.
The Task Force developed its recommendations across four pillars that represent core elements of organizations’ operation: governance, strategy, risk management, and metrics and targets.
- Governance example information includes whether the board considers climate-related issues when reviewing and guiding the company’s strategy and risk management policies etc.
- Strategy examples information includes climate scenario analysis results on how resilient a company’s strategies is to climate-related risks under different climate-related scenarios, including 2° C above pre-industrial level or even more ambitious scenarios.
- Risk management example information includes the processes of assessing the potential size and scope of identified climate-related physical risks.
- Metrics & targets example information includes company’s Scope 1 and Scope 2 greenhouse gas (GHG) emissions and, if available, Scope 3 GHG emissions.
Information on TCFD recommendations’ fulfillment can be turned into a standalone report, but it can also be mapped to indicators from other reporting standards such as Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), and can be incorporated into companies’ sustainability reports. Such flexibility and compatibility help decrease the reporting as well as auditory burden.
Why stakeholders need TCFD reporting
As I mentioned in the previous section, TCFD encourages the quantification of climate-related financial risks and by doing so, it increases consistency and comparability of data across companies.
From the companies’ perspective, granular targets and metrics as well as qualitative financial impact indicators can assist them in setting effective long-term strategies while showing phased performance promptly.
From investors’ point of view, if organizations are not transparent on their governance structures, business strategies and risk management practices, investors may incorrectly price the assets and misallocate their capitals due to inaccurate information. On the other hand, If TCFD recommendations are more broadly adopted, investors can seek to invest in companies that are committed to adequately addressing the long-term climate risks to their business.
How can we leverage SAP Profitability and Performance Management to incorporate TCFD reporting?
TCFD reporting is now incorporated in SAP Profitability and Performance Management Financing and Investment Sustainability Management sample content as well as the Value Chain Sustainability Management sample content.
In the Financing and Investment Sustainability Management sample content, climate-related financial information from invested companies, including, but not limited to low carbon transition degree, fossil fuel exposure, climate regulation by region and management board’s oversight on climate issue, are collected from invested companies’ public filing and maintained in specific model table. Screenshot below provides a view of the interface and available fields of TCFD model table in Financing and Investment Sustainability Management sample content:
Our TCFD report is displayed in tables with mixture of description and charts, as presented in screenshots.
A lot of progress has been made, but some obstacles on the road to full implementation of TCFD reporting by companies still exist. Data limitation and cumbersome data extraction process have hindered many companies from disclosing all necessary information based on recommendations. However, TCFD indeed took a huge step with emphasizing financial implication of climate risk and recognizing the need of comprehensive climate change strategy for companies to become climate resilient. From here we will head for the next steps – conduct climate scenario analysis, consolidate the results and build more robust TCFD reports – by now we have already implemented corporate-side TCFD reporting template in our Value Chain Sustainability Management sample content, so stay tuned for more TCFD-related sample contents in SAP Profitability and Performance Management.