TCFD climate disclosure - from policy to action
With the release of Treasury’s consultation paper on the development of a climate risk disclosure framework last week, the TCFD is here to stay.
In this article series, we will explore why Australian organisations should be prepared to transform to deliver TCFD reporting, and the unexpected benefits that may flow as a result.
The Task Force on Climate-Related Financial Disclosures (TCFD) is a framework that helps organisations disclose climate related risks and opportunities
The Task Force on Climate-Related Financial Disclosures (TCFD) was formed in 2015 when the G20 asked the Financial Stability Board (FSB) to convene public and private sector participants to review how the financial sector could incorporate climate-related risks and opportunities in decision making. Capital markets and investments were identified as a key change lever in the transition to a low low-carbon economy. However, until this point investors were unable to access or interpret consistent, comparable, reliable information from investments to distinguish climate-related risks or opportunities.
In 2017, the TCFD released a set of recommendations that provide a framework for how organisations should disclose their approach to identifying and managing climate-related risks. This framework included guidance for how organisations should evaluate and manage climate-related risks through governance, strategy, risk management and metrics / targets.
Since this time, TCFD reporting has garnered increasing support internationally from governments, investors and companies. The TCFD’s 2022 status update report highlighted that in fiscal year 2022, ~80% of all companies globally disclosed in line with at least one of the 11 recommended disclosures; ~40% disclosed with at least 5, and ~4% fully disclosed against all 11 recommended disclosures.
TCFD reporting has gained critical support in Australia and is likely to be mandatory for large organisations by 2024
On 12 December 2022, the Australian Treasury published a consultation paper and issued a press release reaffirming that mandatory climate related risk reporting can be expected for large companies and financial institutions from 2024.
The consultation paper asked for feedback on a range of matters including:
The benefits and costs of climate disclosures to organisations
Which organisations disclosures should apply to
Whether disclosures should apply to any existing standards (including the standards being developed by the International Sustainability Standards Board (the ISSB)
Where reporting requirements should be situated in relation to annual reporting
What considerations should apply to the requirement to report emissions (Scope 1, 2 and 3)
While consultation is still open until February 2023, our view is that the climate related risk reporting framework that will be ultimately chosen by Treasury will be aligned to the TCFD. This is because:
1) TCFD aligned reporting is already well adopted in Australia – Even in the absence of mandatory standards and a regulatory framework, in 2021 Australia had the 4th largest number of TCFD supporting organisations globally. Regulatory bodies in Australia are also strong supporters of TCFD aligned reporting:
In March 2022, ASIC issued guidance for climate-related financial risk disclosures recommending the TCFD as the preferred framework for such disclosures
In August 2022, APRA released a climate risk self-assessment survey that found that 68% of institutions have publicly disclosed their approach to measuring and managing climate risk with 90% of these aligning disclosures to the TCFD framework
In 2019, The ASX encouraged organisations to align disclosures with the TCFD in its Corporate Governance Principles and Recommendations
2) TCFD-aligned reporting standards are becoming the norm globally – With global quality and standardisation as a key priority of the G20 in establishing the TCFD in 2015, Australia is likely to follow suit.
Australia is also likely to follow a similarly accelerated implementation timeframe for mandatory TCFD-aligned reporting to other countries as outlined in the table below.
Organisational alignment to the TCFD reporting requirements can bring significant benefits beyond just meeting compliance requirements
For many organisations, TCFD reporting represents a paradigm shift in how governance, strategy, risk management and metrics and targets are done and disclosed. It often requires investment in key business processes and in some instances entire operating models.
Reporting against the TCFD requires organisations to have:
Clear understanding of climate-related risks and opportunities and scenarios
Strategies in place for managing and mitigating risk and opportunities in multiple scenarios
Clearly defined and publicly communicated governance structures
Intricate understanding of its own data and systems
Clearly defined processes to extract and report information
Personnel capable of interpreting and communicating results
Organisational alignment to the TCFD reporting requirements can bring significant benefits beyond just meeting compliance requirements
For many organisations, TCFD reporting represents a paradigm shift in how governance, strategy, risk management and metrics and targets are done and disclosed. It often requires investment in key business processes and in some instances entire operating models.
Reporting against the TCFD requires organisations to have:
Clear understanding of climate-related risks and opportunities and scenarios
Strategies in place for managing and mitigating risk and opportunities in multiple scenarios
Clearly defined and publicly communicated governance structures
Intricate understanding of its own data and systems
Clearly defined processes to extract and report information
Personnel capable of interpreting and communicating results
In transforming their business to enable TCFD aligned reporting, organisations may achieve other outcomes including:
Improved access to capital - Financial institutions and investors are increasingly demanding that organisations disclose climate related financial information. In 2022, over 680 financial institutions with more than US$130 trillion in assets and asked more than 10,000 companies to disclose climate-related financial risk information in alignment with the TCFD recommendations. Additionally, 2022 survey conducted by the TCFD highlighted that 77% of companies disclosed climate-related information due to increasing investor demands. Without such disclosures it is likely that organisations will miss out on capital as investors continue to implement more sophisticated ESG investment criteria.
Process improvement for enhanced internal decision-making capabilities and business resiliency – Full disclosure against the TCFD inherently requires organisations to strengthen governance, strategy, and risk management practices. In 2021, the TCFD reported that early adopters of the TCFD Recommendations saw enhancement in data-gathering strategies, improvements in collaboration across business units and improved visibility of risks and opportunities. Collectively these improvements, allow leaders to make more effective decisions to navigate a changing and uncertain operating environment.
Increased trust between the organisation, society and investors – Transparent and voluntary disclosure of climate related risks in line with TCFD recommendations can demonstrate a company’s proactive credibility and willingness to adhere to best practice disclosures. A survey of the UK’s top companies conducted by Carbon Trust in 2019 reported a 72% reported increase in brand value and a 37% decrease in shareholder pressure and activism because of disclosing information in accordance with TCFD Recommendations.
Improved collaboration and partnership potential – Sophisticated TCFD reporting requires disclosing Scope 3 emissions. This disclosure inherently requires strong relationships with value chain partners, and can lead to additional benefits through improved engagement with suppliers and customers – which in itself could evolve into commercial opportunities.
What does this mean for Australian organisations?
Our view is that all Australian organisations regardless of size and corporate structure should consider implementing TCFD-aligned reporting ahead of any 2024 mandate or risk losing out on the benefits outlined above.
In the next article in this series, we will share insights from interviews with blue chip Sustainability Leaders on the specific benefits and lessons learnt from their own implementation of TCFD in their organisations.
For more information, please contact Arvind Sharma at asharma@rennieadvisory.com.au