In previous blog posts, we’ve looked at specific climate initiatives like developing a credible net-zero strategy, how to get started with scenario analysis, and how climate goals are driving demand for better disclosure. This time, we’re stepping back to focus on what it means to ‘act’ on disclosures that are developed in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (the TCFD).
As regular readers will know, the TCFD provides a framework to help companies disclose their climate-related risks and opportunities. The TCFD is compelling and increasingly mandated around the world (at present more than 110 regulators and governments worldwide support TCFD, and there are over 2,000 TCFD signatories across all major economies).
But turning TCFD disclosures into action, and what action even means in this context, needs some unpacking. That’s because the TCFD doesn’t require a company, or any investor in a company, to take specific climate action. Rather, it aims to bring transparency to capital allocation decisions. If that sounds confusing, read on.
A framework for action
The TCFD is organized around four core pillars: governance, strategy, risk management, and metrics and targets. Each of these pillars supports specific recommendations. The governance pillar, for example, asks a company to describe both the board’s oversight of climate-related risks and opportunities, and management’s role in managing those risks and opportunities. That’s good, but it doesn’t necessarily result in improved board oversight, or better management.
A significant volume of TCFD-authored supporting material adds to the basic TCFD framework, which points us in the right direction. For instance, TCFD guidance includes notes on performance objectives, climate plans and accountability for climate matters within an organization. But again this guidance, purposely, aims to inspire action, not mandate change. The TCFD is a framework, not a standard. Effecting change is left for companies and investors to consider on their own.
Action within a company
Operationalizing the TCFD framework within a company is sometimes as simple as asking some pointed questions.
For instance, let’s say you’re a sustainability professional and you become aware of a climate report that you know will have a huge impact on your organization. A timely example is the recent publication of the International Energy Agency’s Net Zero by 2050: a Roadmap for the Global Energy Sector. In the IEA’s own words, this will require nothing less than a complete transformation of the global energy system. This is staggering, and will almost certainly have a direct or indirect on your business. But:
- Do you know who to share it with?
- Do you know if it will be received fairly?
- Do you know that your board will act on it in a way that is consistent with your climate plan?
- Do you even have a climate plan?
If the answer to any of these questions is ‘no’, then you know you have work to do.
If the answer is ‘yes’ to all of them, then, first, well done, you’re ahead of the game. But even if you answered yes, there’s another critical factor to consider. If you posed the same set of questions to an external investor, how would they respond? Would they – like you – answer ‘yes’ to all of the same questions? Or might they waver, or even answer ‘no’ to one or more of them? We suspect your answers may differ from those of your investors. That’s what we’re often finding when we conduct our TCFD alignment assessments for our clients.
A company that answers ‘no’ to our questions is the easy case; it’s obvious what action needs to be taken. In other cases, however, a company answers ‘yes’ to all our questions, but we look at their public disclosures and find that their message to the outside world is different. That happens far more often than you might think and can be very damaging to the perception of that company in the market. Put differently, a mismatch between an internal story (i.e. what a company thinks it’s doing) and an external story (i.e. what a company’s disclosures reveal to anyone reading them) can have a material impact on how that market is perceived by, among others, investors. Which brings us to our next point of focus.
Action by investors
Accurately reading and interpreting a company’s TCFD disclosures requires both skill and endurance. Skill because there are nuances in company statements that take time to learn and change over time. Endurance because disclosures are often lengthy and climate-related matters appear in different places.
So, when an investor thinks about acting on TCFD disclosures, that investor – like the sustainability professional within a company – can ask themselves some pointed questions.
Assume you’re an analyst that has just received the latest annual reports from a portfolio of companies, and have been asked to assess those disclosures on climate:
- Can you say, with confidence, that you know where to look for climate disclosures?
- Will your review be consistent across the whole portfolio?
- Can you accurately assess TCFD-alignment for each investment?
- Can you do all of this in time to make an informed investment decision?
If the answer is ‘no’ to any of these questions, then you’re not alone. If you’re also thinking that the consistent, accurate and effective interpretation of climate disclosures is critical to making an informed investment decision, then you’re also right, it is. There is increasing pressure on investors to make investment decisions that are consistent with net-zero ambitions.
The good news is that improvements in TCFD-alignment make it easier for investment professionals to act on climate disclosures. And here there’s a positive feedback loop. Just as investors feel pressure to make informed decisions, so too can investors exert pressure on the companies they invest in, to improve their climate disclosures. Such investor influence is itself action, and evident from the proliferation of net-zero and TCFD-alignment pledges by investors with trillions of dollars of assets under management.
Pressure by investors on investee companies will necessarily result in clearer and more consistent climate disclosures, and better disclosures will make it easier for investors to make decisions about which companies they invest in. That is transparency in capital allocation. That is the purpose of the TCFD.
Part II, and how Manifest Climate can help
In Part II of this blog, we further unpack action that climate professionals can use to determine where they are on their climate journey.
In the meantime, whether you work for a company that’s looking to assess how well your organization is doing against its peers (and act on that assessment), or an investor looking to make your investment decisions a little easier, call us. We can help. We’ll work with you to turn climate disclosures into actionable steps. Contact us today.
