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Lead with Climate: A Primer on ‘Climate, ESG, and the TCFD’

April 20, 2022

A more detailed version of this blog can be found here.

Today’s investors have to understand how businesses are impacted by Environmental, Social, and Governance (ESG) and climate-related risks and opportunities if they are to make wise decisions. While ESG and climate are often conflated by companies and external stakeholders alike, there are important distinctions between the two.

In this blog, we lay out the differences between ESG and climate, and how the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) can be used by businesses to understand and report their impacts.

Defining ESG

ESG encompasses three sets of non-financial risks and opportunities that have not been historically considered by investors when valuing a company. However, these factors are becoming increasingly material to business’ financial performance, and therefore to the value of the equity and debt they issue into the capital markets.

ESG risks can negatively affect a business’ performance in various ways. For example, a chemical manufacturer that fails to consider the environmental issues related to a new factory may struggle to obtain the necessary permits to start construction. A poorly-governed bank may give rise to a company culture that incentivizes profit over all else, leading to misconduct and regulatory fines.

Often, ESG risks intersect. A North American oil pipeline company, for instance, has to consider the environmental risks facing its physical assets, as well as the social risks associated with their construction in the territory of Indigenous peoples.

The same is true of ESG opportunities. For example, establishing a governance structure that includes non-executive-level employees can bolster a company’s productivity and make it more attractive to socially-minded investors.

For some stakeholders, simply understanding how ESG factors impact a company does not provide a holistic view of their risks and opportunities. For that, they need to also grasp how the company itself affects ESG considerations. This ‘double materiality’ approach can be insightful because when a company adversely impacts the environment and society the consequences can rebound on them in the form of litigation or reputational damage.

Defining climate

Climate change is a systemic risk. This means it threatens to undermine or fundamentally reshape the interlocking systems that underpin human civilization and the biosphere. 

Climate-related physical risks will transform Earth’s atmosphere, oceans, cryosphere (snow and ice), land surface, and more — with profound implications for humanity. Climate-related transition climate risks, meaning those actions taken by human societies to mitigate climate change, have the potential to remake the global economy. Each category of risk could inflict trillions of dollars of losses on businesses. Each also has the potential to make certain businesses more profitable than ever.

Though these risks and opportunities will manifest differently across regions and economic sectors, each and every business will be affected by them. Many have been impacted by them already.

Because of the epic sweep of climate change, it should not be considered a mere subset of the ‘E’ in ESG. It is a risk factor that intersects with — and exacerbates — all three ESG categories, as well as all traditional financial risks.

How should we think about ESG and climate?

ESG and climate are different lenses through which to assess a business’ risk profile and its capacity to maximize opportunities. However, it is only through the climate lens that stakeholders can gain insight into a business’ ability to withstand, adapt to, or profit from the ultimate systemic risk.

A company may be able to boast of having a low ESG risk profile if it ticks enough boxes in a given non-financial rating methodology. But a strong ESG performer may not be a strong climate performer. It may have a well thought-out environmental policy; but lack a physical climate risk resilience plan. It may score a high ‘S’ rating for its charity commitments; while failing to help its local community prepare for the low-carbon transition. It may have an inclusive governance structure; but no linkage between remuneration and climate factors. 

In short, using ESG factors alone to judge a business’ risks and opportunities would leave out a wealth of information that the climate lens would capture.

The TCFD’s role

The recommendations of the TCFD are intended to surface businesses’ climate-related risks and opportunities. Other voluntary disclosure frameworks are focused on broader ESG disclosure, but have yet to achieve stakeholder buy-in at the same scale as the TCFD.

Why? One reason is a widespread demand from investors and other stakeholders for better information on how businesses could be impacted by climate change. This reflects growing awareness of climate science and the efforts of policymakers and civil society to make companies understand its implications. 

Another factor is that the TCFD is backed by the Financial Stability Board, an international body of financial regulators, and has been endorsed by the G20 countries.

Climate disclosure and ESG disclosure are not mutually exclusive. In fact, the TCFD recommendations are being used as the building blocks for broader ESG disclosure frameworks. For example, the International Sustainability Standards Board (ISSB) is developing a global baseline of sustainability-related disclosure requirements for companies around the world. It has started with climate-related disclosure requirements based on the TCFD — but it won’t end there. It simply recognizes that climate-related disclosure can inform and enrich other ESG disclosures down the line.

How Manifest Climate can help

Our climate intelligence SaaS+ platform combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale. We can help companies of all sizes understand their climate risks and opportunities.

  • Our technology and world leading experts support teams to get started by identifying and implementing critical actions to achieve disclosure objectives, and beyond.
  • Our platform, which combines climate expertise with AI, can help companies understand their reporting strengths and weaknesses as well as how they stack up against their peers.
  • We help companies understand the extent of their alignment with TCFD or other climate reporting standards/regulations, providing transparency into a company’s climate risks/impacts and making the reporting process more efficient.
  • Our world-leading climate disclosure data shows that when companies understand their climate risks and impacts, they are better positioned to put in place a plan to more effectively manage and ultimately reduce emissions.

Get in touch with us now to learn more.