Climate Change: Whose Problem Is It Anyway?
Zasti
Oct 1, 2021
Climate risk is a term that is fast gaining attention as a major determinant of sound business practice. However, there are several ambiguities associated with what constitutes climate risk, and how best to tackle it. In a global system that is made up of businesses with diverse interests, there is no singular means of resolving risk. But risk disclosure frameworks have become streamlined in ways that are accessible to businesses everywhere. The TCFD (Task Force on Climate-related Financial Disclosures) is a notable example of such a framework that is currently changing from being a voluntary practice to a mandatory requirement for businesses across sectors.
What’s in it for us? Organizations that currently follow profitable carbon-intensive models may lose out on the gains of making a timely transition to a low-carbon future. This applies to financial and non-financial organizations equally. Various companies in the healthcare and pharmaceuticals industries have begun to align themselves with frameworks such as the TCFD and GRI to fulfil their net-zero commitments. AstraZeneca recently published a report in alignment with TCFD recommendations, and is an example of a large global company that is considering the economic opportunities of early decarbonization: “Managed correctly, this presents a commercial opportunity where peers have yet to establish a path to net-zero or carbon zero.”
Risk disclosure frameworks are becoming increasingly significant with each passing day, and the TCFD is one that businesses would benefit from familiarizing themselves with. The TCFD was established by the Financial Stability Board to be a future-facing tool to incorporate climate risk into investment, credit and insurance pathways. It is founded on the premise that climate change has made necessary the incorporation of a new category of risks into existing organizational structures of risk management. The TCFD equips businesses and investors with comprehensive information about the financial impacts of climate change to encourage sustainable and transparent decision making.
The TCFD follows a process of making recommendations to organizations across four central categories: governance, strategy, risk management, and metrics and targets. Governance includes a two-part disclosure of the board and management’s role in climate risk management. Strategy includes the disclosure of the existing and future impacts of climate risks on the organizational umbrella. It consists of a three-part submission on risks in the short, medium and long term, the impacts of climate risks and future opportunities. Additionally, it also encourages disclosures of organizational resilience based on the 2°C target scenario.
Risk management also consists of a three-part disclosure on the identification of climate risks, plans for management, and the modalities of integrating climate risks into organizational risk management architectures. Metrics and targets include a three-part disclosure on how the organizational strategies for risk management translate into the realization of quantifiable objectives. This category tops off risk management processes with clear statements of accountability by including a disclosure of metrics for the assessment of risks and opportunities, Scope 1, 2 & 3 emissions, risk management targets and the verification of performance.
The benefits of TCFD are numerous. The framework integrates organizations into an internationally standardized system for transparency and risk reporting. It provides analyses that are tailored to the metrics of specific organizations, while identifying new areas of opportunity. The ability to compare organizational performance against targets creates a system of accountability that can translate into significant sustainability gains. The channelling of these benefits into a single streamlined process contributes to TCFD’s value as a robust mechanism for climate risk disclosure.
All businesses would do well to hop on board the risk disclosure train before it is too late. Proactive transitions are key to a climate resilient future.
