Climate-Related Financial Disclosure
What is climate-related financial disclosure, and why does it matter?
Today, we see far more investors interested in climate issues.
This is because, according to The Economist Intelligence Unit, up to $43 trillion (£31.5 trillion) of value is at risk as a result of climate change to manageable assets by 2100. Without reliable climate-related financial reporting, “financial markets cannot price climate-related risks and opportunities correctly and may potentially face a rocky transition to a low-carbon economy, with sudden value shifts and destabilising costs if industries must rapidly adjust to the new landscape,” according to the Financial Stability Board.
To move industries, markets, and people securely to a low-carbon energy future, companies need to show they can adapt as our environment changes, regulations and policies on climate-related issues evolve, and customer behaviours shift.
“Investors have an important part to play in actively encouraging companies and policymakers to commit to implementing credible transition plans that will support this achievement,” states The Institutional Investors Group on Climate Change (IIGCC), the European membership body for investor collaboration on climate change. The body of 330 investors from 22 countries encourages companies, policy makers, and fellow investors to drive progress to a net zero future. This means, increasingly, investors want to see how companies handle the financial risks and opportunities presented by the climate crisis.
Today, however, there is no consolidated method by which companies can report on financial and sustainable issues. Additionally, companies who focus only on the financial risks related to climate reporting miss the mark on reporting their impact on the climate, according to Bastian Buck of the Global Reporting Initiative. Without transparent reporting on climate matters, investors lack the information they need to make key investment decisions. They want to put their money towards companies that are resilient to environmental issues spurred on by climate change and adaptable to evolving climate-focused policies.
The TCFD and climate-related financial disclosures
The Task Force on Climate-related Financial Disclosures (TCFD), a group of five framework- and standard-setting international institutions formed in 2017, together with The International Financial Reporting Standards (IFRS), aims to create a global standard in climate and financial reporting as a consolidated report.
The TCFD includes the CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB). In December 2020, they co-authored an illustration of how each of their own current frameworks, standards, and platforms “can be used together to provide a running start for development of global standards that enable disclosure of how sustainability matters create or erode enterprise value.”
The goal of TCFD is “to promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.”
Members of the TCFD represent or provide their own frameworks for sustainability reporting, which is designed to reveal a company’s most significant impacts on not only the environment, but also people and the economy. Transparent climate reporting enhances corporate reputation, builds consumer confidence, accelerates innovation, and improves financial risk management.
TCFD sees that climate-related financial disclosures would allow companies to disclose their sustainability matters as it relates to the creation or erosion of enterprise value.
TCFD believes that “sustainability reporting and sustainability-related financial disclosure must be seen as interrelated reporting concepts, with shared methodologies wherever appropriate.” Their climate-related financial disclosure standard will be a “natural extension” of the IFRS’ current role.
Timelines for the consolidated reporting scheme will be released later this year, the TCFD says.
An overview of TCFD’s recommendations on climate-related disclosures
As work on a final climate-related financial disclosure method continues, the TCFD offers recommendations on how a consolidated disclosure would look and work. Their recommendations are structured around four thematic areas that reflect how organisations operate: governance, strategy, risk management, and metrics and targets.
In regards to governance, the TCFD recommends for a company to describe their board’s oversight of climate-related risks and opportunities and their management’s role in assessing and managing those risks and opportunities.
Disclosures on a company’s strategy should describe their short-, medium-, and long-term climate-related risks and opportunities that they have identified. They should also consider the impact on their business, strategy, and financial planning and describe the resilience of these things when taking different climate-related risks scenarios into consideration.
When disclosing how the organisation identifies, assesses, and manages climate-related risks, companies should describe their process for identifying and assessing these risks, the processes for managing them, and how these processes are integrated into the organisation’s overall risk management.
Finally, in regards to metrics and targets, the TCFD recommends for companies to disclose the metrics used to assess climate-related risks and opportunities that are in line with its strategy and risk management processes. They should disclose Scope 1, Scope 2, and Scope 3 (if necessary) greenhouse gas emissions and their related risks. Lastly, they should describe the targets used to manage these risks and opportunities.
What would climate-related financial reporting mean for businesses?
Climate-related financial disclosure helps investors discover if companies will find financial security and longevity through climate-friendly practices and environmental stewardship.
This type of reporting would be crucial for a company wanting to show to investors their short- and long-term financial sustainability as it relates to sustainable practices. Investors see that the business model of a company has both positive and negative impacts on customers, employees, and natural resources – what the TCFD calls together “stakeholders.” These stakeholders together with the environment in which the company operates conversely impacts positively or negatively the company’s business model, thus affecting its enterprise value.
According to the CDP, the non-profit charity that operates a global environmental disclosure system, there is a “high and growing market demand for environmental disclosure.” Nearly 600 investors with over $110 trillion USD in assets request thousands of companies to disclose their environmental data through the CDP, the group says.
Future growth for companies through the support of keen investors will rely on transparent climate-related financial disclosures. A recent study found that companies recognise this, as evidenced by their increasing recognition of the importance of sustainability reporting. The KPMG Survey of Sustainability Reporting 2020 suggests there is a growing trend in companies acknowledging the financial risk of climate change and linking corporate carbon targets to global climate goals.
What can companies do now to prepare for this standard?
While there are no finalised standards on climate-related financial disclosures as of now, companies can prepare themselves for the standard by continuing their reporting obligations according to existing guidelines. Companies do not have to wait to see what they must do as they can anticipate that the vision on the global standard will include things they are already doing. They can also identify what they can do and tackle the current reports from their own business perspectives.
Companies can also act now to decarbonise their business. As we at Northern Gas and Power emphasised during Net Zero Week 2021, companies of all sizes can act now to develop their plan towards bringing the UK to net zero by 2050. Energy audits and setting achievable net zero goals can be accomplished by all companies.
Dan Smith, Head of Energy Services for ClearVUE Systems, makes the strong argument that there is a strong business case to be had for decarbonising your business. “Once we do the investigative work (through energy audits),” Dan Smith says, “there is a business case for net zero: save energy, save money, and save carbon.”
At Northern Gas and Power, our expertise in energy management services reduces the workload for companies and offers them confidence with compliance.
Our Energy Services department is headed by Chartered Engineer Dan Smith (C.Eng.), who will oversee all matters related to your business carbon assessment.
ClearVUE. PRO – providing cost, consumption, and carbon reporting tools
ClearVUE Systems, the technological arm of Northern Gas and Power and the Global Procurement Group, provides energy management solutions that help companies save money and cut carbon emissions through smarter energy usage. It lets companies view and analyse their business energy, power consumption data, carbon emissions, and energy-related costs in real time or historically, all in an effort to improve business and energy efficiencies.
An energy management system such as ClearVUE. PRO is an invaluable tool for companies wanting to precisely measure their energy efficiency. The granular energy data from the system can help you fulfil your reporting obligations such as those for the SECR (Streamlined Energy and Carbon Reporting).
ClearVUE. PRO has powerful reporting tools on businesses’ energy measurements such as energy consumption, waste, emissions, and costs. Users of the energy management software can select their business’ sites and meters and use the Inspector functionality to print user-friendly Consumption Reports in PDF or Excel formats.
Have more questions about climate reporting?
Northern Gas and Power’s carbon assessment service offers this reporting as well. We offer additional services for this reporting as part of our carbon assessment offer. We can help you report on your climate-related risks and opportunities.
If you have questions about your business energy and how you can better manage, procure, and consume it, give us a call on +44 (0)3 300 300 800.