Investors determined that climate is a material issue for a company’s financial performance. As a result, the Task Force on Climate-related Financial Disclosures (TCFD) developed disclosure recommendations to have a common way to evaluate company approaches to climate to “support market transparency and more informed capital allocation.”

While TCFD was set up to guide disclosures and is a regulatory requirement for many companies (e.g., California's SB-261 on climate-related financial risk and the US SEC’s rule on climate-related disclosures), there is a compelling case that its recommendations can bring useful value to a company’s sustainability program – for those required to use TCFD and those not required to use it.

The TCFD recommendations, now managed by the International Financial Reporting Standards (IFRS) and run through the International Sustainability Standards Board (ISSB), include four areas of focus: governance, strategy, risk management, and metrics and targets. Of particular interest, the “strategy” recommendations guide companies to: Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. Specifically, to:

• A) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
• B) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
• C) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

When a company undertakes these recommendations, a deep dive into the business’s connection to climate change impacts is needed. This requires assessing and understanding the physical (i.e., flooding) and transition risks (e.g., carbon tax) to the business, along with related opportunities. As summarized by TCFD, organizations should consider including the [climate] impact on their businesses, strategy, and financial planning in the following areas:

• Products and services
• Supply chain and/or value chain
• Adaptation and mitigation activities
• Investment in research and development
• Operations (including types of operations and location of facilities)
• Acquisitions or divestments
• Access to capital

Notably, the financial aspects (e.g., costs, revenues, liabilities, and assets), of these risks and opportunities are evaluated. The process ends up being new for most companies that have been focusing on metrics (GHG emissions) and targets (GHG reduction).

As a result, the TCFD process offers a few unique approaches that enable greater success for sustainability programs, such as:

• Elevating the discussion to levels and roles in the organization that are typically less engaged in sustainability, such as executives and board members and finance and risk management.
• Considering future scenarios and how the business would need to adjust its strategies accordingly.
• Shifting the climate conversation from investment/cost to identifying business value, risks, and opportunities.
• Uncovering new/additional sustainability and business strategies.
• Providing financially relevant information about sustainability and climate to the business.
• Connecting climate metrics and targets to business priorities.
• Integrating climate into business decisions.

For example, Nestlé identified key climate-related risks and evaluated their potential directional impacts for both transition and physical risk factors. With an understanding of those risks and in an effort to increase farmers’ resilience, they provide regenerative agriculture technical assistance to farmers – such as the development and distribution of plantlets that are more resistant to drought and disease.

AstraZeneca enhanced its business and risk strategy based on the TCFD process. The sites with the highest physical climate risk were identified, and efforts were undertaken to manage those risks, such as restoring lakes near one site to improve resilience under times of extreme water stress and availability. While the company started its climate risk process with assets, it then adopted the approach for its value chain.

Ingka Group, a holding company operating IKEA stores, notes, “We are likely to face increased costs under both [future] climate change scenarios if no action is taken to mitigate transition risks. However, with our ambitious climate action targets, we expect to mitigate these costs while playing our part to limit the costs to planet, people, and society to 2050 and far beyond.”

Companies have been using TCFD largely as a qualitative process, but the most benefit comes from including a quantitative perspective – by adding estimated financial value. Since TCFD is explicitly included and implied in regulatory requirements, more companies will be undertaking the process and the typical practice will likely shift from qualitative to quantitative assessments for key areas of risk.

Additional TCFD implementation improvements are expected by adding nature. Nature has a similar framework, the Taskforce on Nature-related Financial Disclosures (TNFD). This process is aligned with TCFD and supports nature strategy development. Since the two are similar, TNFD can help a company to consider both climate and nature as it goes through the process.

Nature may not be as far along for many companies or have as much information/data available as climate. Companies can begin including TNFD in the TCFD process with the information they have available to start exploring the connection between climate, nature, and business. Climate and nature are interconnected in ways that they both need to be successful for the planet to thrive. For more information, Pure Strategies developed an effective and accessible means for companies to understand and advance climate and nature for the most effective sustainability programs, Planet-Forward Strategies.

TCFD and related regulatory requirements should not be seen simply as a check-the-box activity; business and sustainability program benefits will be gained from this effort. Even companies that are not required to do this type of risk and opportunity assessment should look at TCFD and the joint TCFD/TNFD processes as a strategic opportunity to help build greater internal engagement and interest in climate and sustainability to set the program up for greater success.

- Contact Pure Strategies to learn more about how we can help with TCFD and TNFD, with a focus on a strategic approach to these processes.