By CDP head of reporting Tony Rooke
CDP is a global platform for environmental disclosure.
All companies will soon have to account for climate risk. That was the clear message from the report of the G20 Task force led by financial heavyweights Mark Carney and Michael Bloomberg earlier this year, and it is increasingly the message of shareholders too. In recent months we have seen landmark investor votes such as the one at Exxon in May that saw 62% of shareholders call for disclosure on climate risk, and we’ve seen the world’s largest asset manager, BlackRock, make it a top engagement priority to ask companies how they are assessing the risk that climate change may pose to their operations.
Thus for many accountants the question has become not whether to manage climate risk, but how to do it. What is the process, and what metrics and targets will companies be expected to report?
A global standard emerges
That is why the Carney/Bloomberg Task Force on Climate-related Financial Disclosures (TCFD) which reported this summer may prove so significant. With the support of the G20 the TCFD’s core recommendation is that all companies should disclose climate-related financial information alongside their mainstream financial filings; and it has tried to create some global standardisation to climate reporting. Its key recommendation is that all companies, and investors, report against the same four core areas: i) governance, ii) strategy, iii) risk management and iv) metrics and targets.
It is a job that is likely to land on the desk of most accountants in the near future so it’s important to explore each of these four core areas in more detail.
i) Displaying climate competent governance
The TCFD recommends that all companies disclose how their board oversees climate risks and opportunities. In practical terms this is likely to mean reporting on how a board supervises and monitors climate-related issues.
ii) Evidencing a corporate climate strategy
The second TCFD recommendation requires companies to disclose the actual and potential climate-related risks and opportunities they believe will affect business strategy, and the extent to which they are likely to impact revenue. In practical terms this is likely to mean undertaking a ‘scenario analysis’ i.e. disclosing financial planning (for example by using an internal carbon price) for the potential impact of different climate scenarios such as 1.5° and 2° degree temperature rises.
iii) Disclosing climate risk management
The third TCFD recommendation is that all companies disclose information on how climate-related risks, as well as opportunities, are integrated into overall risk management. In practical terms this is likely to mean reporting on the processes for identifying, assessing and managing climate risks.
iv) Showing the metrics and targets used to manage progress
The final TCFD recommendation is that one that many accountants see as the most challenging: the task of finding clear, measurable climate targets that can be easily integrated into a company’s mainstream reporting.
However, there are several useful initiatives that can help companies find the right KPIs for them. A good example of this is the science-based targets (SBTs) initiative. SBTs are a way to set meaningful carbon emissions reduction programmes that align with the Paris Agreement and therefore also ensure that your company’s efforts fit into the bigger picture of climate change mitigation. SBTs also enable companies to better understand where they are vis-a-vis their competitors.
Some of the most common metrics used by companies that report to CDP that can help form corporate environmental targets include:
- Total capex in low carbon investment: Providing a relatively easy-to-quantify way to measure progress towards decarbonisation.
- Operational efficiency measures: Improvements in areas such as energy efficiency and water use provide a material and quantifiable way to measure progress.
- Percentage of production in water stressed areas: An important target for companies in water-risk areas, especially in sectors with high-water use such as extractives, apparel or beverages.
What are the benefits of working towards these targets?
The metrics and targets that the TCFD recommends all tend to link closely to clear business benefits including cost savings, better investor and customer relations and a healthier working environment. Most of all, they are about showing how a company is futureproofing its growth ahead of likely future policies and regulations to limit GHG emissions. All this leads to better overall performance; companies on CDP's 'Climate A List' outperformed the market by 6% over four years.
Every company is different, and not everyone will agree on the timing or scale of what should be reported on in this area. However, as the importance of assessing environmental risk continues to gather momentum those who begin the process now will join a growing group of businesses reporting greater efficiencies, improved profitability and competitiveness from their efforts around climate change.