Is TCFD a catalyst for transformational climate adaptation?

Is TCFD a catalyst for transformational climate adaptation?

Is TCFD a catalyst for transformational climate adaptation?
Karl Schultz
Wed, 03/24/2021 – 01:00

This commentary is part of a series on emerging issues from Adaptation Leader.

The Taskforce on Climate-related Financial Disclosures (TCFD), an initiative of the influential Financial Stability Board (FSB), offers a framework for disclosure of climate risks. Despite the generally positive response and resulting buzz, in particular among advocates for climate action by businesses and those wanting to get on the bandwagon, the uptake of TCFD disclosures has been slower than its proponents had hoped.

With time, the levels of disclosure likely will increase with more governmental mandates and shareholder activism on climate action. But the quality of the disclosures is critical in meeting the existential challenge of climate change.

There are, of course, two sides of climate action that must be addressed: mitigation (usually by emissions reductions) and adaptation. Economic and social survival can be achieved only through both rapid declines in greenhouse gas emissions and, critically, armed with foresight on the impacts of climate change, decisive action to adapt to these impacts.

Can TCFD stimulate adequate movement on both tasks? On its current trajectory, the answer is a clear “no.”

Can TCFD stimulate adequate movement on both mitigation and adaptation? On its current trajectory, the answer is a clear ‘no.’

In their current form, the TCFD recommendations lack the specificity and enforcement mechanisms needed to induce broad-scale changes in corporate disclosure. Could they contribute to such a transformation or is this asking too much? We believe that with modifications to the recommendations and the resources to guide climate-related disclosure, TCFD’s activities could lead to important improvements.

TCFD could unveil risks and opportunities with tangible impact on the bottom line. As corporate leaders realize that they have the potential to help their organizations adapt, thrive and gain competitive advantage through adaptation, the TCFD recommendations could spur an economic and social transformation.

Missing pieces

It’s important to understand what is missing in the current framework and disclosure regime.

  • TCFD steers towards carbon exposure and transition risks. TCFD risks are broadly defined into two categories: physical climate risk and “transition risks.” Physical climate risks are risks of impacts caused by flooding, droughts and storms. Transition risks are the risks a company may face when society forces it to curtail its greenhouse gas emissions and the risks of impacts caused by policies and investments that lower emissions such as reductions in fossil fuel demand. TCFD guidance insufficiently emphasizes physical climate risks, which results in corresponding disclosures emphasis on transition risks.
  • Adaptation strategy is under-emphasized. Only 7 percent of companies in the latest review by the FSB “disclosed information on the resilience of its strategy.” The short shrift given to adaptation strategy is quite shocking. Among the early guidance provided to any junior staffer in a corporate setting is some variant of, “Don’t just bring a problem to my attention, tell me how you propose to solve it.” In a climate action context, then, the response(s) being planned or taken to adapt to a changing climate is of primary importance.
  • Adaptation metrics need further development. The International Platform for Adaptation Metrics notes, “One of the key barriers over and again acknowledged is the need for a global effort to build consensus on metrics to help governments, businesses and financial institutions to identify and steer investment.” The FSB acknowledges this insufficiency of guidance on metrics and targets, and recently has undertaken a consultation to identify “decision-useful, forward-looking metrics to be disclosed by financial institutions.” Unfortunately, it looks at high-end financial metrics (value at risk, for example), not the underlying metrics necessary to understand physical climate risk and adaptation.
  • Limiting scope to financial disclosure is a missed opportunity. The TCFD — and it’s in the name — is focused on financial disclosure. The question, then, is by only looking at financial impacts, do the TCFD recommendations do enough to ensure that corporations understand what to do to adapt and be more climate resilient? Corporations need to explore the social and broader contextual, market, employee, customer and supply-chain environmental/physical climate risks, and the adaptation actions they are implementing or could undertake as well, if they are to truly consider the interests of all of their stakeholders.
  • Focus on the disclosing corporate entity ignores important systems effects and solutions. Unlike carbon emissions and mitigation, physical impacts, risks and adaptation to climate change permeate whole systems. For many industries, common but complicated issues may require sectoral disclosures or initiatives, so as to give individual companies a sufficient level of understanding of the types, range and extent of climate impacts on their future assets, productivity, markets and broader stakeholder community.

Driving adaptation

Given that we are looking at an uncertain climate future, TCFD disclosures, if undertaken to instigate corporate adaptation foresight and nimble planning, could become a key aspect of corporate competitiveness. These disclosures will create positive feedback loops as companies strive to become best adapted and encourage public sector adaptations that further grow their competitive advantages and a more climate-resilient global commons.

How could TCFD further contribute to corporate value creation and investment decision making, as well as to the transition to a climate change-resilient economy and society?

To begin, we must surmount the considerable remaining hurdles impeding effective, action-oriented disclosures of physical climate risk and adaptation. Adaptation Leader suggests that FSB, corporate entities and other critical stakeholders (trade associations, governments, research bodies) focus on the following measures:

  • Ensure that climate mitigation “policy failure” scenarios are considered to enable adaptation planning and enlightened investment decisions for extreme climate disruptions.
  • Require and make TCFD guidelines and national disclosure policies clear on strategy resilience, including explicitly the need to include adaptation planning strategies.
  • Redouble efforts to integrate not just financial metrics but also support efforts to achieve consensus on and provide guidance on coherent climate impact and adaptation metrics in disclosures.
  • The FSB, national governments and industry associations should prepare guidance, approaches, sector-wide scenario planning methods and industry-specific tools, as well as support capacity building for evaluating corporate physical risks, impacts and adaptation options. Local and regional groups should develop system-wide scenarios and impact assessments to better inform localized corporate disclosure, which would better enable small and medium-sized enterprises to report.
  • At a minimum, the FSB should work with non-financial governance and standards bodies to encourage greater integration of financial disclosure with environmental and social impact, risk and adaptation plans and disclosures.

The FSB has taken on a difficult but important task, and thus far through TCFD, it is making some noteworthy progress in stimulating more and better climate disclosures.

If we can build on the existing momentum while focusing disclosures more on physical climate risks and adaptation strategies, it may be possible to build the vastly greater direct action and social and political resolve needed to achieve a global economy and society that is resilient to the dramatic changes in climate that lie ahead.

Pull Quote
Can TCFD stimulate adequate movement on both mitigation and adaptation? On its current trajectory, the answer is a clear ‘no.’
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