Businesses, investors, and financial institutions are coming together around the race to net zero at a remarkable pace. Indeed, there is increasing awareness of the power these companies hold in funding and influencing sustainability outcomes, and this goes beyond climate. In this light, appetite for climate- and more general ESG-related disclosures is growing rapidly. The Task Force on Climate-Related Financial Disclosures (TCFD) framework has emerged as the gold standard for such disclosures, allowing companies to tell their sustainability story in one common language. The framework brings together four key focus areas – governance, strategy, risk management, metrics, and targets – providing a strong yet flexible foundation upon which ESG-related disclosures can be built on. This was recently evidenced by the International Sustainability Standard Board (ISSB)’s launch of two proposed standards of sustainability disclosures for capital markets, both built on the TCFD framework.
With the sustainability-disclosure landscape becoming more sophisticated and demanding, there is a risk of companies viewing this as a growing disclosure burden rather than utilising the framework to improve strategic planning. We consider TCFD as a strategic issue hiding behind a disclosure mask. Through the lens of disclosures, the TCFD framework seeks to bring climate-related risks to the forefront of strategic planning. Welcoming climate as a new key driver in business by taking into consideration the positive or negative climate impacts companies generate is crucial for financial flows to shift to a green economy. Within companies, this enables companies to establish their place in a low-carbon economy, and build resilience to navigate the inevitable transition. So how does the TCFD framework provide strategic business value? And what can you do to harness this?
Sustainability issues are too complex and interdependent to be approached independently in a silo. Until recently, companies often faced sustainability issues as discrete issues managed by discrete parties; a facilities manager would manage operational office improvements whilst the legal counsel would ensure a company’s compliance with environmental regulations. A Human Resources department might organise employee engagement campaigns to promote sustainability.
The TCFD recommendations challenge this, calling instead for centralised governance of climate-related issues at the board level.
Once ESG-related issues are governed centrally, this opens the door for wider collaboration. Putting sustainability at the heart of business is a bold objective, one which will not come without challenges. A central sustainability strategy and steering group will bring together different business areas and allow for collaboration amongst them.
To really harness the strategic business value behind TCFD requires deep-rooted collaboration, not just within companies, but also with external stakeholders.
Companies are under pressure to deliver short-term results; many organisations carry out operational and financial planning over a 1–2-year time frame and strategic and capital planning over a 2-5-year period. Thinking about climate change requires a longer-term mindset than normal business planning as the effects of climate change are likely to be felt over multi-decadal timeframes. Organisations need to be aware of the changes to start adapting now. This will undoubtedly prompt decision-makers to adopt longer-term thinking about business and finance as well.
By allowing sustainability conversations to enter the boardroom, the TCFD provides a methodological framework to drive sustainability thinking. Aligning to the TCFD recommendations engages businesses in a constructive exercise to aid internal decision-making.
How can you build on the TCFD framework to drive strategic thinking? Use the guiding questions below to drive board-level thinking:
TCFD and its closely related regulations are not intended to be tick-box disclosure burdens. They offer a lens to drive strategic thinking and align internal processes, culture, financing, and strategy to a sustainable future. TCFD alignment is not just about identifying risks and opportunities. It is about establishing appropriate governance and leadership to reduce risks and manage those that cannot be mitigated. It is about having a clear plan to manage ESG-related risks and harness opportunities, including a timeline and allocated budget. Finally, it is about reflecting all these understandings and actions in the company’s strategic and financial planning.
TCFD is not the answer to all sustainability issues, however, it is the first step to aligning financial and economic activities with social and environmental needs. By increasing preparedness and encouraging companies to recognise climate risk, the TCFD seeks to bring stability to financial markets. To businesses, using the TCFD framework to connect the dots between governance, strategy and risk management provides long-term business viability and enhances resilience in the face of climate change.
more than a word.