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?

1. Establishing shared governance of sustainability issues

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.

How can you maximise the benefits brought by shared governance?

• Create a cross-functional working group: bring together different areas of the business and ensure members can influence strategic, operational and investment decisions. Appoint representatives in all key areas to influence change, including the areas with the highest environmental impact and those most susceptible to the effects of climate change.
• Establish a clear governance structure: clearly set out responsibilities for specific sustainability targets in the short-, medium- and long-term. Ensure the board has visibility over these issues and targets and that the governance structure and responsible parties are clearly communicated to all employees.
• Bring in external expertise: identify areas where external input is required, and leverage external support to advise and challenge your strategy.

2. Enabling collaboration

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.

How can you mobilise 100% of collective intelligence internally and amongst your value chain?

• Upskill your team: does your board have the information and knowledge required to effectively manage climate risk? Ensure all those able to influence change understand the financial risks and opportunities brought on by climate change. Consider extending this training to all staff to create the ESG-savvy workforce required for transformation.
• Work with your peers: establishing the best approach to becoming a sustainable business will take time. Work with peers from your sector to pool knowledge and share best practices. Your supplier’s climate risks are your climate risks – engage with your value chain and encourage suppliers and service providers to align their reporting to the TCFD recommendations.
• Engage with industry and corporate bodies: industry and corporate bodies such as the GFANZ (Glasgow Financial Alliance for Net Zero) provide a forum for collaboration. Join an alliance, learn from others, and accelerate the transition to net zero.

3. Adopting a longer-term mindset

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.

How can you leverage the TCFD framework to drive long-term strategy?

• Expand the long-term thinking beyond climate: embrace this exercise and use it to try and expand the usual time horizons over which you think about general strategic and financial planning. This should enable better-informed investment decision-making and implement a business strategy that is informed by both short- and long-term societal trends.
• Start early: implementing TCFD-aligned governance and risk management structures will provide greater readiness to upcoming sustainability requirements. Businesses will benefit from being ahead of the curve on strategic risks. Those who do not get on board with the TCFD early risk getting left behind, not only on disclosures but from a strategic perspective.
• Identify TCFD champions in and out of your sector: Companies with leading TCFD disclosures will show external stakeholders they have effectively evaluated climate risk to their company and are able to make better-informed strategic decisions, attracting more investment and clients. Identify these TCFD champions and seek to match their ambitions.

 4. Providing a methodological framework for sustainability transformation

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:

Strategy:

• How will your business’ operating model deliver long-term value in the low-carbon transition?
• How soon will you reach your climate ambition?
• What investments are required to achieve the goal and how do you get the whole organisation on point?
• Will you need to diversify the goods and services you offer to get there?

Risk:

• What external factors are you reliant on to succeed?
• How could the economy or environment shift around you?
• How vulnerable is your business to such shifts?
• Do you have a process in place to identify emerging sustainability risks?

Financial planning:

• How will your decarbonisation plans affect your costs?
• What about your balance sheet?
• Where will revenues come from and are they phasing in and out at the same pace?
• Do you have the same rigour and internal controls on your ‘non-financial’ data as your ‘financial data’?

Discuss your TCFD requirements with a member of the team

Conclusions

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.