Masterclass in implementing the TCFD recommendations

Editor's Notes

• #4: Nadine: The Climate Disclosure Standards Board is a consortium of 9 environmental and business NGOs. We were set up in Davos in 2007 with a mission to create the enabling conditions for material climate change and natural capital information to be integrated into the mainstream report.
• #5: David: Standards development overseen by SASB Standards Board Follows rigorous, evidence-based, market-informed process Maintains industry-specific standards for 77 industries in 11 sectors Designed for use in financial reports targeted to investors Guided by a strong conceptual framework grounded in financial materiality Operated under the auspices of the SASB Foundation, a non-profit organization
• #6: Nadine: We have used a pyramid to help illustrate how the SASB standards, CDSB Framework and TCFD recommendations inter-relate. The idea being that there is a connection from bottom to top and the pyramids represents a stable solution and solid structure for TCFD implementation. As pyramid-like structures are found worldwide in different forms or names, the use of the SASB Standards and CDSB Framework to help companies implement the TCFD recommendations in their mainstream report is also universally applicable across multiple jurisdictions. This of course is subject to compliance with national legislation. e.g. requirements pertaining to the 10-K. SASB standards can help you with the content for your disclosures by generating data and information. CDSB framework has a set of principles and requirements which help you – principles with how to report and the requirements with what to report such information in your mainstream report. Everything comes together under the umbrella of the TCFD recommendations – which are the basis for implementation – and SASB and CDSB as implementation tools.
• #7: Nadine – -how TCFD came about -TCFD has helped to galvanise political will.
• #8: “...a set of recommendations for consistent disclosures that will help financial market participants understand their climate-related risks…” The Task Force expects to advance the quality of mainstream financial disclosures related to the potential effects of climate change on organisations today and in the future and to increase investor engagement with boards and senior management on climate-related issues
• #9: Nadine: For those of you fairly new to the TCFD, I would like to quickly recap the scope of the disclosures. , Four core elements of the TCFD with 11 supporting recommended disclosures. They relate firstly to how the organisations governs climate-related issues. Secondly on how it impacts on the organisation’s business, strategy and financial planning. Third, how the organisation identifies assesses and manages this risks. And the final core element relates to the metrics and targets to assess and manage such risks. There are also 7 Principles for Effective Disclosure which help in preparing the disclosures – this are described further at the beginning of the implementation guide. In summary climate-related disclosures should be relevant, specific and complete. They should also be clear and balanced, reliable, verifiable and objective. They should be, comparable (within a sector, industry or portfolio). And they should be consistent over time and provided on a timely basis (at least annually). Key features of the recommendations: adoptable by all organisations (i.e. universally applicable) Included in financial filings (i.e. the mainstream or annual report) Designed to solicit decision-useful, forward-looking information on financial impacts of climate-related risks and opportunities Strong focus on risks and opportunities related to the transition to a low-carbon and climate-resilient economy. (p.iii TCFD Final Report)
• #10: David: So how far have we come in implementing the TCFD recommendations and what does the latest status report tell us about market adoption? Over 785 organisations have expressed their support globally to the TCFD, however the 2019 Status report tells us that, despite support rising by more than half since last September, companies are still finding it a challenge to implement the recommendations resulting in insufficient disclosure for investors. (click to “float it” each finding as David speaks). Here you can see the top four findings that emerged from the status report.
• #11: Nadine: Which leads us to the next question: How can we accelerate adoption of the recommendations to facilitate consistent comparable and clear climate-related financial disclosures? That’s where the TCFD Implementation Guide can bridge this gap taking commitment to the TCFD to concerted action. Through our research we have spoken many companies who have cited a need for practical advice and guidance on how to implement the TCFD recommendations and were looking for examples of good practice disclosure that companies can follow. CDSB and SASB have developed the TCFD Implementation Guide to bridge this gap and showcase how companies can enhance climate-related financial disclosure using SASB standards and the CDSB frameworks.
• #12: David: The guide is intended to: Identify actions required to establish a strong foundation for practical and effective implementation of the 11 different TCFD climate-related financial disclosures (getting started) –i.e. laying the groundwork and building on existing processes and structures (e.g. for risk and governance) Provide industry-specific annotated examples of what those disclosures could look like Provide practical how-to guidance an organization can use to develop or refine its own practices (to generate good-practices disclosure) [NB – we should not be talking of best practice] In preparing the guide, CDSB and SASB have captured several lessons learned for corporate practitioners, that will be shared at the end of this presentation.
• #13: Nadine: Getting your house in order and making the TCFD work for you. 11 things to start with. It is not just about disclosure but also laying the groundwork or foundation upon which to develop effective disclosures.
• #14: David: It is easier to see how this may work by looking a real-world illustrations from specific sectors. We have provided three sectors but the analytical approach applies no matter what industry you work in. In the subsequent slides, we will take you through some examples of good practice and how you can use both the CDSB framework and SASB standards to decide what to disclose and how to disclose in your mainstream report. In the paper, we do this by providing examples of disclosures and then have narrative in the column next to it to help understand how the company has addressed the respective disclosure in their report. Let’s step through some examples:
• #15: Nadine: This first example is a mock disclosure for the TCFD’s core element on governance. Governance disclosure a) related to board oversight of climate risks and opportunities. At the top you will see a question which is drawn from the guidance on board oversight disclosures in the TCFD Final Report. This helps to identify possible content in the disclosure. On the left hand side you will see an excerpt from the disclosure with two numbers flagging where the disclosure has satisfied the first disclosure requirement in the CDSB reporting framework. On the right hand side, we list the disclosure requirement under the CDSB framework. REQ-01 of the CDSB Framework requires that disclosures must describe how environmental policies, strategies, and information are governed. This includes those related to climate. Mirroring the TCFD recommendation, REQ-01 suggests preparers consider how the highest governing body approaches and is informed of climate-related issues, including the respective processes used and frequency. In the OilCo excerpt, the highest governing body in the company responsible for related policies, strategy, and information appears to be the Board. 1 However, the Integrated Sustainability and Advisory Committee (ISAC) informs the Board of climate-related impacts, and is charged with reviewing actual or potential climate-related risks, and reporting back to the Board with recommendations. 2 . So if I now turn to David to give a further example drawn from the strategy core element
• #16: David:
• #17: Nadine: REQ-03 advises all organizations to consider applying a basic level of scenario analysis for strategic planning and risk management processes and to describe the scenarios used. As an oil and gas company, OilCo is likely to be more significantly affected by climate-related risks, and has therefore taken a somewhat more in-depth approach, per the TCFD recommendations. The company identifies five scenarios, including three widely used third-party scenarios 1 as well as two internally-developed scenarios.
• #18: David: OilCo discloses data on the sensitivity of its hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions, per SASB metric EM-EP-420a.1. 12 Along with the accompanying discussion of how changes in price, demand, and regulation may influence the company’s capital expenditure strategy for exploration, acquisition, and development of assets (per metric EM-EP-420a.4) 13 and other quantitative indicators included in the Metrics & Targets section below (i.e., EM-EP-420a.2 and EM-EP-420a.3), these disclosures are collectively designed to facilitate assessment of a company’s business model resilience with respect to the transition to a climate-constrained economy, as well a
• #19: Nadine: Start at the beginning: Practitioners of sustainability or ESG reporting are no strangers to juggling a variety of tools, but when faced with making TCFD disclosures using the CDSB Framework and SASB standards, veterans of financial reporting may wonder where to begin. Just as with all effective business decision-making, organizations should start by defining their objectives—in this case, fulfilling the TCFD recommendations and its 11 underlying recommended disclosures. This is why the questions that precede the annotations in each of the four core elements above are specifically derived from the TCFD’s own guidance. These questions can provide useful prompts for organizations to better understand how the CDSB and SASB tools can help them develop robust, comparable, and decision-useful disclosures on the climate-related risks and opportunities that are critical to investors, lenders, and insurers to inform their allocation of capital. Keep it simple: Clarity in writing is a reflection of clarity in thinking. When disclosures become overly complex or confusing, they may impede investor understanding of management’s thought processes around climate-related issues, and therefore an investor’s ability to effectively act on the reported information. For example, when enterprise-level risk managers delegate or outsource their climate-related responsibilities to different functions or regional business units, organizational structures can become complex, chains of command can become less clear, and disclosures may be less useful. When approaching climate-related disclosures, organizations should not try to run before they can walk. Reporting is likely to benefit from a straightforward approach, addressing one recommended disclosure at a time—in order—using the TCFD’s fundamental principles for effective disclosure and associated CDSB and SASB principles (see Figure 5) as guidance. More sophisticated— and, in many cases, more streamlined—reporting will become possible as the organization’s approach matures. Connectivity is key: A core principle of the CDSB Framework is that disclosures should be connected with other information in the mainstream report to explain the links between an organization’s governance, strategy, risk management and environmental results. Preparers must recognize that none of the four core elements can stand on its own. Rather, along with an organization’s financial statements, they inform and reinforce one another, establishing a more complete and holistic picture of the organization’s approach to identifying, assessing, measuring, managing, and monitoring climate-related risks and opportunities. For example, an organization’s Strategy disclosures may provide insight into how it has elected to respond to key risks and opportunities. Meanwhile, its Metrics & Targets disclosures would be more likely to shed light on the effectiveness of those strategies. At the same time, performance metrics could be construed as incidental and targets as arbitrary in the absence of a discussion of the organization’s strategy for achieving them. Push for proportionality: The mock disclosures presented here are designed to illustrate how an organization might think about approaching its own climate-related disclosures. As a result, they provide fulsome, comprehensive examples of effective reporting, addressing many aspects of many issues from the perspective of a large, global organization with extensive operations and plentiful resources. For many organizations, climate-related reporting could be considerably more concise. Applying the principle of materiality will aid in overcoming this proportionality challenge. All organizations should consider how their TCFD-aligned reporting compares to what they disclose on the other financially material risks and opportunities facing the organization, particularly as the TCFD recommendations are intended for inclusion in mainstream financial filings. To ensure disclosure is useful to investors without overwhelming them, the lens of materiality should be applied—particularly to Strategy and Metrics & Targets disclosures, in accordance with the TCFD recommendations. Take an iterative approach to scenario analysis: The TCFD notes that while some larger organizations and investors are making use of scenario analysis, it is a practice that is still developing and will benefit from “[learning] by doing.” As such, “advancing the use of climate-related scenario analysis will require further work.”40 For example, it will likely involve an exchange of experiences as well as further development of data sets, tools, methodologies, and established standards. To this end, the final part of the Strategy section above was developed to reflect the current, relatively limited state of uptake of this practice and associated disclosures. This is an area where CDSB and SASB intend to collaborate further and look to develop additional guidance on how to make enhanced disclosures in mainstream reports, building on the growing and evolving body of practice. Organizations can contribute to such progress by taking an iterative approach, establishing a reasonable baseline for scenario analysis upon which improvements may be built over time. For example, organizations might initially focus scenario analysis and/or related disclosures on a specific asset or aspect of their business before expanding to wider operations, and, eventually, their whole business. Scenario analysis also affords organizations with a tool to help them identify not only risks but strategic opportunities in light of a changing climate—one of the key features of the TCFD.
• #20: David:
• #21: Tell us what you think of the Guide. We have a short survey (8 questions) available on the CDSB website. We would welcome your feedback on this guide and what else is needed.