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How financial systems and companies are managing climate risk: the TCFD program

As the pace of global climate change accelerates and weather extremes re-organise to the new ‘climate normal’ societal systems face no option but to adapt and mitigate risk. This includes the global financial system – defined here as the complex of banks, lenders, investors and insurers and the associated transactions that maintain much of the services and infrastructure on which our way of life hinges.

Climate-change is disrupting business and the financial system

Drought

Rapid global heating and the continuing jolts to global weather extremes have the capacity to catastrophically shock the financial system, if capital allocation and risk management strategies have not kept pace with change, nor adequately anticipated further change. 

Climate-related risk to the financial system – and constituent companies – can be separated into two parts. Firstly there are the direct physical impacts from climate change as weather systems re-organise under new regimes e.g. flooding, drought, excessive heat all contributing to interrupt business viability, either in regions where companies are based – or remote regions that contribute to the company’s supply chain. 

Secondly so-called transition risks exist as the world attempts to de-carbonise: how will changing energy delivery and generation affect a company’s operations, and what risks are there if consumer preferences continue to become greener and, of course, the implications of possible emissions targets within industrial sectors.

The G20 acts

In recognition of the severity that these risks pose, the G20’s Financial Stability Board commissioned a task force in 2015 to devise a reporting system incumbent on companies and businesses that could serve two purposes: firstly, to steer businesses to take their own climate-related risks seriously (if not already) and to enable them to develop risk-management strategies increasing their resilience to ongoing global warming – whilst also identifying and managing any opportunities and advantages that may exist. Secondly, the reporting system would be such that it would provide lenders and investors with standardised cross-industry information that could help ensure efficient capital allocation by the market – in the face of disruptive and volatile change. 

Skyline

Climate risk recommended reporting: win win. 

Within two years, the task force – the Task Force on Climate-Related Disclosures (TCFD) – released an inaugural set of reporting recommendations that companies could align to in order increase their climate resilience and provide reliable strategic information to potential investors. These recommendations cover not just identifying and managing a company’s climate-related risks – but also include reporting on critical ancillary activities: how does the company structure ensure sufficient governance of climate-related risks and mitigation work? And how does the company track performance against climate risks – and what measured metrics are used? 

Uptake of recommendations has been rapid as global heating has continued unabated in the last few decades. Over 60% of the world’s largest companies are now TCFD supporters and / or return TCFD-aligned reports every year. But the benefits of TCFD reporting are not limited to just the largest companies.

Climate scenarios for risks and opportunities

Companies of all sizes should assess exposure to current and forthcoming climate change. Supply-chain interference, local physical risk and transition risks (to a low carbon economy) are certain to exert stress on business continuity and profitability and where risks exist, so too may lie opportunities: innovating services or products to help others mitigate climate-related risks, diversifying your own products / assets to ensure ongoing security etc. 

A key element to effective climate-related risk management and recommended by the TCFD for particular focus is appropriate scenario analyses. What does this mean? In a nutshell, it can boiled down to this: how resilient is your organisation’s climate risk / opportunity management under differing futures? For instance, what if global greenhouse gas emissions fail to be checked, and a ‘worst-case’ climate scenario unfolds, instead of a more moderate one in which climate change is kept to a 2°C limit? 

These different futures will have marked regional differences in physical climate impacts and transition pathways – and the jury is still out on which scenario will unfold.  Risk strategies tied to one scenario, with no contingencies, will therefore be limited if the assumed scenarios differ in actuality. A better strategy therefore is to devise risk management solutions that can be as resilient as possible to as many potential future scenarios. Do this and you not only maximise your business, protect customers, but also offer a far more secure proposition to future investment.

TCFD-aligned assessments add value to companies.  

Assessing your company via a TCFD-aligned report will provide you with valuable insights into your resilience against current and future climate change and identify areas for potential improvement. The exercise will enable you to consolidate against potentially catastrophic risk and allow you to convey this information to current and potential investors and customers. 

EarthSystemData are registered TCFD Supporters and have completed official TCFD Climate Disclosure Standards Board training for TCFD reporting. Through EarthSystemData’s ‘THEMIS’ service we can produce full TCFD-aligned assessments of your company and advise on impacts, opportunities, governance and risk-management areas to produce reports that match or exceed TCFD recommendations.

We are especially suited to working with SMEs that have regional exposure to climate risks, e.g. supply chains, clients or assets spanning several countries on a continental scale and beyond. Our service excels in identifying climate impacts and since we are climate projection specialists, dealing day-to-day with the latest United Nations IPCC climate change projection data, working with ESD guarantees that your climate risk evaluation will use the most scientifically-robust, international-accredited climate data.

We provide dedicated, one-to-one client engagement throughout the process and guaranteed delivery times. We’re a small, highly-experienced team, and therefore can offer superb value with zero quality compromise. 

To find out how we can help, contact us now we’re ready to talk. Many companies commission TCFD-aligned returns as part of wider ESG workstreams and if this describes you we can offer ESD’s TCFD service as a wider ESG service incorporating our ESG-specialist partners ESGABLE.  

Craig Wallace PhD, EarthSystemData

EarthSystemData designs and deploys climate data solutions to meet organisational needs. We specialise in climate risk assessment, risk disclosure and adaptation projects assisting multi-national firms through to local clients. To discuss using our research or consultancy services contact us here: info[at]earthsystemdata.com 

 

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