TCFD settles in as the big new adaptation game in town
THE ADAPTIVE CO: If only more, far more, PREPARER companies got the memo.
The Task Force on Climate-related Financial Disclosures (TCFD) announced a major milestone last week: it surpassed 1,000 supporters — 1,027 to be precise, in 55 countries. The achievement, though, comes with an urgent calling.
Just under half of those supporters, or 473, are financial firms interested in using the disclosures. TCFD appropriately calls them users. Another several hundred are organizations TCFD calls knowledge resources to help companies disclose. A smaller number are government-sector and related entities (central banks, regulators, stock exchanges, credit rating agencies, etc.) with their own obvious public interest in supporting TCFD’s crusade.
Missing, then, are the companies themselves, at least in far greater numbers, the ones TCFD is trying to attract to first assess and then disclose their climate risks and opportunities. TCFD calls these supporters preparers, and it is mincing no words in its disappointment that few have come forth.
“The Task Force is concerned that not enough companies are disclosing information,” reads the group’s 2019 Status Report.
Of those that are, TCFD recommends future-scenario analysis, but most companies that run scenarios are failing to “disclose information on the resilience of their strategies,” undercutting the whole point of the exercise.
Preparers, TCFD further finds, are nicely delegating the task to sustainability leaders, but not sufficiently integrating “risk management, finance and executive management. The Task Force believes involvement of multiple functions is critical to mainstreaming climate-related issues.”
But of course. Nothing this existential and complex happens and gains enterprise-wide cultural buy-in at any company without the active leadership and participation of the board and senior team.
“As such, over the next several months, the Task Force will continue to promote adoption of its recommendations,” along with such other steps as further monitoring, reporting and scenario-analysis education.
To which I say, to which we must ALL say, let’s not leave TCFD alone in this struggle. The Financial Stability Board (FSB) got the ball rolling when it launched TCFD in earnest over two years ago, but we see today that for all its laudable gains, this is a campaign everyone in the world’s adaptation movement must make our own.
Clearly, the most critical mission boost TCFD has achieved is to attract those 473 financial firms, with trillions of dollars in assets under management. The pressure they stand to exert on portfolio companies is simply phenomenal, and it is one reason we must all stand behind this effort, as it has become easily the biggest accelerator in the adaptation universe.
The ESG space, short for Environmental Social & Governance performance criteria, has become a hot field as climate news become ever more worrisome, and those of us outside the investment world must step in with the utmost urgency and passion to help financial firms, starting with TCFD members, strengthen the adaptation performance of their portfolio companies.
Another accelerator is seeing how the TCFD framework has been so thoroughly adopted by the sector’s market drivers, including the UN’s Principles for Responsible Investment, the most widely used guideline in the world, plus the Network for Greening the Financial System and its 34 central banks in five continents, the Climate Disclosures Standards Board (CDSB), the Carbon Disclosure Project (CDP), the Sustainability Accounting Standards Board (SASB), the Global Reporting Intiative (GRI), and others.
In the end, climate change itself will move preparer companies to join. But that is precisely what we do not want, for it to come to that, for climate disruption and devastation to happen before they assess and disclose their risks and implement adaptation plans.
I led a team of COMMON colleagues last year in a novel effort to launch an adaptation-awareness campaign and ran smack into what I suspect TCFD members are encountering when they approach potential preparer companies. “We’re aware of our climate risks…” “We know climate change is worsening…” “We’re just not ready yet to let the world in on our exposure…” Some of the responses we received.
They resonated with findings by The Economist in this story exactly one year ago that found companies “have few pressing incentives” to look into and uncover their climate risks. “Markets tend to punish honesty about previously unacknowledged risks, not reward it. Rather than learn that nature poses a material threat, it is safer not to look in the first place.”
But that is a wall we absolutely must break through, and in fact TCFD has been the game changer in getting that historic persuasion project started. To be sure, it isn’t perfect. TCFD itself has a standing request for improvement suggestions.
McKinsey, in fact, just published a Climate Risk Report where I discerned at least three: a) weigh climate tipping points in your models and scenarios; b) secure the right individual and institutional mindset to enable enterprise-wide buy-in; and c) insert socioeconomic risks as a third risk category, along with transition and physical risks. These are socioeconomic risks associated with climate events, including viral pandemics, as we’re seeing painfully today with the coronavirus.
If I may add one more, when reading the TCFD recommendations, start by understanding the difference between the risks inherent in the transition to a low-carbon economy pursued to avoid the worst of climate change, and the risks inherent in catastrophic climate that is already unavoidable. The TCFD narrative often merges the two, so it is up to preparer companies to keep them distinct.
Companies should no doubt disclose and act on both, but from the perspective purely of adaptation, the focus is on steps that help them prepare for and recover from transition, physical and socioeconomic risks stemming from worsening climate impacts. Luckily for them, many low-carbon measures double as adaptation strategies, but they come with distinct objectives, and organizationally it makes all the difference to know the difference.
It also helps to realize that no one should be content just with disclosure, least of all a TCFD preparing company. Assessing and reporting risk is but the start of what TCFD rightly calls a journey along this process. What companies are really after is protecting and securing their value and viability — for them, yes, but also for the rest of us, because if there is one thing we’ve learned from climate disasters, it is that urbanized society, where most people live, is tightly dependent on companies for just about everything. We can only adapt if they adapt.
TCFD is not just a great start. It is the great accelerator. And it is off and running. The time has come for the rest of us to catch up, join and help take it to the next level.
Alex Díaz, a leading thinker and analyst in the fast-emerging field of corporate climate adaptation, has a long career spanning business journalism, strategic communications, sustainability management, and stakeholder initiatives. He lives in Puerto Rico, at the entrance of the Caribbean hurricane alley, and runs adaptation studio COMMON Future, an affiliate of global social-enterprise collaborative COMMON.