[TEJ Finance Research Institute] Climate Change Risk (TCFD)─Take TungHo Steel as An Example

To Learn TCFD and Take the Lead in Green Investment

🔸Preface🔸

In recent years, the global impact of climate change has become more and more serious. There are lots of countries and organizations that have strengthened the formulation of environmentally friendly laws and regulations. These laws and regulations indirectly restrict enterprises’ investment targets, potential transactions, or other various financial activities. The Financial Supervisory Commission (Taiwan) launched the “Corporate Governance 3.0 — Sustainable Development Roadmap” in August 2020, introducing the financial disclosure of climate-related risks and opportunities recommended by Task Force on Climate-related Financial Disclosures (TCFD), and encouraging companies to provide more risk-related issues Financial information.

Taiwan Corporate Credit Risk Index (TCRI) offered by TEJ will be incorporated into the evaluation index along with the implementation of ESG, TCFD and other environmental evaluation indicators to help companies keep up with the international pace and provide a more accurate evaluation index. This article uses TungHo Steel‘s TCFD as an example to introduce the structure and content of TCFD.

✨TCFD Introduction & Application✨

1. TCFD Introduction

TCFD was established by the Financial Stability Board (FSB) in 2015 in response to climate change and the Paris Agreement. Its purpose is to a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks.

2. Support TCFD

As of September 2021, 2,571 companies or institutions worldwide have signed up to support TCFD, and there are 60 in Taiwan. The number of Taiwanese companies participating in the signing is 22 in the financial industry, and 18 in the general industry, followed by 11 in the conventional industry and 7 in the service industry. TungHo Steel, TSMC, China Airlines and Fubon all provide separate TCFD reports; although Formosa Taffeta(FTC) did not participate in the signing, they also provide TCFD reports.

3. Climate-Related Risks & Opportunities

The TCFD climate-related risks are divided into two main categories:
(1) Transition Risk
Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations.

(2) Physical Risk
Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations’ premises, operations, supply chain, transport needs, and employee safety.

Efforts to mitigate and adapt to climate change also produce opportunities for organizations, for example, through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market, and industry in which an organization operates.

Through climate-related risks and opportunities that may affect the organization’s current and future financial status, TCFD has identified four major financial impact categories: income, expenditure, assets and liabilities, capital and financing, and the potential financial impact corresponds to the path of financial statements, such as As shown in Figure 1.

Figure 1. Climate-Related Risks, Opportunities, and Financial Impact

4. Related Case — TungHo Steel TCFD reports

Below shows the climate change-related risk and opportunity matrix established according to the identification results:

(1) Climate Change-Related Risk
According to Figure 2, the risks of greater financial shock and higher probability of occurrence are the five dots in the upper right corner: the three risks related to “Policy and Legal Risk” in the” Transition Risk” (Cap/Trade, Increased pricing of GHG emissions, Renewable energy regulations) and two physical risks (Cyclones, Average precipitation change). Completing the matrix can let investors understand the climate-related risks faced by the company at a glance.

Figure 2. THS Climate Change-Related Risk Matrix

The climate change-related risks identified by the Company are classified by type and by item as follows:

Table 1. THS Climate change-related risks

According to the description in the above table, rank the THS facing risks. The first threaten is “Average Precipitation Change”, which is a long-term physical risk. The second is the “Cap/Trade”, and the third is “Increase Pricing of GHG emissions”. The fourth is “Cyclones”, which is an immediate physical risk, and the last is the major electricity user clause in the “Renewable Energy Regulations”. In addition to allowing shareholders and investors to understand the company’s current risks at a glance, the tabulation is also let the company recognize the problem and respond in advance.

(2) Climate Change-Related Opportunities

After evaluation, the two dots in the upper right corner are the most likely to be implemented. They are “Use of more efficient production processes”, which includes energy-saving and process improvement. Such as purchasing more high-efficiency machinery and equipment, or updating more mature technology; the other one is “Use of lower-emission sources of energy”, such as wind or solar energy. This part can not only solve the risks caused by the “High Energy User Clause”, but also through Profit from selling green electricity.

Figure 3. THS Climate Change-Related Opportunities Matrix

🔸Conclusion🔸

Financial Supervisory Commission (Taiwan) requires listed companies to disclose ESG and climate-related information when preparing the 2022 sustainability report. The structure of TCFD helps companies understand the risks and opportunities they need to face in order to transform into a low-carbon industry and analyze their pros and cons so that they can respond when they truly face climate-related risks. For investors, lending institutions and insurance companies, climate-related risks are also important factors that need to be taken into consideration in prudent decision-making on resource allocation.

TEJ will incorporate the financial impact data of climate change risks into TCRI’s rating by analyzing and accumulating climate risks of various industries, providing a more complete and consistent evaluation.