12 October 2020: Last week’s TCFD Summit in Japan was certainly timely: the pandemic has been highlighting our unpreparedness for systemic risks, and recent natural disasters such as wildfires and floods are giving a new urgency to addressing the climate emergency, driving innovation and achieving the transition to a low-carbon economy. This is where the Task Force on Climate-related Financial Disclosures (TCFD) recommendations come to play as the most important and transparent leverage to link systemic risk and climate change to company decisions and capital market valuations.
The online 2020 Summit followed the successful inaugural edition that took place in Tokyo last year. It was attended by the Prime Minister of Japan Yoshihide Suga and organized by the Japanese Ministry of Economy, Trade and Industry (METI), WBCSD and the TCFD Consortium of Japan. It highlighted the importance of advancing progress of climate-related financial disclosure, in Japan and beyond, by addressing the growing support for the TCFD, as well as of the achievements from last year towards climate-smart decision-making, during the opening of the Summit.
- The number of TCFD supporters now stands at 1,400 organizations worldwide, including 300 supporters from Japan. This, together with regulatory developments in the European Union, New Zealand and Canada among other jurisdictions, as well as with supervisory and security organizations, means that disclosures are improving, both in terms of numbers and quality.
- At a national level, the TCFD Consortium of Japan is a strong model for communication between financial institutions and non-financial institutions in collaboration with government agencies. It has made significant contributions to the global TCFD community, including the publication of Guidance 2.0 with best practices.
- Various TCFD good practice and other guidance has been produced including the WBCSD’s Preparer Forums and guidance for investors by the United Nations Environment Programme Finance Initiative (UNEP FI) and by Principles for Responsible Investment (PRI).
At the same time, there is still much room for improvement, as disclosure of the potential financial impact of climate change on businesses, strategies, and financial planning in particular, remains low. There is also a challenge in achieving comparability of disclosures without encouraging stereotype information and whilst allowing flexibility for companies to explain their unique strategies and transition plans.
Beyond climate, the disconnect in the financial system between financial returns and environmental and social impacts calls for a comprehensive response.
Building resilience and accelerating progress towards a low-carbon economy requires a myriad of important stakeholders working together reflected in the Summit´s participants and speakers: investors, financial institutions and the public sector with interventions from senior executives from Shell, Enel and Sumitomo Chemical among others.
The TCFD recommendations provide an important framework within which business can respond to questions about their approach to resilience, purpose, society and the environment. The Summit´s panels highlighted many points, and in particular:
- The prospect of TCFD becoming mandatory in some jurisdictions and what approach (soft law or otherwise) legislators should take to this.
- Approaches to scenario analysis, including awareness raising of its purpose and benefits in strategic planning as well as disclosure.
- Treating the TCFD as a standard investment framework for risk and return analysis so that disclosures are taken into account, like interest rates, credit risk and future cash-flows are now.
- Using TCFD disclosure as a strategic tool for engagement between companies and investors and to attract capital to opportunity and innovation.
Moving forward, the TCFD’s efforts to develop guidance related to risk management, scenario analysis and metrics will support practitioner practice. This is fueled by the COP26 Private Finance Strategy, which clearly describes the role that TCFD can play to ensure that every financial decision takes climate change into account.
Mark Carney, who’s leading that work as the Finance Adviser to the Prime Minister for COP26 and UN Special Envoy for Climate Action and Finance, commented: “We’re working to make sure you will have the information to take into account climate risk and very importantly climate opportunities”, adding that the foundation of that is TCFD disclosure.
As I highlighted during my remarks at the Summit, “we must create a capital market that rewards more sustainable businesses with a lower cost of capital and thus allocates more financial capital to the critical systems transitions ahead of us.”
Simple accounting rules around meaningful ESG indicators towards the delivery of science-based targets – driving the risk assessment, strategic scenario building and management decision-making like TCFD is prescribing – will bring us towards the sustainable world that will serve all people and protect our planet.
To accelerate progress, we must now focus on how climate and sustainability-related information is used in the investor to corporate relationship and how businesses and investors can integrate sustainability in valuation, incentives, strategic and capital allocation decisions. The investor-corporate exchange is a crucial factor to build markets that value sustainable companies, which is why PRI and WBCSD have formed a collaboration facilitating constructive dialogue between business entities and financial institutions.
As the road to COP26 in November 2021 has already begun, the TCFD recommendations continue to play a key role in accelerating the transition to a low-carbon society by strengthening climate-smart decision-making. To support this, we are continuing our work to help companies implement the TCFD recommendations and integrate climate-related risks and opportunities in their decision-making. We look forward to convening at the next year´s TCFD Summit to take stock of the progress in increased sign-up and better-quality disclosures.
