Simplifying climate risk and reporting for corporate decision makers

TCFD or TPT? That is (not really) the question

Last week saw the production of the UK’s Transition Plan Task Force “Sector Deep Dives” (open for consultation until 29th December 2023) which marks a significant milestone in the development of the concept of transition planning for all companies.

In light of the rapidly evolving regulatory landscape and the increased pressure to identify, report and take effective action, Ricardo’s new Head of Climate Risk, James Davey, takes a step back to consider the best ways to make climate reporting useful to decision-makers in the private sector. (And he includes a helpful glossary for all the acronyms).

CDP, TCFD or TPT – how does any of this help my business?

In one sense, company reporting on climate change is a pretty straightforward ask. The scientific community has established that, until human-driven emissions of Greenhouse Gases are reduced to zero, the global climate will continue to warm, and that a continually warming climate poses threats not just to ecosystems and the natural world, but to human society. In short, our economy is based around activities – particularly agriculture, water-supply, logistics and healthcare – which work well in a stable climate. Extreme weather events and chronic (i.e. long-term, permanent) change mean those critical activities which underpin our wellbeing may be severely disrupted or even destroyed. In response to the science, policymakers have adopted a range of responses of which the Paris Agreement is the best known.

In a “Paris Agreement world” companies would simply report their emissions and it would be up to boards, owners and shareholders, responding to policy and regulation as appropriate, to put in place measures to reduce emissions (assuming, of course, that reducing emissions was part of the company strategy). The risk posed to companies by climate change makes reporting a little more complicated than this.

CDP (originally known as “Carbon Disclosure Project”) is long established and recognised as being the “Gold Standard” in voluntary climate reporting. The Task Force on Climate Related Financial Disclosures (TCFD) brought the concept of climate risk (particularly financial risk) into the mix, and the Transition Plan Taskforce (TPT) attempts to draw – through an overarching framework as well as the sector specific guidance first published this week - a road map to connect the dots on not only decarbonisation but also on (physical and market) resilience and opportunities, as well as products and solutions enabling the transition.

Climate risk is global, which means climate risk is relevant for companies of all sizes, across all sectors. However, there is no ‘one size fits all’ approach to working with climate risk, since different sectors experience different risks across different timeframes, and risks (and regulation) differ from region to region. While the depth and detail expected by investors and wider stakeholders will not be the same for all companies, a robust understanding of the climate risk your company faces – and the opportunities climate change offers – is essential to keep your company in good health. 

The future of both climate change, and climate policy, remains highly uncertain. Would your business be profitable if countries were successful in achieving the goals of the Paris Agreement and there is an orderly transition to a low-carbon economy? Would your business be profitable if transition is slower, and more chaotic, and climate impacts are worse than hoped? What can you do to be resilient to both scenarios?

How did we get here?

This is often a question with no simple answers but in this case the impact of the 2008 global financial crisis cannot be understated. Before 2008, CDP had already established the principle that until companies reported their emissions, action to reduce them would necessarily be half-hearted. However, it was the 2008 crisis that finally injected consideration of risk into the conversation. And because risk played out in 2008 primarily in financial markets and banks, financial regulators and financial actors took the lead in determining the next steps. This led to TCFD being formed in 2015.

Injecting discussion of risk into the conversation was undoubtedly a good thing as understanding emissions is a necessary but insufficient step in understanding climate change. However, an unfortunate side-effect of talking about finance risk is that a profusion of acronyms flooded into the lexicon. From voluntary (CDP, GRI, CDSB, IIRC, SASB, TCFD, ISSB) through to regulatory mandates (UK CFD, US SEC, CRDR, EU ESRS under the CSRD, and CCDAA/CRFRA in California) it seems that the finance sector loves nothing more than a good acronym, and because finance in different parts of the world is regulated by different organisations, each region has its own ensemble of acronyms. 

Keep it simple! 

Seen through the fog of acronyms climate reporting may now seem to be a fully-fledged industry of its own, one deliberately designed to be opaque to outsiders and lucrative to insiders. But there is method in the madness, or logic in the frameworks. Rather than detail the complete history of CDP to TPT, it is probably easiest (and most helpful) to settle on some essentials:

1. GHG emissions (scope 1, 2 & 3) matters to companies who are setting a decarbonisation strategy.
   
   
2. But the climate is already changing and will continue to change. Which means every single business in the world needs to adapt. Adaptation begins with identifying the risks posed by extreme weather and identifying the tools at your disposal to mitigate these.
   
   
3. A net-zero global economy offers tremendous opportunities to companies which are well placed to take advantage of that. Transition risk may be existential to companies who sell products and services associated with GHG emissions, unless they can shift into new markets.   
   
   

In short, your organisation needs to not only reduce emissions but also understand the twin risks:

• “physical risk” (a storm destroys your assets) and
• “transition risk” (nobody wants to buy your products/services anymore).

Once you understand risk you can integrate these risks into company strategy and management early enough to seek opportunities and gain competitive advantage over those who are slow to act.

And at this point it is probably clear why the finance sector has woken up to the risks posed by climate change. To have one company fail due to their inability to adjust to a low-carbon, less-climate-stable world would be an unfortunate but acceptable correction in the economy. To have entire sectors of the economy fail to understand climate risk until those risks became issues is the sort of thing that keeps central bankers awake at night. Particularly as the 2008 crisis showed that poor risk management can lead to contagion across the global economy and Covid-19 showed that global supply chains are far more fragile than hoped. Climate change could simultaneously lead to both of these sorts of crises, since companies could try to ignore or hide the risks that changing markets posed to their balance sheets (2008-like) and also ignore the risks that extreme events (and worse, the political consequences of those extreme events) could suddenly make it impossible for their supply-chains to function properly (2020-like).

So my company is carrying a lot of unseen risk?

It is obviously a cliché to say “where there are risks there are opportunities” but it is also (partly) true. The growing physical risks to your assets, operations, supply-chain and customers needs to be understood and managed. There are unlikely to be many business opportunities here unless you can sell products or services to others who need to manage climate risks, but there may be spillover benefits from addressing physical risk, whether these benefits arise from you being less vulnerable to non-climate disruptions to your business (diversified supply chains are less exposed to geopolitical disruption) or benefits that arise from better risk management overall (you might spot something you may have missed, or be able to put in place climate resilient working practices which also improve staff retention today).

Transition risks certainly come with transition opportunities. Your customers and suppliers are not standing still, and neither are you. A robust assessment of company strategy in the context of a growing net-zero economy and shrinking (unabated) fossil economy is essential for all companies. Your owners, investors and shareholders will expect to see that, and initiatives like those described above will shine a light on companies who are under-performing in this sector. The impressive growth of renewables, energy storage and hydrogen are just some examples of the transition pathway that the global economy is on. These trends will accelerate and spread, which means new business opportunities are there for the taking if you can spot them.

The ethos of the Transition Plan Taskforce – TPT – which on Monday 13th November launched its sector deep dives, is to help organisations set down on paper what they will do to tackle emissions and climate risk, in a way which is comparable across organisations. Through clearly articulated, comparable Transition Plans, stakeholders can then keep companies to account as they move from risk identification to risk management. The initial sector deep dives are open for consultation until 29th December, so companies who are already on the transition plan journey are strongly encouraged to reflect back to the TPT ways in which these can be improved.

But I still need to comply with SECR/TCFD/CSRD etc…

It would be lovely if we could do without all the acronyms but we can’t, for two reasons:

1. Without a bit of ‘stick’ as well as carrot, some organisations would probably ignore the issue until it was too late, which would be bad for society and have political and financial consequences. 
2. Investors and regulators want comparable information so that they can easily assess and compare companies. 

But in the end, this isn’t about acronyms. It’s about taking action in order to thrive in a world where net zero is seen as political necessity and where physical changes to the climate and the net-zero transition itself pose risks which must be addressed as well as opportunities to be exploited.

In a word this is all about resilience.

A more resilient business may have taken physical steps to address the risk posed by flooding, drought and overheating to business operations but it will also likely to be taking ‘soft’ measures, putting in place contingency plans to be activated if needed, and exploring with staff how working practices and training need to be adapted to keep the business running smoothly under difficult conditions.

A more resilient business will certainly be looking at transition risk and opportunity, and aligning business strategy to meet changing customer asks in a world where decarbonisation is rapid, if sometimes inefficient or chaotic. And a more resilient business will be seeking to monitor and learn, so that resilience is maintained over time.

The future is cloudy so we don’t know everything we would wish to about our climate risks, but through being honest, open and transparent and humble to the fact it is a journey we can avoid future regret that we didn’t start to act sooner.

Support to build your resilience

At Ricardo we firmly believe that the value in climate reporting – whether it is focused on emissions, on risk management, or in showcasing your sustainable portfolio as a solutions provider – is in the identification of steps that each entity should then undertake and the execution of these steps. Climate change is here, it is real and it isn’t going away (for many, many decades). This means both an implementation of short term goals as well as the development of longer term climate strategy that fall outside of the typical five year business and financial strategy horizons.

At the heart of the Ricardo’s support for organisations is scientific, business and technical sector knowledge – which can help you identify and address climate risks -both physical risks and risks due to the transition to net zero, and position you to seek those opportunities early to remain ahead and competitive in the global market. Our ESG experts use tools such as diagnostics and double materiality assessments to identify and prioritise the most pressing issues impacting your organisation as well as how your organisation is impacting the environment from a multi-stakeholder perspective. Our net zero and life cycle assessment teams can support you in identifying and reporting corporate and product emissions and creating robust science-based action plans which our technology teams can support you to implement. 

Ricardo’s experts can also set up important monitoring frameworks to track indicators which provide an early warning that particular risks may be becoming issues, so that the effectiveness of your risk management framework can be understood, and you have an early warning of when contingency plans may need to be deployed. 

Further information

• Get in touch with questions or to start a conversation about support
• ESG strategy and reporting
• TCFD and climate risk
• Net zero pathways
• Transition plan support
• Life cycle assessment
• Climate adaptation and resilience
• BLOG: Doubling up: why materiality matters and double materiality is the essential next step
• BLOG: Climate transition plans - how to develop a credible plan
• BLOG: Local laws with global reach – California’s new sustainability disclosure laws