Incorporating climate reporting into new, post-COVID-19, strategies will not only help achieve net zero targets but early adopters will be at the forefront of gaining valuable expertise, market resilience and better returns.
There has been much discussion about the economic model for the global effects of COVID-19 and for our transition out the other side. Whether our recovery is V-shaped, U-shaped or even skip-shaped, it is clear that many businesses will undergo huge changes, resulting in a seismic shift in strategy going forward.
Some hard-hit sectors may need to consider operating with fewer staff or with a different model. Financial restructuring will be a concern for others and it must be the case that almost all businesses will reconsider the amount of inter-office travel undertaken or how much office space is required for their newly-agile workforces. However, the resurgence from COVID-19 may also offer businesses the perfect opportunity to hardwire climate policies into their new strategies.
The Under2 Coalition of 220 state and regional governments this month called for stimulus measures to support a green recovery. Via the Science-Based Target Initiative, some of the world’s largest companies have also suggested that government support packages should be focused on helping establish a net zero economy.
The UK Committee on Climate Change has reported that it will refocus to include discussion of how economically sustainable industries and activities can be at the centre of efforts to rebuild the economy. Indeed, countries such as Canada have already stipulated that recipients of government-backed funding packages make climate-related disclosures and commit to environmental sustainability.
Well before the lockdown, the focus of those spearheading climate change policy was on three things: reporting, risk and returns and private finance was at the centre of the agenda.
At the forefront of this was the Taskforce on Climate Related Financial Disclosures (TCFD); a market-driven initiative designed to help investors understand their financial exposure to climate risk. TCFD has developed voluntary disclosures designed to provide decision-useful information on the financial impacts of climate risks and opportunities for use in climate-related reporting by businesses in all sectors.
The UK government’s green finance strategy stated an expectation that all listed companies and large asset owners in the UK would be making TCFD disclosures by 2022 and is exploring whether such reporting should be made mandatory.
Organisations such as banks, insurance companies and asset managers will therefore be encouraged to understand the climate impact of their borrowers, customers and portfolios and the percentages of those which are undertaking TCFD reporting, have climate plans or which have given consideration to global warming potential.
TCFD disclosure asks organisations to identify potential risks and their financial implication on the business or portfolio. Such risks include:
- Policy and legal such as pricing of emissions, enhanced reporting obligations, regulation of existing products and services and exposure to litigation;
- Technology such as substitutions of existing products with lower emission options, the cost of unsuccessful investment in new tech and the cost to transition to lower emissions tech;
- The Market such as changing customer behaviours, uncertainty in market signals and increased materials costs;
- Reputation such as shifts in consumer preferences, stigmatisation of particular sectors, increased stakeholder concern or negative feedback;
- Physical such as the increased severity of extreme weather events, variability in weather patterns, rising temperatures and rising sea levels.
TCFD reporting will also allow businesses to consider possible opportunities and, consequently, to increase returns.
Resource efficiency such as changing to new modes of transport or production processes might reduce operating costs or increase production capacity.
Identifying alternative energy sources may allow the use of support policy incentives or reduce exposure to volatile fuel prices. It may also offer reputational benefits.
As consumer preferences evolve and demand for lower emission products increases, benefit may be had from development of new products and services or diversification, giving a better competitive position and increasing revenue.
Identifying new markets, assets or locations may also increase revenue.
Considering resilience, for instance or energy sources or supply chain will increase reliability and could impact market valuation.