Five things you need to know about TCFD and Climate-related financial disclosure

At Beca, we’re supporting our Australian property and infrastructure clients to think about and prepare for reporting under the new Climate-related financial disclosure framework. This relates to climate reporting under sustainability standards being developed by the Australian Accounting Standards Board (AASB). Like many other countries, Australia is moving to incorporate major elements of the Taskforce for Climate-related Financial Disclosure (TCFD) framework into legislation to ensure transparent and comparable reporting on the way climate impacts business.
 

In navigating the new reporting requirements, we find that climate reporting is a bit like life. The stuff you worry about may not turn out to be such a big deal. It’s the things you never expected that blindside you.

Here are five things we think our clients should take on board to avoid being blindsided as they embark on the climate disclosure journey.

1. Everyone needs to consider climate-related reporting, not just those who need to report

Initially, at least, reporting under accounting standards based on the TCFD framework will only be required by some of Australia’s larger companies. But even those who aren’t captured by the reporting legislation are bound to be somewhere in the value chain of companies who are. 

An entity’s carbon footprint is the sum of its value chain. Big businesses may choose not to engage with companies that will increase their carbon footprint, increase their climate risk or who cannot provide credible data on either front. They will also be interested to see who can support their climate resilience.

Plus, every entity needs to consider the risks and opportunities of a decarbonising economy – for their own risk management purposes. In that case, why wouldn’t you structure your climate reporting to align with new standards

Climate-related disclosure will soon become the primer for how all businesses approach climate-related governance, risk management, strategy, metrics and targets. You might as well learn to speak the language now – and use the data from reporting to understand the new shape of your risk universe.

A prime example is the importance of giving equal consideration to both climate-related physical and transition risk. Physical climate risks may be viscerally evident in extreme weather events, drought and sea level rise. Whereas transition risks, like increased climate-related regulation or insurance costs, may be less obvious but present more immediate risk and financial exposure . 

Similarly, when considering their critical path towards climate adaptation, property companies often fail to consider all the potential climate-related supply chain disruptions. Insurance retreat is very much on the property radar as insurers reduce or withdraw coverage from assets that are vulnerable to climate-related hazards like flooding or hurricanes. But what about people retreat? What is the risk of tenant flight from properties that are not aligned with a 1.5c trajectory – or not sufficiently energy efficient? What if a labour force is no longer willing to operate or live in certain geographic zones – or will only do so if companies are offering hazard pay?

At the other end of the risk spectrum, property and construction businesses have multiple opportunities to diversify into climate adaptation markets. Flood defences, green building technologies, resilient infrastructure development and climate-adaptive real estate development will all be fast-growth areas in the coming years. It’s time to consider which options are viable for your business – now.

In navigating the new reporting requirements, we find that climate reporting is a bit like life. The stuff you worry about may not turn out to be such a big deal. It’s the things you never expected that blindside you.

2. Prioritise value as much as compliance

You can approach your climate-related disclosure as a tick-the-box exercise, but this is a sure way to leave value on the table. Even done purely at a compliance level, the process of establishing an internal capability to report annually under the new framework and standards is time, energy and money intensive. So you might as well create as much value as possible from the exercise. That means developing skills and capability in the climate context and creating a repeatable framework to deliver this reporting year-on-year. It means creating a well-defined strategy that considers all potential climate-related risks and opportunities. And having data from robust metrics to inform decisions.

The approach must be both top-down and bottom-up. This is particularly important for those who build long-lived assets that must be designed with the future in mind. Everyone who supports that process (builders, designers, constructors and operators) must understand what your climate adaptation strategy is and how they plug into it.

A key activity is testing your business strategy against future climate scenarios. For this scenario analysis process to add-value, you need to take the time to craft scenarios that are comprehensive and challenging. A good example are the scenarios developed for New Zealand’s construction and property sector. These sector-wide scenarios provide an industry-agreed set of underlying assumptions and climate-related indices, allowing greater comparability between sector participants who now share a consistent starting point for scenario analysis. Gaining sector agreement significantly reduces the cost and effort associated with scenario development for each reporting entity. We strongly recommend that sector-wide scenarios are similarly developed for Australian entities.

3. Take your time moving to quantification

Your organisation understands how to quantify different types of risk, but climate is a new and different beast. Its horizons are different – they are longer, they shift and they can have non-intuitive pathways. It takes time to gain a clear understanding of how your organisation will address climate-related risks and opportunities in its financial reporting.

Also, there’s no point starting quantification until you have comfort at the highest governance levels that you’ve really identified the “big ticket” climate risks to your business. You’ll need several passes at climate risk assessment. Your first climate risk register may have 100 lines. Take time to understand the most significant showstoppers to your strategy and objectives before pouring resources into quantification. Spend the first years putting in place the foundational layers you need to set yourself up for success. You’ll be amazed at how many stakeholders there are at multiple different levels – and how many internal and external systems feed into this process.

Recognise that it can take time to educate and bring key stakeholders, especially those critical decision-makers at governance level, on the climate reporting journey – and especially where it concerns putting dollar figures on climate risk exposure or future opportunities and disclosing that information externally.

Your organisation understands how to quantify different types of risk, but climate is a new and different beast. Its horizons are different – they are longer, they shift and they can have non-intuitive pathways. It takes time to gain a clear understanding of how your organisation will address climate-related risks and opportunities in its financial reporting.

4. Get practical advice specific to your company

Bring in scientists and engineers alongside your financial and legal teams. Find people who can unpack what a 1.5-degree or 3-degree scenario will mean to your business. Sector scenarios will be helpful. But you’re going to need to understand the implications of different scenarios for your specific activities and operations. It’s one thing to understand how to decarbonise assets at the portfolio level. It’s another to understand how enterprise level risks are filtered down into on-site implementation.

Your critical assets, services and locations may be very specific to your business. Your climate transition risk may be of more immediate concern than physical risk. You have a three-year plan to relocate those critical assets sitting on flood plains. But you need to access finance and insurance next month. Lenders will look at you sideways if you can’t articulate how you intend to evolve your business model to address its glaring transition risks.

5. Stop looking for a short cut

No one develops a climate-related disclosure report in a few short months – no matter what people promise you. The end point of this work is the public disclosure of some of your organisation’s most significant climate-related risks and opportunities. It’s a process that needs to be carefully understood and managed. The time and resources cannot be underestimated. The process and stakeholder engagement, especially at senior leadership level, is as important as the final output. Based on our experience delivering TCFD and regulatory-driven climate-related disclosure aligned reports, you’re looking at a 12- to 18-month process to deliver an end-to-end report aligned with incoming accounting standards.

The writing is on the wall. The Climate-related disclosure framework is the direction of travel for climate-related financial reporting. Whether yours is an entity that will have to report under the new accounting standards, or is in the value chain of those large entities, you need to start now. It will take time to build and develop the capability and the internal processes and frameworks to deliver climate-related reporting. Get support to develop a robust understanding of your climate risk and opportunities and how this may impact your business in the short, medium and long term.

Getting a handle on your climate exposure goes to the heart of ensuring business resilience, assuring your stakeholders that you have climate adaptation covered.

You can find out more about Beca's sustainability initiatives and how we are making everyday better here.