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TCFD as a mile-marker on the journey to net zero
27 April 2022

TCFD as a mile-marker on the journey to net zero

6 minute read
Net zero Climate risks & opportunities
Nancy Xie
Nancy Xie Senior Managing Consultant, Climate Risks & Opportunities

As climate change accelerates, companies – as well as investors, regulators and stakeholders – are looking to understand the impact that a company's operations and products have on the planet.

Increasingly, they are also keen to understand the risk that the changing environment poses to a business' operations and profitability. Strategies are being designed both to reduce impact (mitigation) and adapt to the impact (adaptation).

Two leading frameworks are being used in this context: adopting a net zero strategy which is aligned with the criteria of the Science Based Targets initiative (SBTi), and conducting risk and opportunity assessments under the Task Force for Climate-Related Financial Disclosures (TCFD) framework. The popularity of both approaches has increased dramatically: the number of companies committed to net zero has doubled each year since 2019, and the total number of companies that have committed and set targets has increased by more than 500% between 2019 and 2021.

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The number of companies that have committed to an SBT have doubled each year since 2019 (Source: South Pole based on SBTi data)

Meanwhile, the number of TCFD supporters has increased by 72% from 2018 to 2021, and 40% of signatories are financial institutions. This is partially influenced by mandatory reporting requirements in nations such as New Zealand and the UK. The USA's top financial regulator (the Securities and Exchange Commission) has also moved to propose rule changes requiring companies to include certain climate-related disclosures in their registration statements and periodic reports. Another reason for the increase is that companies are also realising that the TCFD aligns well with understanding the business and financial risks of climate change for companies across all sectors. Companies seeking to align with the TCFD recommendations can also enhance their climate-related reporting under other frameworks.

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The number of TCFD supporters has grown drastically between 2018 and 2021 (Source: TCFD Status Report, 2021)

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An overview of countries that have adopted the TCFD framework in climate disclosure requirements or expectations (Source: TCFD. “What's New in 2021?" Webinar)

How companies impact the climate and how climate change impacts companies are two sides of the same coin. Companies should therefore aim to address both – align with TCFD and pursue a science-based net zero target – as part of their climate strategy, and ensure that these efforts are in sync. 1

We have identified three key points to consider as you take the first steps on your climate journey.

Key point 1: There is a symbiotic relationship between TCFD and net zero

Net zero and the TCFD framework overlap in fundamental ways:

  • Calculating/disclosing greenhouse gas (GHG) inventories and metrics. Understanding your company's GHG footprint across scope 1, 2 and 3 means you can comprehend the total environmental impact of your operations. Gaining visibility over your full value/supply chain can also help you identify key emission sources, and major physical supply chain risks. This assessment can then enable you to set emission metrics and engage key suppliers to decarbonise and de-risk together in a partnership. For TCFD-aligned climate risk assessments, GHG data is further needed to estimate certain transition risks, such as carbon pricing.
  • Developing scenarios and planning for the future. Scenarios help with the identification of climate impacts and future emission trajectories, on which targets and emission reduction interventions can be based. Aligning with the selected scenarios, assumptions and the data used for decarbonisation modelling is ideal for supporting progress towards SBTs and net zero targets, as well as for strengthening TCFD scenario analysis.
  • Setting targets for sustainability reporting. Setting net zero targets and interim SBTs is a crucial part of a robust net zero strategy and forms one of the key recommendations of TCFD reporting. Modelling absolute targets, or intensity targets, and clearly communicating them to internal and external stakeholders is increasingly the expectation of investors and customers.

Identifying the overlaps between net zero and TCFD can streamline the implementation of both, while ensuring that assessments provide clear insights into the business' risks and opportunities.

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Key areas of overlap between the SBT and TCFD (Source: South Pole)

Key point 2: Net zero shows us the benefits of taking action, while the TCFD shows the impacts of inaction

A net zero strategy is a company's way of showing responsibility, and it can improve internal and external stakeholder perceptions of a company's climate action. However, setting a target is just the beginning of earning a "social licence" to operate in today's world. Stakeholders are increasingly looking for measurable, verifiable action. Emission reduction projects can have positive business cases, e.g. energy efficiency, while other projects may have negative cost impacts on the business, e.g. alternative materials and feedstocks. By buying carbon offsets, for example, a CFO immediately sees the cost of the company's current emissions, which can be used to encourage teams to reduce emissions across the value-chain and to factor emissions – and, importantly, the expected price hike in future carbon credits – into their long-term investment decisions.

On the other hand, the TCFD focuses on the cost impact of climate risks and opportunities on the business. Scenario analysis is a key component of the TCFD, which essentially attempts to project how a company's most material climate risks and opportunities will evolve under different climate scenarios. This includes physical risks (e.g. flooding risk or heatwaves) and transition risks or opportunities (e.g. reduced/increased demand for products and services). TCFD recommends that companies understand the actual and potential impacts of material climate risks and opportunities from the perspective of a balance sheet (assets and liabilities) and/or income statement (revenue and expenses), which represents the "cost of inaction". Companies can then use this information to inform their business decisions and strengthen the resilience of their value chain.

Key point 3: Both TCFD and net zero require engagement and transformation across corporate functions

Deep operational changes are necessary to embed climate action within a company to protect against claims of "greenwashing". A company's sustainability team typically does not have enough control to make these changes on their own. When speaking to our clients, the common challenges we hear about are the difficulty of collecting data across departments, limited knowledge and understanding of climate topics, the lack of governance over climate topics, and gaining buy-in across the business. When everything falls under one net zero strategy, driven by the C-suite, these operational issues have a better chance of being resolved.

What next?

Companies can use a holistic climate action framework, such as the South Pole Climate Journey, as a roadmap for their climate action. Understanding their GHG footprint and key climate risks and opportunities should be the first step: these actions inform TCFD reporting and the development of a net zero strategy. Understanding your emission hotspots and risks will then inform the decision on whether to develop further insights.

1 While sustainability is broader than climate (e.g. water, waste, diversity, and social impacts), global warming, which is caused by rising carbon emissions, is at the core of many corporate sustainability strategies and can inform actions in other areas. Understanding your company's carbon footprint and risks, and setting roadmaps and targets, are important steps on any corporate journey to net zero.

Contact us today for more information
Contact us today for more information

South Pole's climate experts can support you with understanding the processes involved as you take the first step on your Climate Journey.

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