By Guest Author April 13, 2023
Source: Environmental Leader
Photo / Image Source: Unsplash, Five years ago, the TCFD released recommendations that continue to represent the gold standard in how companies should convey the potential impacts of climate change on their businesses. Governments have only recently begun to make TCFD reporting mandatory, but this trend is accelerating exponentially alongside other climate policies that promise to fundamentally shift the playing field of the global economy.
The climate policies and regulations coming online in 2023 are designed to bring accountability to corporate climate strategies and to align global capital with low-carbon, resilient investment opportunities needed to realize global climate commitments. Within this climate policy architecture, the actions taken by companies in the next few years will be consequential in determining future competitive advantages. Hollow corporate climate commitments will be exposed, revealing legal and reputational risks that are sure to intensify in the coming years as decarbonization accelerates. On the other hand, companies that use climate risk reporting as an impetus to invest in the skills, capacity, and technologies to future-proof their businesses will be leaders of the global climate transformation and the beneficiaries of favorable access to finance and markets.
Four Trends Toward Corporate Climate Accountability Here are four trends that signal the shift toward corporate climate accountability and the opportunity for companies to move beyond TCFD to secure their future competitiveness. TCFD enforcement: Mandatory climate risk reporting is here In the years since the TCFD released their 11-point climate disclosure framework, governments hailing from nearly every continent have introduced climate disclosure requirements or proposals. Last year, the United Kingdom became the first G20 country to legally require climate disclosures. In the EU, the Corporate Sustainability Reporting Directive (CSRD) is set to require disclosures from more than 50,000 companies. Whether the requirements come from policymakers, financial regulators, or stock exchanges–every major company in the world will soon need to demonstrate an understanding of climate risks and opportunities in mandated reports.
ISSB standards: Climate risk in the global economy With the proliferation of national requirements, global standard setters have come together to drive greater convergence in the substance and format of climate disclosures. Building on the work of the TCFD, the International Sustainability Standards Board (ISSB) was launched in 2021 under the umbrella of the International Financial Reporting Standard Foundation–the global accounting standards body. The proposed ISSB climate disclosure standards were designed to provide global investors with consistent and decision-useful information to enable comparative analysis of companies and to surface the greatest climate investment opportunities in the world across industries. The new standards will be finalized in June and will go into effect in January 2024–and they are expected to replace the TCFD as the new basis for national climate disclosure regulations.
Green taxonomies: Aligning global capital with climate resilient business If climate disclosure policies are the bottom-up approach to understanding corporate climate risks and opportunities, green taxonomies are the top-down effort to shift capital to business activities classified as sustainable. Green taxonomies specify the criteria that various business activities must meet in order to be considered sustainable, making greenwashing more difficult and bringing clarity to the sustainable finance market.
The EU Taxonomy, in effect since January 2022, is setting the bar globally for green taxonomies. Taxonomies are under development in countries around the world, including Australia, Brazil, Chile, Colombia, India, Indonesia, Japan, Mexico, the Philippines, South Africa, South Korea, Thailand, and the UK. With a whopping $3-6 trillion of annual investment needed to fulfill global climate targets, green taxonomies provide the framework to shift global finance to fund the climate transition. Companies that proactively align their activities with green taxonomy criteria will have first mover advantage in the climate economy, including more favorable access to global capital markets.
Realizing opportunities in the global climate economy The global climate policy landscape is evolving fast. Though it will take time to work out the implementation challenges that come with unprecedented climate disclosure reporting requirements, the trajectory is clear. Policies like climate disclosure requirements and green taxonomies, combined with greater climate alignment of public investments, are the machinations of a necessary economic shift. And more than ever before, there is a roadmap for companies seeking to build their competitive edge in the decades ahead.
The TCFD – with its four pillars of governance, risk management, strategy, and metrics and targets – continues to be the best starting point for companies with climate leadership ambition. Companies serious about climate change have leaders and boards that are prepared to accept climate change as a responsibility and a business priority. Their leadership sets the tone for broad and deep organizational engagement. It also provides a license to invest in the skills and technologies that will be needed to design and execute strategies to climate-align business activities.
Most companies early in the TCFD journey rely heavily on qualitative analysis to develop an intuitive understanding of their climate risk and opportunity profiles. As their approaches mature, climate intelligence (CI) technologies help companies level up their strategies with actionable insights derived from the best available climate science. CI technologies provide on-demand, asset-level analysis on the exposure and vulnerability of critical business infrastructure now and well into the future, across multiple climate scenarios. This equips companies to efficiently prioritize investments that address the most pressing risks and that enhance future competitiveness in a low-carbon, resilient economy.
Put together, TCFD-inspired climate disclosure rules, new global standards, and green taxonomies provide the basis for a climate-aligned global economy. It’s a future state that every company should be investing in and preparing for. Climate risk reporting is an invitation to begin organizational climate alignment in earnest, and green taxonomies provide a roadmap to build future industry competitiveness. Companies that prioritize investments in skills, capacity, and technologies today will be at the forefront of their industries, positioned for success in the decades to come.
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