Are you as inspired by climate-related financial disclosures as I am?

Written by Rebecca Oliver, at Purple Ivy AB

It may seem odd to get excited by something with such a mouthful of a name as the Task Force on Climate-Related Financial Disclosures, but that is just how it is. Those of you who have spoken with me since the TCFD emerged in 2017 know that I can get pretty animated on the subject. Why? Because I see it as a flexible tool supporting a step change in our combined response to climate change across the global economy. Let’s use it!

What is the TCFD?

Quite simply, the TCFD encourages companies to prepare investor-facing information about their near to mid-term resilience, recognising that climate change is and will continue to alter the planet and the economy. It asks that firms recognise, put a financial value on and then manage risks and opportunities that arise from the physical effects of climate change and from the shift or transition to a low-carbon economy. The disclosures are voluntary but will tell investors about the governance of companies and about their resilience. 

How is this different from all other climate disclosures?

Two things stand out in the recommendations from the TCFD. One is that firms are encouraged to adjust their financial forecasts. The other is that these calculations should be backed up by the use of scenarios, and the assumptions behind these also disclosed. Both these processes have potential to kick off a transparent and material conversation about how climate change may change our world, about where we invest and about how we do business in the future we are creating together. 

Inside companies, there are other interesting changes that can be sparked by this newcomer on the disclosure stage. Just to take one example, creating a TCFD disclosure process will generate intense conversations and new relationships between investor-relations, finance, risk management and sustainability departments. These kinds of cross-functional teams were unthinkable not too long ago and are still not the norm. It is great to hear Unilever’s CFO, Graeme Pitkethly, say that this should now be considered normal https://www.youtube.com/watch?v=P3pQewDHb1I .

Who can benefit?

Integrating a TCFD-compliance process into the yearly reporting cycle for a company of any size, whether there is an immediate plan to publicly disclose the results or not, can deliver a robust, climate-relevant narrative about the company’s governance, strategy, risk management, metrics and targets - in a language that motivates and reassures employees, and is meaningful to financial actors. 

When a company doesn’t see themselves at the centre of climate action, preparing a full disclosure of climate-related financial risk may sound like a tall order. But I see an opportunity for companies to construct lean and repeatable future-proofing processes and internal structures as they build towards the disclosure goal. These processes have potential to deliver value at every step, to external and internal stakeholders alike. 

Two or three mid-term scenarios for potential futures in which the company needs to remain resilient can be started in sketch form, simply to gather the right people, knowledge and lay plans. They can then evolve with the capacity of the company to be more sophisticated, with more metrics, targets and ideas for how to be a winning company in the transition to a low-carbon economy. 

So why does this excite me so much? 

Corporate reporting is nothing new. Climate disclosures are nothing new. Green finance doesn’t feel new anymore either. But I stand my ground. The potential of the TCFD is profound even if just its spirit is embraced into normal practice. It changes the way that companies think about climate change, from something vague, debatable and irrelevant to daily actions, to something quantifiable, relevant and actionable. It can furnish investors with wake-up calls. 

The TCFD also addresses the tragedy of the horizon, as former Bank of England head Mark Carney so memorably named it. And above all, it stretches the field of action on climate change deep into the world of finance.

As someone who has been working with “the big picture” of global change for almost 20 years now, when something inspires me, it is usually because it reminds me of new words or concepts that may have come and gone, but which we now see shifted the conversation profoundly and created ripples of irreversible change. 

The acceleration in how actors in the global economy have limbered up to seriously address the climate crisis is quite something. From simple tools like indices and signatory lists such as the Global Compact, to pioneers fighting to make carbon disclosures the norm. These were joined by strong alliances like the World Business Council for Sustainable Development, working to define the critical changes each sector would need to achieve by 2050. One by one leading CEOs stepped forward to quash sceptical voices. 

Each time a new crowd comes up to the start line and starts flexing their muscles, it is because the story suddenly makes sense to them. The right words and concepts have become part of the lexicon - and paths ahead begin to take shape in their imagination. Now it’s the asset managers, fund managers, banks and financial regulators coming to the start line - they understand the language of financial risk, and are beginning to see - as the reinsurance industry has before them - the potential impacts of climate change on their daily lives, both in terms of how they can change what they do and vice versa.

Seizing the winds of change

Just ten years ago, the global economy looked like it was locked - interlocked. Any big changes were blocked by walls; fixed ideas and assumptions made business as usual seem the only option. We have all sensed the shifts, the loosening of straitjackets and heard the cracks as assumptions split wide open and normal suddenly looked crazy. 

I passionately believe that the TCFD belongs to this process. We need to grab this opportunity for dialogue with global finance - and I am geared up to help you. Shall we take a crack at it?

So, to sum up, it occurs to me that every single company can benefit from working with or at least being inspired by the TCFD. It is a carefully developed concept that can be used as a tool to integrate climate change and the transition to a low carbon economy into the governance, strategy and risk management processes at the core of every company. 

Former New York Mayor Mike Bloomberg and former head of the Bank of England Mark Carney get praise for kicking off the concept, but clearly many should get credit for how it took shape, including all those on the Taskforce (#Neil-Hawkins).  Together with my new colleagues at Purple IVY and some wonderful expert partners, I am looking forward to being of service. Do get in touch. 

Lean Forward

Ever heard of the term stationarity? Though rooted in the rules of mathematics and statistics, it can come in very handy when explaining what needs to change in business thinking.

Stationarity is a way of finding solutions for the future by looking back at what was. In strategy terms, you can also call it ‘leaning back’. We can see this principle applied in all too many businesses, when sustainability strategies are based on a more-of-the-same approach, and targets are set a little bit higher than they were before.

But the thing is, our world is changing much too quickly and radically for that kind of approach to work anymore. Past performance can’t predict how we can succeed in the future. We need to adapt strategies by aligning them to what’s happening in the world. We need to lean forward, not back.

Human’s impact on the environment, limits to growth, an interconnected world and shifting demographics are all changing the business game plan. These drivers shape how our society is structured, which is bound to have a huge impact on the dynamics of your market and value chain, as well as on people’s expectations on your business.

Through the impacts of these drivers, your business is entering unchartered territory. And the fun thing is that corporate sustainability teams have a huge role to play in helping your company succeed in this new business landscape. Scania, Ericsson, and Electrolux  are all good examples of companies that are integrating sustainability thinking into their core processes and defining top-level business strategies in the context of their roles in a changing world. Integrating sustainability is helping them carve their place in a new world.

In our posts, my Purple Ivy colleagues and I are going to explore how companies can benefit from leaning forward and developing a deeper understanding of their role in changing times. We’re convinced that doing so is the only way to build a flexible, visionary organization which can weather the storms ahead and come out stronger on the other side.

We look forward to receiving your feedback!

From Purple Ivy’s Astrid von Schmeling