By Joanne Lee
The Covid-19 pandemic has disrupted businesses and economies at a magnitude we have not previously seen and exposed the vulnerability of our economic systems. Given the enormous weight of the pandemic on the corporate psyche, one would think that longer-term sustainability issues would take a backseat in the boardroom. On the contrary, the pandemic has illuminated the importance of planning ahead to manage systemic risks; the largest of which is climate change.
Climate change and its related environmental risks ranked among the top five risks in terms of likelihood in the World Economic Forum’s Global Risks Report. The report explores the biggest concerns of over 800 global experts and decision makers for business in the next decade. It revealed that climate risk was deemed more significant and pressing than economic risks, which traditionally dominated the rankings.
Regulatory trends on climate risk reporting
Recognising the urgency of climate action, regulators and governments worldwide have turned their focus to climate risk reporting. In July 2019, the UK government released their Green Finance Strategy with the expectation that all listed companies and large asset owners make climate disclosures by 2022. Shortly after, New Zealand and Malaysia announced that it will require its major financial institutions to report their exposure to climate risk. Bank Negara Malaysia has also said that it would set regulatory standards for corporate Malaysia based on the experience of the financial institutions. All three countries recommend or require the adoption of the Task Force for Climate-related Financial Disclosures’ (TCFD) recommendations.
TCFD, a framework for financial governance
TCFD was established in 2015 to develop a new reporting framework that would promote more transparent disclosure on organisational climate related issues. It aims to provide insight into an organisation’s exposure to and management of climate risk and opportunities, helping stakeholders such as investors and lenders to make better informed decisions. In turn, the visibility on climate issues will help organisations to better track and manage the risks or opportunities arising.
Disclosing in line with TCFD recommendations
The TCFD reporting framework is made up of four core elements, namely, Governance, Strategy, Risk Management and Metrics & Targets. For each of these elements, the TCFD recommends the following disclosures:
- Governance: Describe the Board’s role in overseeing climate-related risks and opportunities; and the management’s role in assessing and managing climate-related risks and opportunities.
- Strategy: Describe the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning, where such information is material. In describing the resilience of the organisation’s strategy, climate-related scenarios including a 2°C or lower scenario should be considered.
- Risk Management: Describe how climate-related risks are identified, assessed and managed.
- Metrics & Targets: Describe the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material.
Current trends on climate reporting in Malaysia
As part of a yearly analysis of the corporate reporting trends in Malaysia, Singapore and the UK, Black Sun examines the quality of disclosures based on the TCFD recommendations. As the regulatory developments in Malaysia focused on financial institutions, the analysis looked into the disclosures of Malaysian-listed banks.
The research showed that commitments to implementing the TCFD recommendations have not necessarily translated into meaningful disclosures – yet. Companies in their nascent stages of reporting climate risk tend to make disclosures in a siloed fashion, where climate strategy is separate from the broader corporate strategy, possibly indicating that these companies have yet to consider climate issues as a strategic matter. A mere 10% of Malaysian-listed banks were observed to have successfully integrated sustainability considerations into the overarching organisational strategy.
At the other end of the spectrum, we observe companies with integrated management approaches to climate risk, demonstrating the role climate related issues play in the development of strategy and in the creation of long-term value. Companies in this category provide clearly defined metrics and targets, as well as a clear explanation on the different roles the Board and management play in overseeing and managing climate issues. We found that 60% of Malaysian-listed banks disclosed the metrics they use to assess climate-related risks and opportunities and 40% described the role of the Board in overseeing climate-related issues. As the focus on climate related issues intensify in Malaysia, we expect to see companies managing climate risk more holistically, rather than as an isolated sustainability challenge.
Most challenging of all is providing disclosures on the resilience of the company’s strategy through scenario analysis. None of the Malaysian-listed banks observed had integrated scenario analysis into its disclosures. This observation is unsurprising, as scenario analysis has been cited as the most challenging aspect of implementing the TCFD recommendations. Among the FTSE 100 companies, 15% have made reference to a climate scenario and only 5% reported its outcomes.
Towards meaningful climate communications
Like any reporting process, meaningful disclosures aren’t achieved overnight. Each company is at a different stage of the reporting journey with unique challenges and unique stakeholder needs. But how does one get started?
- Think Integrated
As you embark on your climate reporting journey, develop an integrated approach to all your communications and across all media. Key to making progress on climate-risk disclosure is the collaboration across corporate functions. Strengthen inter-departmental links and identify an internal champion to put climate issues on the agenda.
- Be Authentic
Authenticity is the key to effective engagement. Ensure that all your communications are based on credible and real aspects of your business. Focus on what matters most to your relevant stakeholders and reflect their interests.
- Build Your Story
Build, report and reinforce key themes and messages. Tell your company’s story and reinforce what makes it unique, establishing the link between your climate initiatives with the organisation’s wider purpose.
This article was contributed by Joanne Lee, Director, Research & Strategy, Black Sun Asia Pacific. To learn more about the TCFD framework and recommendations, please visit https://www.fsb-tcfd.org/