Climate change disclosures: what your business needs to know
Climate change poses serious risks to businesses, and investors and financial markets are demanding to know which companies are most exposed to this risk and which are best prepared to take action. Here’s what your business needs to know on the issue.
The G20’s Task Force on Climate-related Financial Disclosures (TCFD) launched its voluntary framework in 2017 calling on companies to provide climate-related financial disclosures in their public annual financial filings, but many have been slow to recognise the value of doing so.
Where’s the risk?
Closer to home than you think. The most recent flooding put countless farms and rural businesses out of action, while the record temperatures of summer 2018 disrupted business operations across the country. Even if your business isn’t directly affected by extreme weather events, your supply chain might be. Flood damage to crops has fuelled price rises that impact the entire value chain of the produce, including hauliers, retailers and restaurants.
Head of ICAEW Sustainability Richard Spencer says: “Where businesses are paying more for produce, their margins will be squeezed. They need to think about this not just from the climate risk disclosure perspective, but also their own bottom line.”
What are the benefits of disclosure?
These range from financial benefits, including improved access to and lower costs of capital and a stronger credit rating, to reduced shareholder pressure or activism, and attracting an increased diversity of investors. Reputation was the most commonly expected advantage from climate change disclosure, according to Carbon Trust research, with 72% of the UK’s top 500 companies surveyed believing it increased brand value. A fifth (21%) perceived it would directly result in an increased company valuation.
Why is disclosure needed?
Although the number of organisations committed to supporting the TCFD framework has risen more than 50% since September 2018, not enough are disclosing decision-useful climate-related financial information. Bank of England governor Mark Carney has already warned that regulators will impose mandatory climate disclosure requirements if companies don’t take action voluntarily.
How can you prepare for a low carbon economy?
To compete in a carbon-neutral economy companies must understand the climate-related risks and align their strategies to properly address them. In following TCFD guidelines they need to explain how their company would fare under various climate scenarios, focusing their attention internally on managing risk and harnessing associated opportunities arising from the new low carbon technologies and products being developed. Put simply, recording and responding to your climate-related risks now will help future-proof your business to compete in tomorrow’s low carbon economy.
“It also allows companies to better mitigate future disruption from the physical impacts of extreme weather events, and develop sustainable business models, with the potential for significant long-term competitive advantage,” adds Spencer.
ICAEW has published a practical guide to the TCFD’s recommendations. Read it here.