In the last few years, we have seen the proliferation of reporting standards and frameworks around climate-related disclosure. The convergence in reporting requirements prescribed by the TCFD (now subsumed by ISSB), the EU (CSRD and Taxonomy), and recently the SEC, highlights a global imperative for companies to understand their impact and exposure to climate risk. Many companies still face significant challenges in reporting consistent and comparable information to stakeholders and the public.
Climate-related financial reporting presents a significant challenge for companies because it requires them to collect and analyze large amounts of often unfamiliar data related to their climate-related risks and opportunities. It takes significant effort to get engagement and gather information from across the organization. It also requires potentially new knowledge and skill sets to ensure that the data and methodologies are appropriate, accurate and reliable, and to analyze potential risks that have potentially not been previously considered or are difficult to quantify.
Here are five best practice principles to keep in mind as you work through your report:
1. Show your working
The TCFD recommendations, aligned both in the EU and UK laws, are designed to be an iterative process. Building the technical capability to assess climate impacts on your business will take time, especially if your organization is new to climate risk reporting. The goal of both EU and UK regulations, along with TCFD recommendations, is to enhance the completeness, quality, and decision-usefulness of climate-related reporting with each submission.
Demonstrate that your organization understands the goals of disclosing climate-related risks and outline your plan to improve disclosures over time. By describing where you are on the trajectory of your climate risk journey, you can demonstrate that your organization is actively building the knowledge, skills, capacity, data, and processes necessary to fully comply with all of the TCFD recommendations.
2. Ensure your analysis is forward-looking
In your disclosures, balance historic climate-related information and data with a clear narrative on future climate-related impacts, based on forward-looking analysis.
This is important because climate risk is created by changing conditions in our climate system, meaning that climate risk won’t necessarily follow historical patterns. Using only historical data to measure climate risk will vastly underestimate that risk, which has the potential to create surprises and losses in the future. TCFD’s specifically include scenario analysis in their recommendations because risk models based only on historical data don’t account for climate shocks.
Traditional data capture and analysis of risk tend to be retrospective. This can give organizations a false sense of security that they are managing climate risk. It also makes it easy to overlook initiatives and actions that are improving climate resilience, because they haven’t yet had an impact and aren’t present in the data. Demonstrate that your organization clearly understands that to gauge an accurate picture of vulnerability, climate risk and resilience, you combine historic data with forward-looking methods, such as scenario analysis.
3. Make your report easy to navigate for external readers
Climate-related disclosures can feel like quite a dry, technical read. Making your reporting easy to navigate will take some of the cognitive load of the readers and keep their attention on the important information for decision-making.
There are several ways you can make your reporting easier on a reader's attention span. Include a summary or overview at the start. Where you are describing internal structures or processes, consider including visuals or graphics. Some information submitted as part of your report might apply to more than one recommendation, so cross-reference where relevant. Clearly define the technical terms you use so readers are on the same page.
4. Include the right details to enable transparency
Transparency is a key principle that underpins the TCFD recommendations. You can build transparency across your reporting by ensuring you include enough detail on the what, how and why of your analysis. You can do this by being specific and referencing the methodologies, data sources, and thresholds you used in your analysis. Including these details supports investors to better understand the information in your reporting and how it compares with other organizations. Having this context means investors can make more climate resilient decisions in both the management of existing investments and new investments.
5. Ground your reporting in your industry’s context
TCFD recommendations are designed to be applicable across all sectors and industries, which means that they can be quite non-specific. Demonstrate that your organization understands how climate change will impact the sector and markets it operates in, and link your disclosures to the context of your industry or sector where it’s relevant.
The benefits of credible climate reporting
Assessing and disclosing information on a wide range of climate-related risks and opportunities, including physical risks, transition risks, and financial impacts might feel painful for companies, especially for companies who have not worked with climate-related data or previously disclosed this level of information. However, the benefits of investing in your organization's capacity to deliver good-quality, detailed reporting far outweigh the costs, especially over the long-term.
The exercise of reporting helps companies to better understand and manage their exposure to climate-related risks and opportunities - important insights that can help companies remain competitive. It provides investors and stakeholders with the information they need to make climate informed decisions about where to allocate their capital. In addition, TCFD-aligned reporting helps organizations demonstrate their commitment to being transparent and accountable on climate-related issues - something that is becoming increasingly important as investors, consumers and other stakeholders demand greater action on climate change.
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