Investor interest in ESG has increased significantly during the past few years. And as part of this, TCFD has emerged as a framework for sustainable finance reporting. However, many companies find themselves in unfamiliar territory when faced with requests to report on climate change, using the TCFD framework.
More than 70 members had signed for this DIRF virtual members’ meeting thus stating with determination a huge demand for more information on the subject and keen interest in learning how peers are addressing it.
Explaining what is TCFD (Task force on Climate-related Financial Disclosures), its background and development – Samu Slotte, Head of Sustainable Finance, Danske Bank
The TCFD-framework is EU’s regulatory set of recommendations and is now in place and implemented as from 2021 – supported by Denmark since October 2020 with the government urging companies to demonstrate a commitment to building af more resilient financial system through better disclosures.
Traditionally, investors are setting their targets based on the financial reporting. But now investors are increasingly taking non-financial aspects into account when setting targets on the background of how company activities impact the climate and how climate change may impact the company. This focus is giving a big increase in sustainability targets resulting in a lot of talk with both companies and investors on the double materiality perspective of sustainability, i.e., financial materiality and environmental and social materiality. This trend towards investors demanding more information on sustainability and climate targets will affect financial performance with the perception of a clear overlap as the business story and the four main recommendation on metrics/targets, risk management, strategy and governance gain acceptance generally.
Today, the biggest, unpriced, risk is climate risk, and investors should be able to take this into consideration (started in 2015). Now there is much bigger market understanding, but still a long way to go. TCFD is seen as a reporting initiative with the key goal to improve the disclosures related to forward-looking financial impact of climate-related risks and opportunities. Management should be clear on the set-up and be able to answer questions on TCFD (embedded in company strategy to ensure right transparency), and financial and sustainability considerations are to be included in the company guidance. Key goals to improve disclosure of climate-related risks are to be stated along with opportunities going forward and what the financial impacts will be. It raises a lot of questions such as; how to deal with climate changes far into the future? Should it still be disclosed that it is not an imminent risk as the reporting is describing how the company is dealing with it and analyzing it? How many resources should be used, it seems to be a heavy workload?
The company perspective when reporting on sustainability, climate and TCFD – Lene Bjørn Serpa, Head of Sustainable Governance, A.P. Møller-Mærsk
A.P. Møller-Maersk (APM) is reporting on sustainability since 2009 and is committed to endorsing TCFD since 2018 but are still in the initial stages. Sustainability reporting is seen as a great tool to mitigate risk, build trust and comply with legal requirements, and the core stakeholders are taking great interest but also customers are increasingly beginning to expect that it is taking into consideration. In addition, APM are getting demands from investors also which is seen by management as an opportunity to focus disclosure on the most strategic areas are included in the AR along with a special report on ESG in general and TCFD in particular. Climate risks and opportunities, especially on the customer-side, with increasing requirements to zero carbon targets to improve customer supply chain require that more customer-oriented data are provided. In addition, comes the investor focus which is addressed in the sustainability report.
The work process started by analysing how climate change could pose a risk to the business and by setting targets to ensure transition to a zero carbon targets. It is still early days, but APM is now getting a better understanding of TCFD and are working on improving the reporting and to organise the reporting to provide more disclosure going forward. This process implies continuously expanding and improving the data and information provided (e.g. decarbonization roadmap) to protect the business value from climate change effects. This entails core areas such as governance, strategy, risk management and setting up metrics and targets for instance, setting up a roadmap for decarbonization by 2050. A common methodology is also required which APM is working on for shipping in partnership with peers. It is fair to say that it is a huge task.
The investor perspective – Anders Schelde, Chief Investment Officer, AkademikerPension
Fact is that climate change is a true existential threat to mankind which is why it is so important to take seriously by everyone though it may not seem like a burning platform as the risks are not disclosed directly. AkademikerPension have no direct risks as a company, only indirectly through their investments in the companies and how they are acting. The TCFD framework has emerged as a good template to use to assess risks and opportunities with the companies, but so far not many Danish companies have signed up to the TCFD framework as only 18 companies out of the top 100 biggest companies of which 12 are in the C25-index. To influence this development, AkademikerPension are putting forward shareholder proposals to sign up for TCFD at the general meetings. The companies should do it out of self-interest and not see it only as a tool to please investors or for reporting purposes. Instead, climate changes are to be considered as an actual risk going forward. Facilitate quick action as there is a strong business case in the area. As an example, about a third of Carlsberg’s investor base have signed up for TCFD. When asked, AkademikerPension acknowledge that their own reporting is far from perfect, but they see it has a process, and encourage all companies to get started on the first steps. The most crucial thing is for management to be on top of the issues and start on the communication internally and externally.