IPO & capital market transactions
IPO & capital market transactions
Private funding transactions
Private funding transactions
When the international Financial Stability Board (FSB) created TCFD in 2015, the goal was clear: to identify the types of information companies should disclose to give investors, lenders and other stakeholders an accurate handle on the climate-related risks that might affect a business’s value.
“TCFD is playing a central role in bringing clarity to company disclosures, driving the largest single change in how companies disclose since the formation of the U.S. Securities and Exchange Commission (SEC) in the 1930s,” outlines Mark Lemon, senior manager in ESG and sustainability at Grant Thornton LLP (US).
In a complex and confusing landscape of regulations and standards, adoption of TCFD recommendations is growing rapidly. According to the TCFD 2022 Status Report, support for the framework now spans 99 countries, and nearly all sectors of the economy, with a combined market capitalisation of over $26trn. The report shows that 80% of companies disclose in line with at least one of the TCFD’s 11 recommended disclosures.
In 2021, the TCFD disclosures were the foundation of the establishment of a global sustainability reporting framework, led by the International Sustainability Standards Board (ISSB). Its first set of standards is set to be released early 2023.
As Sarah Carroll, director – sustainability reporting at Grant Thornton International Ltd, explains: “The quality of TCFD as a framework is proven by the fact the ISSB is using it as a foundation for its future standards. The architecture and terminology of the ISSB framework draws heavily on the TCFD guidance.”
With the need to report on climate impacts becoming more urgent, and larger businesses increasingly enforcing compliance throughout their supply and value chains to meet their own reporting requirements, mid-market companies must act now to ensure they’re not left behind in the future.
The case for urgency on TCFD
“Investors are looking for companies that behave as though 2050 is in 10 years’ time, not 28,” warns Katerina Katsouli, ESG and sustainability director at Grant Thornton Greece.
The message is clear: investors will abandon companies that fall behind their competitors in implementing change. Grant Thornton’s latest research into the global mid-market confirms this – boosting reputation with stakeholders is considered a significant benefit of climate-related reporting, cited by 25% of businesses.[i]
And the issues extend beyond investor demands. Laura Tibbetts, associate director in Grant Thornton UK’s financial accounting advisory services team, highlights how many financial institutions are now required to link disclosures in their financial statements and lending portfolios to their progress towards net-zero.
“There’s a risk that companies without a credible transition strategy to net-zero might find funding becoming unavailable or more expensive, because without one they represent an increased risk to the lender,” Tibbetts explains.
Katsouli says powerful commercial imperatives are at play. “The European economy will be completely different in terms of products and services in 10 years. Companies that invest in environmentally friendly technologies and products will achieve sustainable competitive advantage, while those that do not will face major development challenges.”
Businesses that embed climate-change awareness and mitigation throughout the organisation, from the shop floor to the board, will generate the greatest business advantages from the transition, believes Tibbetts. “The need to report is forcing companies to become more sustainable in their behaviour, which in turn is making them more appealing to investors, customers, lenders and other stakeholders,” she says. “It’s a virtuous circle.”
Embracing TCFD: The challenges for business
The advantages of reporting are significant, but so are the challenges involved in meeting the FSB’s recommendations. These include difficulties rooted in the TCFD’s own framework for the type of disclosures made.
Three major difficulties arise. First is the limited or non-existent experience of first-time reporters when it comes to analysing and reporting accurately on the climate-change scenario affecting their organisations. This not only generates risk; it drives the need for new or realigned resource and expertise, either within the business or externally.
Second is access to the relevant data – particularly difficult for smaller businesses that haven’t historically had the research capabilities to crunch the relevant ESG-related information.
Third is the issue of governance. Does the board have the processes and internal controls in place to keep abreast of climate-related matters? Does it take climate issues into account when setting strategy? And how does it measure progress? The same questions apply to management.
The actionable guide below illustrates how businesses can address these challenges.
Where should you start on TCFD?
1. Understand the timeframe and complexity
For example, regulation around climate reporting, which typically encompasses emissions reporting, is coming in the UK, EU, the US and many other parts of the world. But developing and deploying an effective greenhouse gas (GHG) management programme is a significant undertaking.
Companies cannot afford to underestimate the time, effort and complexity involved in embedding climate issues at the heart of the business. This is especially relevant for first-time reporters. Organisations need to understand from a long way out who’s going to be responsible for driving the project forward, and ensure they have the knowledge and resources they need.
2. Build a workable roadmap
The next step in ensuring the success of new reporting processes is developing the right roadmap to get the organisation to where it needs to be within the required timescale. Too often, companies set and declare ambitious targets while providing no insight into how they are going to achieve them.
“Look at the requirements and what you’d need to have in place if you were to report today,” advises Tibbetts. “What would you have to include, and how does that compare to best practice, to your peers, and to others in your industry? Consider what you want your report to say, work back from that, and prioritise any gaps that emerge during the process.”
3. Create an effective and efficient internal reporting framework
Reliable climate-related metrics start with a solid foundation. Documenting the rationale for key decisions through each step of the process will go a long way towards supporting future reporting and assurance requirements, making the required processes easier in the longer term for everyone involved.
4. Define KPIs and track performance
Companies must establish key performance indicators (KPIs) which address the climate-related risks and opportunities it faces and track performance against these over time. For businesses that currently lack the necessary resource to gather and process this data, plans will need to be put in place to ensure this can be done effectively.
“As the world moves to aggressively reduce GHG emissions – targeting net-zero by 2050 – it is important to understand current baseline emissions; identify the most effective and efficient ways to abate those emissions, and in the short term offset residual emissions; and make sure those emission-reduction strategies are operational,” Lemon explains.
5. Understand the financial reporting implications and disclosure challenges
It’s impossible to underemphasise the complexities involved in the interplay between TCFD disclosures and other elements within corporate reporting. The discussions and disclosures companies might include in the TCFD section will have financial reporting implications.
For example, a company might be expecting to exit certain industries or to see changes in consumer behaviour. They will need to consider what this might mean for their forecasting or how they present the business review. They will also need to look at how these factors play into the principal risks they’ve identified, and how this ties into their governance disclosures. And how this all connects with their financial information. Asking these questions is essential for a business at the start of its reporting journey.
6. Gain visibility over your value chain and Scope 3 emissions
Leading companies are increasingly requiring net-zero commitments throughout their value chains, working closely with suppliers and customers as they leverage their ability to meet their Scope 3 emissions targets – setting a precedent that will soon be expected of all businesses.
Lemon is encouraged by this. “It’s great to see businesses engaging with their partners both before they enter their direct operations and then after they leave, creating a cradle-to-grave approach by flexing their influence,” he says. “It’s an approach that works for everybody.”
Effectively tracking Scope 3 emissions will require businesses to ensure they have access to the relevant data and the talent needed to analyse it.
7. Put the appropriate governance structures in place
Companies need to implement the governance structures and procedures required to ensure compliance at both board and management level. While this is becoming easier as leaders embrace their climate responsibilities, it is an important focus area for those companies that have not yet instigated change.
From our global research, we know that integrating ESG thinking at all levels of the organisation is considered the most important factor for boosting the credibility of sustainability reporting, highlighted by 35% of mid-market business leaders.[ii]
Take action now on TCFD
Time is running short for any international organisation yet to set in motion the steps needed to embrace the demands of TCFD. There’s no leeway for further delays: action must be taken now to address the issues involved and overcome the very real barriers that lie ahead.
If you would like the support of our experienced professionals to shape your approach to TCFD reporting, please approach your local Grant Thornton representative or one of our contributors.
i,ii. Grant Thornton’s International Business Report research, H1 2022.