TCFD: A framework to communicate and mitigate climate risks

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

• The TCFD recommendations have been backed by over 250 businesses worldwide, representing more than $6.5 trillion in market capitalization.
• Investors use disclosures as an insight into their investments over the long term and to mitigate risk clusters within their portfolios.
• The importance of ensuring the long-term stability of portfolios in the wake of climate change is going to continue increasing.
• TCFD-aligned disclosures will provide insight into the stability of portfolios against worst-case scenarios such as emerging regulations leading to non-compliance, increasing insurance and liability costs, and potentially leading to stranded assets.
• The disclosures are now used by governments across the world as well as being spearheaded by the largest pension funds globally.

The Task Force on Climate-related Financial Disclosures (TCFD) framework is designed to improve the clarity, consistency, and reliability of climate-related disclosures.

Commercial Real Estate has a large amount of physical risk on its balance sheets in the form of assets that can be affected by climate change. The TCFD framework is designed to help investors understand the climate risks associated with their investments, and for real estate assets, there are clear physical and transition risks associated with the shift to a resilient, net-zero world.

The main hurdle companies are grappling with is having accurate data given the uncertainty embedded within projections of the future, and they are therefore nervous about disclosing such data to external stakeholders. The data and audit processes are new and not as familiar as standard financial disclosure, which makes reporting a difficult first step. 

However, the disclosures present an opportunity to highlight a company’s understanding of its contribution to climate change and the impact of climate change on its operations. The disclosures provide investors with the information needed to make informed decisions. Such information, such as which companies are mitigating and adapting to climate change proactively, provides a huge opportunity for companies looking for funding or investment.

TCFD & ESG Frameworks or Initiatives

We are seeing a shifting alignment of all ESG frameworks to include the TCFD requirements. For example, GRESB has its Resilience Module, CDP has incorporated TCFD-style questions, UNPRI has made TCFD reporting mandatory for its signatories, and the Corporate Reporting Dialogue is working to better align the various ESG frameworks. 

In practice, the GRESB Resilience Module and the TCFD present opportunities for leaders of Commercial Real Estate organizations and funds to view the quality of their investments through a new and sophisticated lens. By recognizing the future impacts of climate change, flood risks, or other transition factors, organizations can consider future shocks and adjust their strategies accordingly. Having accurate data to understand these risk factors and adjust strategies will be key in successfully reporting in alignment with the TCFD.

Legislating the TCFD in the UK

A report by the House of Commons Environmental Audit Committee included an explicit recommendation that “The Government should set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities in line with the TCFD recommendations on a comply or explain basis by 2022.” Whilst we are awaiting development on this, it’s a powerful signal to the market to start to gear up for disclosure. 

Furthermore, the London Stock Exchange aligned its ESG reporting guidance to the TCFD recommendations back in 2017, creating structure and support in all the right places. We just need the rubber seal to make the reporting mandatory and we will see a huge uptake in disclosure and better investment decision making.

At Carbon Intelligence, we are helping our clients become more resilient and use tools like GRESB and TCFD to improve how they operate their portfolios and deliver high-quality assets. Programs like our Net Zero for Buildings roadmap help our clients understand and manage transition risks and accurately report progress to their stakeholders. Contact us today.

This article was written by Sam Carson, Director of Sustainability at Carbon Intelligence.