There are five global megatrends shaping the way that we are currently living, how we respond to them now determines how we are going to live into the future (PwC, 2019).
These megatrends are affecting all aspects of our lives, from the food we eat to the technology running our cities, each carrying with them their own risks and opportunities. Increasing societal awareness of these megatrends with the added realization of the severity of their impacts is driving governments, organizations and industry to address them and become mega trend resilient.
Climate Change and Resource Scarcity
Of the megatrends, it is Climate Change and Resource Scarcity that are dominating the headlines. Although the degree of climate change is uncertain, the physical impacts are increasingly evident. With 16 of the 17 hottest years in recorded history occurring since 2001 (NASA, 2017) it is evident that global temperatures are increasing, and with this brings devasting impacts. It is predicted that the Earth will reach a ‘tipping point’ at which the temperature increase will reach a threshold where catastrophic changes to the climatic system will be irreversible.
It is with this that global agreements and climate laws are enforcing countries, governments and organizations to implement changes in how we use our environment. Building on its Conference of Parties (COP) predecessors, the COP21 Paris Agreement brings together all nations into a mutual agreement to mitigate climate change as much as possible and to adapt to its effects; with the aim of making a global effort to limit the global temperature rise this century to below 2°C above pre-industrial levels (UNFCCC, 2018). However, the Intergovernmental Panel on Climate Change (IPCC) produced a report that highlights aiming for a 2°C is not low enough to avoid the worst impacts of climate change, and pushes the need to aim for below 1.5°C and achieving net zero greenhouse gas emissions before 2050 (Hoegh-Guldberg et. al, 2018). The Paris Agreement monitors its progress towards this target by requesting each country to disclose their post-2020 climate actions through their nationally determined contributions (NDC’s); these are how they plan to reduce their greenhouse gas emissions and adapt to climate change.
Putting a price on Climate Change
However, it is not just the physical impacts of climate change that are affecting us- the financial impacts are becoming increasingly clear. Adhering to such climate agreements does not come without a financial cost, yet one we cannot afford to ignore – financially or environmentally. It is estimated that if Europe is to implement its plans to meet its Paris Agreement climate targets, an additional ~180 billion Euros per year is needed for the next decade (Dombrovskis, 2018). Financial impacts are expected to be felt in all aspects of society, and the way our businesses run is no exception. Not only does climate change cost financially in terms of adapting and responding to the physical impacts, but also the demand that climate change brings in moving towards a lower-carbon economy.
Both the financial and physical impacts of climate change have the potential to disrupt asset values. It is with this growing concern that investors, tenants and other stakeholders are increasingly demanding responsible investments that have considered the climate-related risk. When an organization discloses their preparedness and consideration of the potential impact of climate change on their assets, it reduces the uncertainty of these impacts and increases the value of their stocks and bonds making them a safer long-term investment (TFCD, 2017). However, understanding and disclosing the impacts of climate change of an asset is difficult, and there is a lack of reliable information on the financial implications.
The Task Force on Climate-related Financial Disclosures (TCFD’s)
Recognizing the growing concern of climate-related risks to the global financial system, the G20 requested the Financial Stability Board (FSB) to investigate; this prompted the creation of the industry-led Task Force on Climate-related Financial Disclosures (TCFD’s). The TCFD’s main task is to develop recommendations and guidelines for consistent disclosures that will enable financial organizations to better understand and report their climate-related risks. The TCFD recognizes that there are many different climate-related disclosures out there, however, none that particularly focus on the financial implications and that provide a consistent, reliable and comparable means of disclosing. Ultimately, the TCFD aims to move climate change beyond just corporate social responsibility and into the center of financial and business metrics, improving transparency for investors and other decision-makers (TCFD, 2019).
So, what has the TCFD done so far and what next?
In 2017, after extensive consultations and public engagements, the TCFD has produced three core documents that underpin their recommendations and work going forward:
The final recommendations report of the TCFD – this gives the general recommendations and framework for the climate-related financial disclosures.
Annex of implementing the recommendations giving more sector-specific details and guidance.
Technical supplement for organizations on the use of scenario analysis within the recommendations for disclosures of climate-related issues.
The TCFD has also launched ‘The TCFD Knowledge Hub’, an online platform for relevant resources that will help organizations implement the recommendations
The TCFD has looked at the climate-related risks and defined them into two major categories. The first being the transition risks; these are the financial and/or reputational risks that may come from the policy, legal, technology and market changes that will be required transition to a lower carbon economy. The second are the physical risks; these are the financial risks resulting from both the acute weather- and chronic climatic- physical effects of climate change, causing organizations to be both directly and/or indirectly affected by these.
However, with risks come opportunities, mitigating and adapting to the impacts of climate change can also produce a number of climate-related opportunities For example, through the research and development of new products which allows organizations to diversify into new markets, as well as the cost savings that are bought about by using resources more efficiently and renewable energy sources.
The climate-related financial impacts felt will depend on the organization-specific climate-related risks and opportunities in combination with their strategic planning/risk management plan. The TCFD identified four major categories where financial impacts will be felt within an organization; Revenues, Expenditures, Assets and Liabilities, and Capital and Financing. These could be negative impacts such as reduced revenue due to a decrease in production from supply-chain disruption, or positive impacts such as an increase in asset value from higher-rated energy efficient buildings.
produced four widely applicable recommendations on climate-related financial
disclosures surrounding the core areas in which organisations are operated:
Governance: The organization’s governance around climate-related risks and opportunities.
Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
Risk Management: The processes used by the organization to identify, assess, and manage climate-related risks.
Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
It is within each of these areas that the TCFD suggests recommended disclosures to assist the organizations in providing consistent and reliable disclosures of the climate-related risks, opportunities and financial implications of the four areas.
Towards the end of 2018, the TCFD produced a status report that looked at the disclosures that related to the TCFD recommendations found in 2017 financial reports of over 1,700 organizations. They found a varying level of alignment with the TCFD recommendations within these disclosures, which highlighted areas requiring further work. Following this, the TCFD will publish a further status report in June 2019 in order to enable an analysis of disclosures made in 2018 financial reports to see if there has been any progress in the level of alignment of disclosures from the previous year.
The need to act, disclose AND prove
It is becoming increasingly important to be able to prove that we are doing what we say we are doing and for organizations to show that they have considered potential future risks. Green Building Certification schemes such as BREEAM can help us to do just this.
helps demonstrate to investors, tenants and other stakeholders that the
assessed building is designed, constructed and/or operated in asustainable
way. Using BREEAM standards helps to identify and manage climate-related risks
and opportunities resulting in a more climate-resilient asset. BREEAM uses
performance measures to evaluate a buildings sustainability covering a range of
environmental, social and governance issues; energy, water, health and
wellbeing, pollution, transport, waste, materials, ecology, innovation and
management processes. Managing climate-change risk and encouraging
climate-resilience is embedded amongst these issues. For example, discouraging
development in flood zones, encouraging water efficient processes and building
with weather-resilient materials. BREEAM also encourages climate change
mitigation through reducing the contribution of the built environment to climate
change impacts, by encouraging the use of low-carbon technologies and materials
and energy efficient transport etc.
Hoegh-Guldberg, O., D.
Jacob, M. Taylor, M. Bindi, S. Brown, I. Camilloni, A. Diedhiou, R. Djalante,
K.L. Ebi, F. Engelbrecht, J. Guiot, Y. Hijioka, S. Mehrotra, A. Payne, S.I.
Seneviratne, A. Thomas, R. Warren, and G. Zhou, 2018: Impacts of 1.5ºC Global
Warming on Natural and Human Systems. In: Global Warming of 1.5°C. An IPCC
Special Report on the impacts of global warming of 1.5°C above pre-industrial
levels and related global greenhouse gas emission pathways, in the context of
strengthening the global response to the threat of climate change, sustainable
development, and efforts to eradicate poverty accessed at https://www.ipcc.ch/sr15/chapter/chapter-3/
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