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.
Companies are recognizing the importance of assessing risks and planning for contingency. While many investors have historically looked at how an organization assesses and acts upon risk from a reactive standpoint, companies and investors are beginning to take a proactive approach by assessing and planning for risk through disclosures and strategic approaches. Now, more than ever, improving the quality of firms’ climate disclosures is critical to managing climate risks and opportunities in financial markets.
ESG disclosures are one of the most important and helpful tools as it supports risk assessment by institutional investors, multinational organizations, and the private sector. As the need for standardized reporting metrics grows, companies are faced with a multitude of choices as to how and where to present ESG disclosures. There are many frameworks that recognize the specific ESG topics that have varying impacts on companies and each framework has significant differences in determining which topics should be covered and accommodate disclosures in a variety of documents. To date, the largest US public companies that disclose this information often incorporate the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
The TCFD Framework
The TCFD outlines a voluntary, consistent climate-related financial risk disclosure framework that companies can use to provide information to investors, lenders, insurers, and other stakeholders. The TCFD considers the physical and transition (including technological, market, and legal) risks associated with climate change and what constitutes effective financial disclosures across industries. The TCFD’s work and recommendations help companies understand what financial markets want and need from disclosures in order to measure and respond to climate change risks, as well as encourage firms to align their disclosures with investors’ needs.
What Does An Organization Need To Comply?
The TCFD framework requires recommendations that specific disclosures be made in financial filings or other reports. TCFD disclosures cover four core areas:
- Governance—companies must describe how management and board members oversee and assess climate change risks and opportunities.
- Strategy—companies need to describe any identified business risks and opportunities and the impact these have on business strategy and financial planning while also taking the future into account.
- Risk Management—companies must describe how they identify, manage, and assess climate-related risks and how this process is integrated into the business risk management program.
- Metrics and targets—businesses must disclose and discuss what metrics they have used and targets they have set to assess and manage any material risks as well as opportunities they’ve identified.
All components and disclosures of TCFD are touched upon in GRESB submission prep.
TCFD and the GRESB Resilience Module
The majority—90 percent—of Goby’s clients are completing the GRESB Resilience Module to assess their alignment with TCFD components. This module helps organizations gauge their capacity to assess, manage, and adapt to social and environmental shocks and stressors. The goal of the module is to help property and infrastructure companies meet a growing demand for information on resilience strategies to assess and manage risks from social and environmental shocks and stressors, including the impact of climate change.
GRESB leverages the TCFD framework to provide real asset-specific context to climate-related risks and recognizes forward-looking scenarios used by TCFD. If you’re already reporting to GRESB, your company should be able to:
- Know how to report on company resilience and how you stack up in a competitive fundraising environment
- Recognize best-practices that promote resilience among companies and funds
- Showcase of your capacity to assess, manage, and adapt to social and environmental shocks and stressors as well as how you compare against your peers in this area
- Identify a range of risks and opportunities for value creation in your portfolio and assets
- Understand your investor’s needs and perspectives to improve engagement
- Provide performance reports on resilience to your stakeholders
Working With a Consultant As a Best Practice
It can be difficult to understand these frameworks and keep up with disclosure submission requirements. Going after all frameworks at once is not necessarily the right approach. It’s important to understand what your goal is, what your investors need, and where the market is heading to provide an outline of material aspects you should be covering with your disclosure and alignment efforts. That’s why working with an ESG consultant for support and clarity is good practice.
Ultimately, initiatives like GRESB and the TCFD are about putting better information in the hands of your investors and stakeholders while inviting informed discussions and dialogue on the impacts of climate change. Efforts to disclose in alignment with the TCFD, GRESB, and other initiatives will overlap, so you don’t want to duplicate efforts. A consultant can help you understand the challenges and opportunities of participating in each, as well as understand climate risk and how to fulfill your fiduciary responsibilities in the face of much uncertainty.