What companies can learn from the TCFD 2022 Status Report

Covering the four pillars of governance, strategy, risk management, and metrics, TCFD’s 11-point framework sets the gold standard for holistic assessment and reporting of climate-related risks. This year’s Status Report reveals that although there is a greater uptake of the TCFD’s framework, companies are still facing barriers to accurately disclosing their climate-related risk. On average, companies provided disclosures for 4 out of the 11 TCFD recommendations in 2021. Only 4% of companies are disclosing information for all 11 recommendations.

Only comprehensive, accurate, and credible climate disclosures can enable both businesses and economies to transition smoothly to a low-carbon economy. These reports publish the decision-useful information needed for individual companies to identify and therefore act on their own climate risk and opportunities, whilst collectively creating the market transparency required to facilitate efficient capital allocation.

Reporting on climate risk and opportunities isn’t just a tick-box exercise, it can provide real financial benefits to organizations that can do it properly. However, the status report highlights many challenges ESG, Risk, and Finance Managers face in disclosing climate-related risks and opportunities. How can climate intelligence (CI) help companies overcome these barriers?

For this year’s status report, the TCFD also conducted a survey to accompany its assessment of company reports. A top challenge identified by survey respondents was developing processes for identifying, assessing, and managing climate-related risks and integrating such risks into existing processes.

Cervest’s climate intelligence product, EarthScan™, enhances ESG strategy goals and management, in line with TCFD and other regulatory frameworks using science-backed physical risk insights. The climate intelligence (CI) it provides is dynamic and asset-level, designed to sync with real-world decision-making. EarthScan's climate risk insights integrate seamlessly into existing workflows, unlocking the path to climate action on adaptation.

Climate scenario analysis enables companies to assess their exposure to climate risk according to the potential political, social, and economic shifts that could influence the global approach to decarbonization. The Task Force recommends that companies refer to multiple scenarios to assess their resilience to climate risk under different socioeconomic pathways.

Of all of the TCFD recommendations, the resilience of company strategy under different climate scenarios is the biggest gap in comprehensive climate disclosures. The Status Report revealed only 16% of company reports addressed this recommendation in 2021; with between 3-4% of companies discussing 2°-3° C scenarios.

While they are essential to understanding long-term risk, climate-related scenarios are generally developed for macroscopic assessments. This means they do not “always provide the ideal level of transparency, range of data outputs, and functionality of tools that would facilitate their use in a business or investment context”, according to the TCFD. In addition, many companies lack the data needed to understand the impact of different scenarios over multiple regions.

Actionable by design, EarthScan uses Cervest Ratings™ to allow businesses to screen, compare and prioritize their assets for climate-related risk across three IPCC-aligned climate scenarios (Paris-aligned, emissions peak in 2040 and business as usual), time horizons, and hazards simultaneously. Its granular insights also enable companies to identify the key physical risk metrics driving their rating so that they can make more informed decisions about their adaptation planning, whilst adding comprehensive detail to their climate disclosure.

Assessing the potential damage and financial impact of climate events is an important part of climate risk management. This assessment is what ultimately drives forward-looking decision-making about climate risk. However, deriving financial impact from climate risks is often challenging for organizations because it involves an assessment not only of potential physical damage to assets but also site-specific disruption to business continuity.

Companies also ideally need to understand how the characteristics of a particular asset make it more or less vulnerable to those potential impacts. This information also needs to be provided in a decision-useful metric on the financial impact that is meaningful to investors.

Climate-value-at-risk (CVaR) is a standardized metric with the most potential to estimate climate hazard exposure and potential damage and losses to properties or portfolios of properties across different future climate scenarios. Informing material risk in EarthScan’s climate risk reports, CVaR can provide organizations with a value estimate of the potential damage that also takes into account uncertainty. In climate risk management, this can be used to differentiate asset exposure and vulnerability across asset types, regions, and time frames.

TCFD reports are not another form of paperwork for companies. Their true purpose is to spur effective, targeted action to address the very real risks of climate change. Asset-level intelligence on climate risk to inform decision-making, CI can not only help companies publish more comprehensive, accurate and credible climate disclosure but it can also guide climate action. Its decision-ready insights inform the confident decision-making required to take targeted intervention against the impacts of climate change.

Currently, Europe is the leading way for more comprehensive climate disclosures. European companies on average provided disclosures covering 60% of the TCFD recommendations. This is likely driven by public sector attention in Europe to climate action and climate risk, with the UK being the first G20 company to enshrine mandatory TCFD-aligned reporting. As Europe continues to build resilience to the impacts of climate change, economies around the world will realize the benefits of climate-related financial disclosure. It’s not just a case of “if” your company will have to disclose its climate risk, but when.

If you are reporting your climate risks voluntarily, download this ebook to start upgrading your TCFD report using climate intelligence.

If you are in the UK and are subject to mandatory disclosure, download this ebook to get the full details on TCFD compliance.