Climate change is becoming an increasingly significant issue. Businesses are now expected to consider environmental factors in their everyday decisions and long-term growth. Not only do directors duties now include considering climate change, but many investors regard climate policy to be an integral component of a company’s value proposition. The Australian Securities and Investments Commission (ASIC)’s updates to its Regulatory Guidance on Operating & Financial Reviews (RG247) has followed this investor-led interest with regulatory requirements for public companies. As a result of this increasing market pressure for companies to better address climate change, the Task Force on Climate-related Financial Disclosures (TCFB) was formed in 2015. The TCFB provides a number of helpful recommendations for companies looking to better address and report on climate change in their immediate and long-term growth. 

This article will:

  • explain what the TCFD is; and 
  • set out some of its key recommendations relevant to the governance of both private and public companies.

What is the TCFD?

The TCFB was formed by the Financial Stability Board, which is an international body that seeks to strengthen global economic systems. The purpose of the TCFD is to develop frameworks for companies and interested stakeholders to use when evaluating and disclosing climate-related risks and opportunities.

The TCFD has structured its recommendations for climate-related financial disclosures into four main categories:

  1. governance;
  2. strategy;
  3. risk management; and
  4. metrics and targets.

These recommendations help companies to integrate sustainability into their business model in a way that remains competitive and marketable.

Governance Recommendations

The TCFD recommends that when making financial disclosures, companies should describe the board’s active oversight of climate-related risks and opportunities. Further, each company should ensure that information is readily available to interested stakeholders about how its management manages climate-related issues.

Delegating responsibility to specific management positions is an effective way of integrating a company’s sustainability policy as a core aspect of its business. Having specifically appointed positions will also mean that environmental and social governance outcomes are better communicated throughout the business, with clearer reporting structures and processes. 

For example, appointing a specific sustainability manager will ensure that a company strives towards innovative and efficient ways of becoming an environmentally conscious organisation.

Strategy Recommendations

The TCFD recommends that companies should be able to identify and report on climate-related risks and opportunities over the short, medium and long term. These risks and opportunities should shape the company’s climate-change strategy.

After identifying particular risks and opportunities within their respective business models, companies should develop a corresponding climate strategy that considers factors such as:

  • products and services;
  • supply chain and value chain; 
  • adaptation and mitigation activities;
  • investment in research and development; and
  • operations (including types of operations and location of facilities).

Risk Management Recommendations

In order to effectively identify and respond to climate-related risks and opportunities, the TCFD also recommends that companies have a clear, consistent and flexible approach to assessing risk management and environmental liabilities.

Companies should be able to describe how they identify and manage climate-related risks. This should include how their management decisions approach the mitigation, transfer, acceptance and control of these risks. Wherever relevant, companies should integrate reference to specific industry regulations and standards when developing risk management policies.

Metrics and Targets Recommendations

Climate-related company disclosures should be measurable and clear. This is because both internal and external company stakeholders will respond to quantifiable results more positively. These metrics and targets should relate to an organisation’s: 

  • use of water, energy and land; and 
  • waste management procedures.

The TCFD recommends that when considering metrics and targets for climate-related risks and opportunities, companies should:

  • establish and remain accountable to key time-frames;
  • introduce and maintain key performance indicators to assess progress against targets; and
  • provide transparent explanation of how climate-related metrics are captured and how targets are set.

Key Takeaways

The establishment and increased prominence of the TCFD both in Australia and on a global scale highlights that climate-related factors are becoming a more significant consideration for businesses. Both internal and external stakeholders are placing greater importance on how companies respond to environmental issues. Measurement of company success has moved beyond a sole focus on profit margin.

By following the recommendations of the TCFD, companies can ensure that they take progressive, competitive and marketable steps towards becoming more environmentally conscious businesses that better address climate-related risks and opportunities. If you have questions about implementing the TCFD’s recommendations, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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Thomas Nickoll
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