How to Incorporate TCFD Framework into Sustainability Report?
1.The past and present of TCFD framework
With the adoption of the Paris Agreement at the 2015 Global Climate Change Conference, countries around the world have accelerated their transition to a low-carbon economy, and the various risks and opportunities caused by climate change have attracted the attention of all parties. At the end of 2015, the Financial Stability Board (FSB) took the lead in establishing the Task Force on Climate-related Financial Disclosures (TCFD).
TCFD is a non-profit international body that focuses on climate change and is responsible for studying how the financial sector should incorporate climate-related issues into its decision-making and providing companies with climate change-related disclosure recommendations to help investors conduct risk assessments.
TCFD members include global organizations such as large banks, insurance companies, asset management companies, pension funds, and credit rating agencies. In 2017, the TCFD launched a disclosure framework that mainly includes four major areas: governance, strategy, risk management, metrics and targets, and called on companies to conduct climate scenario analysis and report accordingly.
In July 2023, the Financial Stability Board (FSB) announced that the International Sustainability Standards Board (ISSB) will take over TCFD from 2024.
2.The four core elements of the TCFD framework are:
Governance
It mainly builds a governance structure around climate-related risks and opportunities and clarifies the responsibilities of managers.
Strategy
Assess the actual and potential impacts of climate change-related risks and opportunities on the company's business, strategy and financial planning, evaluate the severity of climate risks in terms of both time and financial impact, and incorporate the assessment results into the company's sustainable development strategy.
Risk Management
Disclose the company’s processes for identifying, assessing and subsequently managing various climate change-related risks and opportunities, and integrate these into the enterprise risk management framework.
Metrics and Targets
Establish appropriate indicators and targets to assess the management performance of climate-related risks and opportunities and help investors measure and compare the effectiveness of management measures to assist them in making investment decisions.
Figure 1: TCFD framework
Figure 2: Financial impact of TCFD on companies
3.Industry Case: Mondi Paper
Mondi Paper is a multinational packaging and paper group headquartered in the UK, with approximately 21,000 employees and approximately 100 production bases in more than 30 countries, mainly in Europe, North America and South Africa. Mondi fully integrates the entire packaging and paper value chain: from the growth of wood and the manufacture of pulp and paper to the conversion of packaging paper into corrugated packaging, industrial bags, etc. At the same time, the company has gained a good reputation in the industry for its adherence to sustainable business philosophy.
Figure 3: Mondi Paper’s assessment of companies’ climate-related risks and opportunities based on the TCFD framework
Mondi paper discloses the potential financial impact of climate risks and opportunities on the company, the time span over which the impact is expected to occur, and how these financial impacts differ under different temperature rise pathways.
In physical risk, Mondi Paper has identified the following risks: extreme weather causing damage to forest assets in South Africa, changes in precipitation affecting some global production bases, rising wood procurement costs due to climate change, and potential flooding at some mills. These physical risks are common in the paper industry and will have varying degrees of impact on the company's financial performance. Mondi Paper quantified the above possible climate-related physical risks and believed that their financial impact on the company was approximately Euro 140-320 million.
Amid transition risks, Mondi Paper mainly identifies the increase in future compliance costs caused by carbon tariffs, mainly in Europe and South Africa, the tightening of regulations on the use of fossil fuels and the increase in demand for clean energy, which may lead to rising energy costs in the future, and the possible elimination of machinery and equipment due to gradually tightening regulations. These transformation risks are also common to companies in the P&P industry. Similarly, Mondi Paper also estimated the financial impact of the above risks. The financial impact was approximately €140-340 million .
In response to the above climate-related risks, Mondi Paper believes that the main countermeasures are to seek diversification of pulping raw materials, increase investment in fast-growing timber breeding and sustainable forest management, cooperate with relevant scientific research institutions to improve the climate resilience of fast-growing forest assets, and cooperate with industry associations in Europe to carry out in-depth and step-by-step utilization of wood, pulp and paper.
Climate change will also provide it with certain development opportunities.
Mondi Paper sees the sale of recycled by-products, improved energy efficiency and the promotion of sustainable packaging as major transformation opportunities from which the company can benefit, with potential financial gains of approximately € 150-280 million.
4.TCFD framework is consistent with mainstream international disclosure guidelines and will not impose additional disclosure burdens on companies.
Since the release of the TCFD disclosure recommendations, the framework has gradually become an internationally accepted climate-related disclosure standard. The requirements for "climate-related disclosure" in mainstream ESG information disclosure guidelines all refer to the TCFD disclosure framework : such as the Carbon Disclosure Platform (CDP), the Hong Kong Stock Exchange's "ESG Guidelines", the Science-Based Targets Initiative (SBTi), etc.; at the same time, international organizations such as the Responsible Investment Initiative (PRI) and the World Business Council for Sustainable Development (WBCSD) have also issued guidelines and related application tools based on the work results of TCFD.
From a global regulatory perspective, countries such as the United Kingdom and Singapore have begun to implement TCFD reporting requirements in 2023 , while regions such as the European Union, Canada, and Hong Kong, China will begin implementation as early as 2024 .
In the past two years, we are pleased to see that more and more Chinese companies have adopted the TCFD framework to identify and assess the climate risks and opportunities they confront. From the perspective of the company itself, the entire process of identification and assessment will help the various relevant departments of the company to comprehensively sort out the potential climate risks and opportunities they face, so as to clarify the intensity and breadth of resource investment.
For potential climate risks, companies should take countermeasures as soon as possible to avoid substantial damage to operations, and in the face of potential climate opportunities, companies can decide in advance and seize the first-mover advantage of low-carbon transformation, thereby improving the company's long-term financial performance and bringing stable returns to investors.
Therefore, we believe that referring to the TCFD framework to identify climate-related risks and opportunities is also one of the effective tools for listed companies to better manage market value in the new era.
Entering 2024, most companies began preparing for the Sustainability Report of 2023. In the section of "Responding to Climate Change", we recommend that companies refer to the TCFD framework and organize relevant departments to identify and quantify risks, while effectively disclosing the assessment results to improve the overall disclosure quality of the report.
Data sources for this article: TCFD official website, Mondi Paper sustainability reports, SCOZ Research
