Implementing TCFD: Climate scenarios into business strategy and targets

This article is the third one of our series titled ‘Successfully Implementing TCFD’, explaining the different phases of Finch and Beak’s Task Force on Climate-related Financial Disclosures (TCFD) Roadmap in more detail. This article focuses on the integration of climate scenarios into the business’ strategy, targets & KPIs as well as the need of internal engagement to review the business model and strategy. Working on the TCFD recommendations and advancing on the integration of its findings will provide an advantage for companies aligning with the upcoming Corporate Sustainability Reporting Directive (CSRD) reporting requirements. The accompanying download gives practical tips to assist your organisation in overcoming three barriers that can prevent the successful implementation of TCFD.

The TCFD status report 2022 revealed that the percent of companies disclosing TCFD-aligned information continues to grow, however more urgent progress is needed. The study shows that 80% of companies disclosed in line with at least one of the 11 recommended disclosures nonetheless only a 4% of the companies disclosed in line with all 11 recommended disclosures. Consequently, there is concern that not enough companies are disclosing climate-related financial information useful for decision making, nor are they defining strategies, metrics or targets, which may hamper the efforts of investors, lenders and insurance underwriters to properly assess and evaluate climate-related risks.

Following the CSRD applicability for the first time in financial year 2024, it is expected to see climate risk disclosure continuing to evolve. While the ESRS covers the full range of ESG issues, the TCFD framework focuses on the “E” (especially on climate-related matters). As a matter of fact, all TCFD disclosures are covered in ESRS 1. The CSRD has included the four pillars of the TCFD recommendations and goes beyond with its reporting requirements. It enhances the importance of the identification and reporting of organisations’ main sustainability-related risks, as well as the governance of these impacts and their relevant indicators. Hence, companies working towards implementing results of the TCFD recommendations in their business strategy can be ahead in the process of CSRD readiness. To check your CSRD Readiness in just 5-days, check the download here.

To help companies in their TCFD journey and to put recommendations into action, F&B has developed a TCFD Roadmap consisting of 6 phases. Hence, after identifying the climate-related risks and opportunities and conducting the Climate Scenario Analysis (CSA) to estimate the impacts on the company across different plausible futures, the next step is the integration of these to the business strategy. The main aim is to develop adaptation and mitigation strategies which manage and establish clear performance objectives and growth opportunities.

How to mitigate risks and integrate opportunities with a climate-focused strategy?

Continuing with the TCFD roadmap and after the already published phases Risk and opportunity analysis and Scenario Analysis, phase five consists of integrating scenarios into strategy, targets & KPIs. Organisations ought to prioritise their climate-related risks considering CSA findings to further determine or redefine SMART targets or metrics in place. This key step will allow them to further integrate the new metrics and targets into strategy processes across all functions consistently.

Before meaningful climate-related information can be reported, an organisation must first integrate climate assessment, monitoring, and management into its routine business activities. Finch & Beak outlines some fundamental tips for companies addressing this step:

- Coordination across multiple corporate functions is essential to implement the results from the risk and opportunities analysis. The involvement of different areas of the company will positively contribute to the integration of climate change into key governance processes as well as securing the support of the board of directors and executive leadership team.

- Linking your climate-related risks to the business’ overall risk framework. Organisations need to start adapting their existing enterprise-level and other risk management process to take account of climate risk.

- Development of a new strategic direction based on the information of Climate Scenario Analysis (CSA). The CSA findings may involve establishing or refining priorities, policies, processes, and practices related to measuring, assessing, managing, and reporting climate-related financial information, from strategic planning to internal performance assessments and external reporting cycles.

- Closing the gap between the companies’ financial performance and projections and the TCFD findings. Organisations should address how growth projections may be impacted by the climate-related risks and opportunities and what are the effects of the factoring of the GHG emissions reduction commitments into financial statements and forecasting.

- Merging TCFD’s findings into business strategy includes exploration of growth opportunities. TCFD process is an opportunity to develop a comprehensive corporation-wide climate risk initiative and should not be seen only as an analysis of possible risks. Shifting the focus beyond the identified risks, climate change-related opportunities should also be duly considered in the investment decision-making process, as they may represent important avenues for investments and the business in general.

How companies are approaching climate-related risks and opportunities’ integration

To better understand how companies are undertaking this step, this section outlines best-practice examples of financial and non-financial companies which have taken advantage and implemented TCFD’s findings in their business strategy and day-to-day business management.

Financial service company, BBVA has integrated the findings from its scenario analysis into its business strategy, risk management framework and considered them to develop new growth opportunities. BBVA integrated their climate change-related risks into the company’s risk planning by incorporating them into the governance and processes in place whilst considering regulatory and supervisory trends. In this way, incorporating the climate risks in its Risk Appetite Framework. Further, the organisation is seeking new growth opportunities by aligning its financial flows with the Paris Agreement and has defined a “Sustainable Activity Standard” to define the alignment of the new products. This standard of sustainable activities includes, among others, activities considered transition activities by the European Taxonomy.

Another example of how to integrate TCFD’s results on the financial sector is the case of Banco Davivenda. The organisation has developed and implemented the methodology Social and Environmental Risk Analysis System which is aligned with TCFD’s recommendations. The organisation has processes in place for identifying and assessing climate-related risks in their investment decisions. In this way, when reviewing loan applications, they focus in historical data on climate change events such as floods, droughts, and landslides, and using geographic tools to profile risks and identify existing or required mitigation and adaptation measures.

Additionally, Enel, a leader in the energy sector, aligned its climate-related strategies and targets to a net-zero commitment. the company has embedded its net-zero commitment into their wider financial and strategic planning. Enel defines specific actions that will be taken to achieve each of the targets, such as the acceleration of the exit from coal, optimisation of the gas portfolio of customers, among others, with some detail provided on the capital investment that is planned to support their achievement.

Finch & Beak provides broad TCFD support

At Finch & Beak, our purpose is to accelerate sustainability within the business of our clients. Together with our fellow companies from SLR, we offer a wide range of TCFD support services:

• TCFD readiness assessments
• Risk & opportunity assessments including physical risk analysis of sites
• Scenario analysis using detailed location-specific climate variables and value-at-risk data from CLIMSystems
• Full TCFD support

If your organisation requires support on integrating the TCFD framework or strengthening your climate strategy contact Johana Schlotter at johana@finchandbeak.com or +31 6 28 02 18 80 to discuss how Finch & Beak can assist you.