Get climate risk ready:
How your business can ramp up climate reporting
Akash Patel
Senior Consultant – Supply Chain
Get climate risk ready:
How your business can ramp up climate reporting
Authors
Akash Patel
Senior Consultant – Supply Chain
Climate change has been long here and now. Close on the heels of COP27; the world has less than a decade left to achieve the United Nations Paris Agreement goal for 2030, to keep global warming restricted to 1.5C above pre-industrial levels. However, governments and businesses are yet to ramp up their actionable commitments to net zero transition.
As per Forrester’s analysis of Fortune Global 200 companies, 61% have a named sustainability lead, and 51% have scope 1 and 2 carbon-neutral goals. However, businesses must navigate financial risks, and the opportunities flared up by the cumulative effects of Industry 4.0, the impact of climate change, and consequent climate policies.
In 2021, the Task Force on Climate-related Financial Disclosures (TCFD) formulated voluntary guidelines for adoption by global public companies. In March 2022, the US Securities and Exchange Commission (SEC) formulated a new climate disclosure rule.
It stated public companies adopting the rule must share in complete detail the climate-related risks, carbon emissions, and their net-zero transition plans, drawing upon the TCFD framework and Green House Gas (GHG) protocol.
As global enterprises weigh the impact of SEC guidelines coming into force by 2024, a pressing need emerges to devise an adequate, comprehensive solutions framework to report climate-related data extensively.
Most companies must identify their potential climate risks and opportunities and how to collate the scattered data and read and interpret them.
The TCFD disclosure framework
The TCFD outlays a framework of four core elements that enterprises must follow to adapt their operational planning processes and strategies to climate risks and opportunities: governance, strategy, risk management, and metrics and targets.
Figure 1: Pillars of TCFD Framework
Governance
How is climate being prioritized through the organization
Strategy
What actions are being taken to mitigate known risks
Risk Management
What actions are being taken to flag and respond to new risks?
Matrics and Targets
What concrete goals are being worked upon?
Businesses must follow the core elements of sustainability to have transparency and consistency in enterprise climate reporting.
Governance:
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Do your disclosures describe the board's role in overseeing climate risks?
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Do they account for the management's role in assessing and addressing climate risks?
Strategy:
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Do your disclosures describe all the specific climate risks and opportunities adequately?
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What is the potential impact of these risks and opportunities on your overall business operations?
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What are the expected resilience strategies/frameworks to successfully tackle and overcome various climate-risk scenarios?
Risk management:
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Do your disclosures detail a process to identify and assess new climate risks?
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What are the processes in place for tackling these risks?
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Are these processes integrated into your overall risk management structures?
Metrics & targets:
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Do your disclosures specify the metrics you apply to identify and assess climate risks and opportunities?
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Are all your current emissions (Scope 1, Scope 2, and if applicable, Scope 3 greenhouse gas) and the related risks listed on your disclosures?
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What targets have you set for climate risks and opportunities and performance against them?
The SEC climate disclosure rule
Building upon the TCFD disclosure framework and the GHG protocol standard, SEC’s climate disclosure rule proposes the following requirements that businesses can adopt to improve their climate reporting.
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Identify and govern climate-related risks and relevant risk management processes
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Assess the impact of climate-related risks on business strategy, model, outlook, and consolidated financial statements for short, medium, or long-term
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Anticipate climate-related events like floods or droughts and plan transition activities on the line items present in consolidated financial statements
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Assess climate risk impacts on financial estimates and assumptions
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Disclose Scope 1, i.e., direct GHG emissions, and Scope 2, i.e., indirect emissions from purchased energy, electricity, or other forms
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Disclose Scope 3, i.e., GHG emissions from upstream and downstream activities in the value chain
Converting climate risk challenges into opportunities
An enterprise’s biggest challenge in climate reporting is accurately identifying the climate risks across the value chain, covering every stakeholder. They must anticipate risks in terms of financial and non-financial impacts. For example, an oil company will impact its finances and natural surroundings in the wake of a spill.
In another instance, a CPG company supplying coffee will have to check for emissions from every vendor it is procuring raw goods, from the transport companies ferrying its goods, and from the power plant it is purchasing electricity. It will have to check for emissions involved in packaging and, finally, the risks involved when the products reach the consumers. The company must check for every emission falling under Scope 1,2 and 3.
A closer look at TCFD disclosures shows several metric categories that enterprises must be aligned with for effective and efficient climate reporting.
GHG Emissions
Absolute Scope 1, Scope 2, Scope 3 emissions intensity
Transition Risks
The amount and extent of assets or business activities vulnerable to transition risks
Physical Risks
The amount and extent of assets or business activities vulnerable to physical risks
Climate-Related Opportunities
The proportion of revenue, assets, or other business activities aligned with climate-related opportunities
Capital Deployment
The amount of expenditure on capital, financing, or investment deployed toward climate-related risks and opportunities
Internal Carbon Prices
The price of each ton of GHG emissions used internally by an organization
Remuneration
The proportion of executive management remuneration linked to climate considerations
Figure 2: TCFD Metric Categories
Understanding and collecting these data can be a daunting exercise for enterprises.
But enterprises must realize that the challenges of adopting climate reporting frameworks present embedded opportunities. As enterprises step up efforts toward identifying climate risks and developing a framework to tackle them, they can mitigate these risks and reap monetary benefits.
Further, they also gain the confidence of every stakeholder involved – be it the government, shareholders, investors, or consumers. Hence, amid its underlying challenges, adopting and implementing climate risk disclosure frameworks can be a valuable growth opportunity for businesses.
Opportunities emerging out of identifying climate risks
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Efficient utilization of resources
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Using low-emission energy sources
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Developing low-emission goods and services
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Access to new markets
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Adopting energy-efficiency measures
How Fractal is actioning climate risk reporting
Fractal has prioritized systematically identifying, collating, and sorting data related to climate risks. With 20% to 30% of the data coming from third parties, we connect with them to collect and refine the data and ensure that the collated data gets converted into meaningful calculations that can interpret climate-related risks.
Going the extra mile for the adoption of TCFD disclosures
Fractal has also incorporated a multi-disciplinary approach to adopt TCFD disclosures fully and adequately with its metric categories. We have been actively integrating our core AI, engineering, and design capabilities, companies, and stakeholders to develop a robust climate action reporting framework built upon the TCFD recommendations.
The scattered structured and unstructured data are integrated into a single platform for the companies to read and interpret them. The collated data then undergoes automation for easy tracking and more interactions. This includes, from a design architecture point-of-view, creating a dashboard with interesting visualizations for increased data interactivity. With filters added in, businesses can perform several data readings and their interpretations better.
Conclusion
With SEC guidelines due to come into force in 2024, more and more businesses are set to strategize and manage climate risks. Businesses are all set to embrace environmental sustainability with integrity and transparency for a greener and better tomorrow.
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