In 2017, the Task Force for Climate-related Financial Disclosures (TCFD) delivered to the Financial Stability Board of the Bank for International Settlements, a set of consistent, comparable and transparent guidelines for the financial disclosure of climate-related risks and opportunities. These identified the risks to investors posed by climate change and showed companies how they should approach such change in their business plans. TCFD is not about the impact of business on the environment; it is rather the impact of the environment on business.
The TCFD framework targets disclosure in four core areas, governance, strategy, risk management, and metrics and targets. Climate crises pose a new range of risks to businesses. These may be physical, such as fire, flood, rising temperature and sea levels and loss of biodiversity. There are also transition risks, which include carbon emission pricing, increased regulation, changing consumer attitudes, litigation and technology. Investors and other stakeholders need to know how companies are meeting the financial consequences of these risks.
The TCFD recommendations help companies to benefit from climate change through a better understanding of long-term risks and opportunities. Governments, consumers and investors are pressing companies to respond in a positive way to such change. Governments globally may well embody the TCFD guidelines in punitive legislation and regulation. These trends will affect the financial position of all organisations.
Investors already use environmental, social and governance (ESG) metrics to identify threats. ESG and climate change analyses, however, fulfil different purposes. Only by looking at climate change can stakeholders assess the capability of a company to endure, adapt to, and profit from systematic risk. As an example, PG&E, a California utility company, was made bankrupt in 2019 due to a poor safety record, despite receiving high scores from many ESG ratings providers. ESG strategies and assessments based on TCFD principles, including good governance, identify problems early, allowing prompt remedial action. ESG-only benchmarking ignores risk and opportunity data that climate change analysis captures.
Strong climate change action is good business. As climate change worsens, investors and regulators demand greater transparency of climate-related information. TCFD disclosure helps investors price and value assets and allocate capital. Companies that insufficiently address these risks will suffer financially, legally and reputationally. Businesses grow if they attract and satisfy investors. Companies will gain an advantage in disclosing climate change risk voluntarily ahead of regulations imposed on investors in their home jurisdictions.
The 2021 Securities and Exchange Board of India’s Business Responsibility and Sustainability Report (BRSR) introduced quantitative, standardised ESG disclosure, effective from FY 2023. Such disclosure applies to the top 1,000 listed companies and reflects the seriousness with which regulators view environmental risk disclosure.
The support of the G20 group of countries gives the TCFD credibility and encourages global adoption. India must therefore hold entities accountable for not disclosing climate-related risks. TCFD is only a guideline; liability cannot be fixed on those who do not comply, and enforcement is impossible. Entities should follow their own national disclosure regulations when making financial reports. TCFD clearly expects countries to have in place laws requiring financial risk disclosure. In India, the guidelines should be incorporated into the Companies Act, 2013, and made enforceable. Legislation will lead to disclosure that is not only persuasive but also proactive. Climate-related risks significantly affect financial markets and businesses that quickly implement the TCFD guidelines will be more stable, resilient and profitable.
Climate change has led to rising commodity prices and resource shortages. Climate disasters have resulted in large-scale loss of life and damage. In 2021, India lost USD159 billion in income due to heat increase and other climate-related causes. Supply and demand chains will be increasingly compromised, leading to a loss of business. It is therefore important that companies adopt disclosure frameworks such as the BRSR and TCFD as soon as possible.
Soumya De Mallik is a partner and Unnati Goel is an associate at HSA Advocates. Prithviraj Chauhan, senior associate and Meeval Mariam Varghese, intern, also contributed to the article
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