IIn 2017, the Task Force on Climate Financial Disclosure (TCFD) provided the Financial Stability Board of the Bank for International Settlements with a set of consistent, comparable and transparent guidelines for financial disclosure of climate-related risks and opportunities. They 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 environmental impact of business; it is rather the impact of the environment on the business.
The TCFD framework targets disclosure in four main areas, governance, strategy, risk management and metrics and objectives. Climate crises create a new set of risks for business. These can be physical, such as fire, flood, rising temperatures and sea levels, and loss of biodiversity. There are also transition risks that include carbon pricing, increased regulation, changing consumer attitudes, litigation and technology. Investors and other stakeholders need to know how companies are handling the financial implications of these risks.
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TCFD’s recommendations help companies capitalize on climate change by better understanding long-term risks and opportunities. Governments, consumers and investors are pressuring companies to respond positively to such change. Governments worldwide can incorporate the TCFD guidelines into criminal legislation and regulations. These trends will affect the financial health of all organizations.
Investors already use environmental, social and governance (ESG) metrics to identify threats. However, ESG and climate change analyzes serve different purposes. Only by looking at climate change can stakeholders assess a company’s ability to withstand, adapt and profit from systematic risk. As an example, PG&E, a California utility company, went bankrupt in 2019 due to poor safety records, despite receiving high scores from many ESG rating providers. ESG strategies and assessments based on TCFD principles, including good governance, identify problems at an early stage, enabling rapid corrective action. ESG-only benchmarking ignores the risk and opportunity data that climate change analysis captures.
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Strong action on climate change is good business. As climate change worsens, investors and regulators demand greater transparency of climate-related information. TCFD disclosure helps investors evaluate and value assets and allocate capital. Companies that do not adequately address these risks will suffer financially, legally and reputationally. A business grows if it attracts and satisfies investors. Companies will gain an advantage in voluntarily disclosing climate change risk ahead of regulations imposed on investors in their jurisdictions.
The Securities and Exchange Board of India’s Business Responsibility and Sustainability Report 2021 introduced quantitative, standardized 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 promotes global acceptance. India therefore needs to hold businesses 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 must follow their own national disclosure regulations when preparing financial statements. TCFD clearly expects states to have laws requiring financial risk disclosure. In India, the guidelines are to be incorporated in the Companies Act, 2013 and become enforceable. The legislation will result in disclosure that is not only persuasive but also proactive. Climate-related risks significantly affect financial markets, and businesses that quickly implement TCFD guidance will be more robust, resilient and profitable.
Climate change has led to rising commodity prices and resource scarcity. Climate disasters have led to great loss of life and damage. In 2021, India has lost US$159 billion in revenue due to increased heat and other climate-related causes. Supply and demand chains will be increasingly compromised, resulting in lost business. It is therefore important that companies adopt disclosure frameworks such as 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 Fellow and Meeval Mariam Varghese, Intern also contributed to the article
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