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Dr. Gary Theseira, CGM board and council member, warmly welcomed participants to the 7th and final session of the Chairperson Masterclass Series, emphasizing the critical need to understand the Task Force on Climate-related Financial Disclosures (TCFD) in the context of the growing recognition of climate change as a systemic risk.
With the growing need for heightened transparency in economic, environmental, and social sustainability aspects, businesses are contending with an escalating load of reporting and disclosure responsibilities. The TCFD has been seamlessly integrated into various reporting platforms, aligning with the overarching trend of convergence facilitated by the International Sustainability Standards Board (ISSB). As reporting standards align, the TCFD assumes a central role in influencing corporate reporting practices, emphasizing the importance of addressing climate-related financial risks.
In this session, Arina Kok, a partner and leader of Asia Pacific Decarbonization Solutions, Malaysia Climate Change and Sustainability at EY, provided a comprehensive overview of key TCFD components, exploring Governance, Strategy, Metrics and Targets, and Risk Management. 1st Pillar: Understanding TCFD
Scientific simulations derived from the IPCC Sixth Assessment Report underscore the urgent imperative for emission reduction measures, crucial in averting the global average temperatures from surpassing the critical 2°C threshold. The recognition of climate change as a systemic risk, encompassing both future physical and transition risks, underscores the need for proactive measures.
In tandem with this, investors are increasingly integrating environmental, social, and governance (ESG) factors into their decision-making processes, rendering corporate reporting a vital element in fostering trust. The evolution of sustainability practices, evident in regulatory changes and initiatives in Malaysia, reflects a global trend. Key milestones, including the launch of the Malaysian Sustainable Finance Initiative and revisions to listing requirements, showcase an escalating emphasis on sustainability across various sectors. Integral to this shift is the prominence of the Task Force on Climate-related Financial Disclosures (TCFD), established in 2015, serving as a valuable tool for enhancing non-financial disclosures. By providing comprehensive recommendations, the TCFD aids organizations in formulating strategies to effectively manage climate-related risks.
Arina further accentuated the advantages of implementing TCFD recommendations, such as improved access to capital, heightened awareness of climate-related risks and opportunities, and more informed capital allocation for a sustainable transition. The guiding principles for effective disclosures, encompassing relevance, clarity, comparability, timeliness, specificity, consistency, and reliability, are presented as criteria shaping the pathway toward comprehensive and meaningful reporting.
2nd Pillar: Governance
Governance plays a pivotal role in tackling climate-related risks, and meaningful disclosures in this domain can and should provide a thorough and structural overview. Organizations are encouraged to reveal the nuances of their governance frameworks pertaining to both climate-related risks and opportunities. Boards, playing a pivotal role in oversight, should disclose details such as board composition, the designated committee or individual overseeing climate risk, and the specific roles of board members in addressing climate-related issues. Transparency extends to highlighting the board's experience with climate change, the presence of a dedicated climate-specific structure or committee, and processes for keeping the board informed about climate-related matters. Furthermore, organizations are encouraged to disclose information on board training and expertise in climate matters, contextualization of climate issues, and the board's monitoring mechanisms for progress toward metrics and targets. Incentive structures linked to the board's management of climate-related risks, showcasing alignment with financial incentives and climate initiatives, should be a focal point. Similarly, disclosures should cover management's role in assessing and managing climate-related risks and opportunities, detailing processes, responsibilities, roles, and associated incentive structures. Leading disclosure examples serve as benchmarks, exemplifying an organizational commitment to transparent and effective climate-related governance. 3rd Pillar: Strategy
The third pillar of the TCFD framework, Strategy, outlines key recommendations for organizations to disclose the actual and potential impacts of climate-related risks and opportunities on their businesses, strategy, and financial planning. It begins by urging organizations to identify and assess climate-related risks and opportunities over different time horizons, emphasizing the need for materiality and sectoral specificity in these assessments. Exemplary disclosures, such as IJM's climate assessments, demonstrate the integration of IPCC scenarios to identify transition and physical risks, recognizing the significant impact of climate events on key assets within specific geographic locations.
Moving forward, the TCFD calls for a description of the impact of identified climate-related risks and opportunities on an organization's businesses, strategy, and financial planning. This includes insights into how organizations manage these impacts and align them with broader business and sustainability strategies. Leading examples, such as Equinor's use of IEA WEO oil pricing and carbon pricing scenarios, showcase a comprehensive approach to scenario analysis, assessing the robustness of their portfolio and ensuring alignment with regulatory initiatives.
Furthermore, the TCFD recommends disclosing the resilience of an organization's strategy in the face of different climate-related scenarios, including a 2°C or lower scenario. It encourages scenario analyses as opportunities to improve strategic resilience, with detailed justifications, assumptions, methodologies, and results showcased in the organization's resilience strategy. For instance, Maybank's alignment of policies and efforts with external factors and its continuous monitoring and improvement initiatives illustrate the bank's commitment to resilience amid diverse climate scenarios. Overall, these leading disclosures serve as invaluable examples, guiding organizations toward comprehensive climate risk assessments, strategic resilience, and transparent reporting.
4th Pillar: Risk Management
Risk management stands as a fundamental pillar for organizations, providing a transparent avenue to articulate their strategies in identifying, assessing, and handling climate-related risks. By delving into the intricacies of risk identification and assessment processes, organizations can illuminate their existing risk assessment frameworks and demonstrate the seamless integration of climate-related risks into their overall risk taxonomy. A prime illustration of such a proactive approach is seen in Iberdrola, which strategically incorporates climate change considerations into key management and corporate governance elements, underscoring a dedication to aligning risk management systems with evolving environmental challenges.
Noteworthy insights into effective risk management processes come from Equinor's Sustainability Report, where exceptional disclosures shed light on the interconnection between risk identification processes and controls within the portfolio. The report takes disclosure beyond the basics, encompassing commitments to future capabilities, carbon measurement methodologies, and sustainability-related training programs for employees. Equinor's climate roadmap and ambitious targets serve as a tangible example, showcasing how organizations can actively navigate and manage climate-related risks in harmony with broader corporate strategies.
Crucially, the integration of climate-related risk processes into overall risk management is exemplified by leaders such as Maybank. By transparently disclosing roles, responsibilities, and enhancements made to embed climate-related risks into existing capabilities, Maybank provides a comprehensive model. The alignment of the bank's policies and efforts with external factors, coupled with continuous monitoring and improvement initiatives, illustrates how organizations can effectively manage risks while steadfastly pursuing sustainability objectives. These leading examples not only fulfil TCFD disclosure requirements but also serve as guiding beacons for organizations navigating the intricate landscape of climate-related risks and opportunities.
5th Pillar: Metrics and Targets
Encouraging the establishment of precise metrics and targets, the Metrics & Targets pillar of the TCFD advocates for organizations to set measurable goals, facilitating the effective assessment and management of climate-related risks and opportunities. This pillar provides a comprehensive framework, enabling organizations to transparently disclose crucial metrics and targets, ranging from key indicators to greenhouse gas emissions and ambitious goals. The detailed disclosure not only highlights businesses' commitment to aligning financial incentives with sustainable practices but also stresses the importance of transparently showcasing climate performance. Arina’s presentation reinforces the essence of this pillar using specific examples, delving into risk metrics and forward-looking targets related to greenhouse gases, energy use, and water consumption.
As organizations embrace the Metrics & Targets pillar of the TCFD, they transcend mere compliance with disclosure requirements, actively engaging in a global transition towards sustainable and resilient practices. The detailed breakdown of Scope 1, 2, and 3 emissions, along with advanced considerations like annual assurance and intensity ratios, provides a holistic view of an organization's unwavering dedication to sustainability. Arina’s presentation concludes by positioning Metrics & Targets as a guiding force, steering businesses toward a future where climate considerations seamlessly integrate with financial success. This approach fosters a robust and transparent business ethos aligned with the growing global emphasis on environmental stewardship.
Conclusion
Dr. Gary expressed gratitude to Ms. Arina for her comprehensive and insightful presentation. He concluded that, given the significant risks posed by climate change, the TCFD framework stands out as a valuable tool for organizations navigating this complex landscape. He specifically highlighted CGM's noteworthy initiatives in supporting the implementation of the TCFD framework, emphasizing its crucial role in guiding businesses towards resilient and sustainable practices in the face of climate-related challenges. This holistic approach ensures businesses are well-prepared for the evolving climate landscape while contributing to a sustainable and resilient global economy. By embracing the TCFD framework, businesses can not only meet regulatory requirements but also actively contribute to addressing one of the most pressing challenges of our time.
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