Climate-Related Risks: A Growing Global Concern
Climate-related risks encompass a range of potential threats arising from climate change, including physical (e.g., extreme weather events, resource scarcity, and sea-level rise) and transition risks (e.g., policy changes, market shifts, and technological advancements). These risks affect various sectors, such as agriculture, energy, finance, insurance and infrastructure and pose financial, operational and reputational challenges.
Coastal cities worldwide face an increasing risk of flooding due to rising sea levels making them vulnerable to storm surges and tidal inundation, exposing them to property damage and disrupting business activities. The risks associated with these climate events are of great concern to real estate developers, investors and insurers.
The Role of the TCFD
The TCFD was established in 2015 by the Financial Stability Board (FSB) to address the need for consistent, transparent and comprehensive climate-related disclosures by businesses. The objective is to improve understanding and assessment of climate-related risks and opportunities and ultimately support a smooth transition to a low-carbon and resilient economy.
The TCFD’s Recommendations consist of four core elements:
a. Governance: Organisations should disclose how they integrate climate-related risks into their governance processes and describe the roles and responsibilities of their board and management regarding climate-related issues.
b. Strategy: Companies must disclose their climate-related risks and opportunities and outline how these may affect their short, medium and long-term strategies.
c. Risk Management: Organisations should detail their processes for identifying, assessing and managing climate-related risks, including risk mitigation strategies.
d. Metrics and Targets: The TCFD calls for transparent reporting on the metrics and targets used to assess and manage climate-related risks and opportunities.
In response to the TCFD’s recommendations, ExxonMobil, one of the world’s largest oil and gas companies, in 2017 witnessed 62% of its shareholders vote for producing an annual report explaining how the company will be affected by global efforts to reduce greenhouse gas emissions under the Paris climate agreement. It also intends to address the financial risks faced by the company as nations slash fossil fuel use to prevent worldwide temperatures from rising more than 2 degrees Celsius (Inside Climate News, 2017). It highlights their strategies to reduce greenhouse gas emissions, invest in low-carbon technologies and diversify their energy portfolio to adapt to changing market demands.
TCFD Implementation and Global Adoption
Since its establishment, the TCFD has gained significant traction globally, with support from financial institutions, governments and businesses. Moreover, numerous governments and financial regulators are endorsing the TCFD recommendations, integrating them into their reporting frameworks, and even considering making them mandatory for certain entities.
In addition to two G-7 members, UK and France, claiming to be the first G7 countries to have made it mandatory for their largest businesses to adopt TCFD reporting, Canadian public companies would be required to make climate-related disclosures informed by the TCFD from 2024. In addition to companies, these reporting regulations would apply to state and federal agencies, financial institutions and pension funds (Environment Analyst, 2022).
Conclusion
As the world faces the proliferation of climate-related risks, the TCFD has emerged as a vital tool in understanding and addressing these challenges. By encouraging organisations to be transparent about climate-related risks and opportunities, the TCFD facilitates more informed decision-making, drives sustainable investments and strengthens overall resilience to climate change. As governments, businesses and investors continue to adopt and expand the TCFD framework, the path towards a low-carbon and climate-resilient future becomes evident, offering hope in the face of the growing climate crisis.
Bibliography
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