Something big happened in 2017: two years after the signing of the Paris Agreement on climate change, experts of the world’s financial community said that companies should disclose details of their climate-related financial risks and how they are tackling them. These were the recommendations of the Task Force on Climate-related Financial Disclosures. The TCFD has rapidly joined the lexicon of annual reporters, but what impact has it had? And two years on, with Greta Thunberg dominating the headlines, is the TCFD still fit for purpose?
A reminder of the background: after the Paris agreement, banking sector leaders were concerned that a climate crisis could bubble up in the financial markets just as the credit crisis of 2007 had done. Lenders, equity investors and insurers needed to know they weren’t walking blind into a market of stranded assets and devalued stocks. They needed good information on the climate-related risks in their portfolios, both in the long and the short term. How viable, for example, would a company’s business activities be under emerging climate regulation such as carbon pricing? How would a company handle changes in customer preferences in a carbon-critical world?
Look at annual reports published in Europe today, and you’ll find around half of them talking about climate risk. Some companies have even published stand-alone climate reports, as ArcelorMittal did this year. They are talking about the nature and extent of their risk exposure. They are looking at the market opportunities as we transition towards a low-carbon world. Some are building scenarios to illustrate how different futures could have an impact on their business.
The TCFD is having a profound impact. 68% of companies surveyed by the TCFD in 2019 said that the TCFD recommendations had increased attention from senior management on climate-related issues. Clearly more companies need to be taking up its recommendations.
But as the world’s students clamour for business and governments to do more, should companies’ climate reporting be limited to how they will navigate their climate-related risks and opportunities, or should they be required to disclose more about their climate ambition?
Many investors looking at climate reporting today want to see more than risk disclosure. They want more on strategy. They want to see real targets. The Climate Action 100 group of investors is asking the world’s biggest emitters not only for implementation of the TCFD, but for carbon targets in line with 2⁰C trajectories – or more recently 1.5⁰C. The assumption that was implicit is now explicit: how will you become a business that is aligned with the Paris Agreement?
And there’s more pressure coming. In New York in September, 130 banks responsible for 33% of the world’s banking system signed up to the new UN Principles for Responsible Banking, committing to align their activities with the aims of the Paris Climate Agreement. Sector by sector, these banks will all assess the alignment of the companies they finance in the same way.
Every business needs to work out how to transition away from business models based on fossil fuels, maximum consumption, an agnostic approach to resource use, and an ‘it’s not my responsibility’ approach to business. When we look at what’s needed, we soon realise that the external drivers for our business – the market assumptions, the regulations and the finance that make our business possible – need to change too.
For ArcelorMittal and the rest of the steel industry, transition means adopting breakthrough technologies that can produce steel with no or very few emissions. In our Climate Action report, published in May, we explained that such a transition is entirely possible if the right external drivers are in place. We set our north star, and committed to being carbon neutral in Europe by 2050 and making significant emissions reductions globally by that date. We also said that we can’t do this alone, and explained the new infrastructure, energy and capital that will be needed. The transition will be expensive – so above all, we need a level playing field on carbon pricing, otherwise cheaper, dirtier steel will win. With carbon prices varying between countries and in many still non-existent, a carbon adjustment for imports is a first base policy if the global carbon emissions from steelmaking (some 8% of all emissions) are really to be driven downwards.
Imagine a world in which all companies committed to the goals of the Paris Agreement, explained to their shareholders what they need to align their business accordingly, and reported annually on their progress. Policymakers would be so much better informed when grappling with the multiple interests of different industries. Investors would understand the scale of the challenge for each sector in their portfolio, and could promote or even join the conversation about how business can achieve the transition that the Paris Agreement requires.
Commitment, ambition and policy positions aren’t the traditional territory of corporate reporting, and yet they are now key elements of any climate strategy, and vital to working out what must change for the climate transition to occur. The TCFD has created a compelling momentum. Now it is time for reporting to work harder.
Progressing your company’s climate reporting in this way is to join the most important conversation this century: how to keep global temperatures to a level that prevents future generations – and companies – from dealing with the catastrophic effects of climate change.
ArcelorMittal is the largest steel company in the world, and one of the largest corporate emitters of carbon. If we can do it, anyone can.