Will TCFD prepare organisations for the climate crisis?

Yanna Badet, Meghan Johnson, Phil Fieldhouse, Karolina Krzystek-De Ranter and Lisa Tassis

Climate Change is hard to ignore this summer:  Europe is battling heatwaves and wildfires, over 60% is in drought conditions while other parts of the world are experiencing several  1000-year floods within months. We are in a climate crisis, and we are feeling it. It is affecting all sectors, including real estate investments, as more stringent regulations are being put in place by governments to reduce emission contributions, and shareholders are demanding carbon neutrality and proof of resilient assets. And then there is the actual physical risk to contend with that can affect the value of the real assets. “TCFD” is one of the acronyms you have probably heard in this context.

So what is “TCFD” exactly and can it truly help the real estate sector prepare for the climate crisis?

TCFD is short for the Taskforce for Climate related Financial Disclosures, a group established by the Financial Stability Board in 2016. It developed recommendations for the industry on how to integrate and address climate risks to prevent climate-induced financial disaster. The premise is simple; to encourage the world’s largest companies to disclose information about how their business is affected by–and deals with–climate change. Since its inception, the recommendations have become a guideline for more than 89 countries and nearly all sectors of the economy, with a combined market capitalization of over $25.1 trillion. Governments are increasingly making the framework mandatory, for example as of this summer (July 2022 – just extended until end of August 2022), TCFD aligned disclosure is required by the UK Government for the largest investment companies, with smaller companies following in the coming years. The EU Taxonomy has similar guidelines and the U.S. Securities and Exchange Commission (the SEC) is also aligning its climate risk disclosure rules with it. So from a regulatory standpoint it can make much sense to start thinking about it now. Depending on your perspective, aligning with TCFD has additional benefits:

Primarily, investors will get access to climate-related information that enables them to compare the performance of their investments in relation to climate resilience. In theory, lower climate-related risk means better risk-adjusted investment performance, which simultaneously encourages investment into more resilient assets.

Secondly, the disclosing companies will be the ones to identify, manage, and monitor the risk of climate change on their business. This provides the strategic oversight required for risks to be managed and helps companies to proactively address the climate-related issues they face.

Thus, the TCFD process can lead to proactive climate risk management, more investment into futureproof, decarbonized and climate resilient assets versus the contrary, and increased capacity within the industry to make more climate-conscious and therefore lower risk investment decisions. All of which is already being demanded by many shareholders and will only continue to pay off, as climate risks increase.

There is of course a balance to be struck for real estate investors and managers: invest the “right” amount so that risks are averted, while keeping investments rewarding.

To respond to and reduce the impacts of climate impacts on the real estate and other sectors, two main things have to be addressed :

1. Mitigation – by drastically reducing greenhouse gas emissions to avoid further contributing to climate change – and become independent from fossil fuels; and
2. Adaptation – to increase the resilient capacity of assets to climate impacts. This concerns  both physical, and the less tangible ‘systemic’ (i.e. social or economic), aspects.

One of the challenges is certainly a remaining level of uncertainty when it comes to climate change. At the same time, catastrophic climate impacts are already happening now, even effects that were forecasted to happen in the distant future only a few years ago, are materializing now. Thus the element of time is important to consider. There is none to be wasted. We believe that the more information investors and asset managers have, the better informed these decisions can be made. The TCFD, with its framework to define, capture, and disclose anyclimate-related information that relates to investment risk, financial position & performance, business planning and strategic decision-making, at a minimum provides a good starting point to ensure opportunities and threats are not missed and risk reduction can be acted on. In its latest Guidance update, the TCFD also published Guidance on Metrics, Targets, and Transition Plans to further support financial statement preparers in disclosing decision-useful information and linking those disclosures with estimates of financial impacts. Such information will help users better assess their investment, lending, and underwriting risks – and inform paths and progress toward net zero. This makes TCFD a useful and timely mechanism for companies and organisations to begin to understand and manage these risks, helping them to more prepared for the unfolding and increasingly irreversible climate crisis.

The full 2021 Status Report, updated Annex, and guidance document are available on the TCFD website. TCFD will deliver its next status report to the FSB in September 2022.