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.

A reflection on my first ever GRESB season

My first GRESB season was an experience. From the get-go, there is a lot to understand and take in – and in a very short space of time. Whilst GRESB aims to be a global ESG benchmark, I was still taken back by the scope of the questions and the level of data required. Without the use of SIERA, being able to manage all this information would have been extremely difficult and it just goes to show the value that the platform has – both to EVORA and our clients. Within the 2022 assessment period, EVORA has supported over 190 fund submissions.

To successfully complete a submission, the importance of planning cannot be underestimated. This is especially true when looking at the performance category, which is also the section that carries the most points. Through SIERA it is easy to prepare all this information and identify variances and gaps in data, which must then be remedied. This is where having strong client engagement is vital as it helps to make this process a lot easier. 

More broadly speaking, I am impressed with how GRESB is designed to constantly promote the real estate sector to improve its sustainability performance. This is primarily done through the design of the rating system in place. This splits all the entries into their quintile position relative to all the participants, with the top quintile receiving a 5-star rating. Having dynamic boundaries means that the sector is constantly having to improve and cannot rely on previous actions to guarantee a good score.

The preliminary results of this year’s assessment will be published on September 1st, and we wish all our clients the best with their submissions.

If you would like any support with your GRESB submissions, or any other sustainability issue, please reach out to the team at EVORA and we will be happy to help.

Booked for July

This month was all about taking it down a gear and going easy on our minds and bodies after a hectic GRESB period. After working towards a big deadline, it’s so important to take some time and check in with yourself. We thought one of the best ways to do this would be to have a month dedicated to books. Our main aim for Booked For July was to take it slow with no pressure of deadlines but plenty of book activities to calm and relax.

Whether you prefer self-help books or fantasy books that transport you away to another world, there is no better feeling that getting comfy with a book and, maybe, an iced tea considering the July heatwaves! And yet when we are busy, we never carve out time to read, despite the fact that reading reduces stress, improves our concentration, expands our vocabulary, enhances our knowledge and increases our imagination and creativity. All these together increment our wellbeing!

We started the month by creating a Book Swap Library where EVORians could bring in books for others to borrow. We made inserts so that the book owners could tell others a bit about the book. You could write what this book made you feel or what you think the next reader should be doing while reading that book – for Jay Kristoff’s Nevernight book it was recommended that you be drinking wine in the ruins of a church to really get into the mind space of the book.

We decided that having the Book Swap in the office is a great way to get people back in to reading but, also, for books that people don’t want back, it was a brilliant way to recycle them. So as well as picking up a read that’s recommended by our fellow EVORians, we are also doing our bit to give these books a second go at life.

We’ve also had book mark making arts and crafts in the break out room for the month. These were left out the whole time, so whenever people needed a break from the ordinary they could pop into the Library and create a bookmark. We had tonnes of pens and pencils for drawing on the bookmarks, googly eyes, and even scratch to reveal bookmarks. If, like me, you are not artistic at all and struggle to even draw a ghost, then these bookmarks are for you! They came with stencils and all you had to do was scratch away your chosen design to reveal the colourful rainbow beneath – yet I still managed to make my elephant look quite angry!

Lastly, we introduce the Book Club. This was something that anyone from any country could join in with. We asked everyone for book recommendations and did a poll to choose the book for the month. This is something we will be continuing for the rest of the year – we’ve chosen the themes for each month and are looking forward to meeting up to discuss the books.

This month’s theme was a beach read, as so many people are on holiday at the moment. The winner of the poll was Beach Read by Emily Henry, which the whole group have enjoyed immensely. We will be meeting next week to discuss the book, with people from outside London joining remotely.

We’ve enjoyed taking it easy this month and have decided to keep our book swap library open. We should always strive to make a positive change wherever we can!