There is no excuse. Companies have the tools, motivation, and support to report.
Structural shifts in the regulatory environment will soon force companies to report and reduce emissions. They will punish companies who do not comply. Companies have the opportunity to get ahead of the curve now, and avoid a regulatory cliff-edge, by voluntarily reporting on their own terms. Thousands of companies around the world have already begun reporting and their experiences, as well as the tools provided by the TCFD, can help companies in South Africa to comply.
Choose to reduce risk exposure
TCFD recommendations are voluntary, which means that companies may choose whether to implement all or some of the recommendations.
Supporting the TCFD and implementing the Recommendations can satisfy financiers, reassure shareholders, and reduce the impacts of climate-related risks. Choosing to make disclosures in line with the TCFD Recommendations can prepare companies for the inevitable regulations that will make reporting mandatory.
Nearly 800 public- and private-sector organizations have announced their support for the TCFD and its work, including global financial firms responsible for assets in excess of $118 trillion.
Four of the companies assessed in Full Disclosure 5 are supporters of the TCFD, with 785 companies and organisation committed as supporters of the TCFD.
Principles for Responsible Investment (PRI)
From 2020, the PRI will make reporting under the TCFD Recommendation mandatory for all signatories out of concern “that the longer the world goes without a safe trajectory on climate change, the greater the risks for investors of an abrupt policy response.”
The UN PRI is the worlds largest investor network on sustainable investing with over 2250 signatories representing over $83 trillion of assets under management. It was set up by the United Nations in 2005.
Critical investors in the companies assessed in Full Disclosure 5 such as the Public Investment Corporation, Old Mutual, Allan Gray, Sanlam, Alexander Forbes Investments, Coronation Fund Manager, and ABSA Asset Management are signatories.
Climate Action 100
+161 company and 373 investor signatories of the Climate Action 100+ have committed to providing enhanced disclosures in line with the TCFD Recommendations to enable investors to assess the robustness of companies’ business plans against a range of climate scenarios, including well below 2°C.
The Climate Action 100+ was launched in 2017 as a five‑year initiative to ensure the world’s largest corporate greenhouse gas (GHG) emitters take critical action to align with the goals of the Paris Agreement.
Structural shifts support reporting
Regulatory shifts are changing the economy for greenhouse gas emitters. Companies that do not report on their strategies and targets for reducing emissions face increased costs, taxes, and fines.
The institution of a carbon tax raises the cost of emitting greenhouse gases for companies, which should encourage companies to reduce their emissions or face declining profits.
South Africa’s Carbon Tax Act came into effect on 1 June 2019. The law prices emissions at R120 per tonne of CO2 equivalent (approx. $8/tCO2e). The rate will increase at CPI+2% until 31 December 2022 and at CPI after this date. For perspective, Sasol estimates its liability to be in excess of R1 billion, according to media reports.
Taxes encourage the market to find innovative ways to reduce their carbon emissions. It is the preferred alternative to government regulation for many companies, as more stringent regulation cold disrupt business. Companies may come under fire for failing to report on their strategy to reduce the tax burden to shareholders, which would necessarily require reducing emissions.
Only four of the ten emitters assessed in Full Disclosure 5 report on their carbon tax liability to their shareholders through their mainstream, and only to a limited extent.
National Climate Change Bill
South Africa’s proposed climate change law will require companies to submit plans to the Minister of Environmental Affairs on how they will reach and comply with an enforced carbon budget or potentially face a fine.
The Bill envisions a carbon budget that will be applicable to companies in line with a greenhouse gas emissions threshold. Once enacted, the Bill will force companies to reduce their emissions and to put in place a strategy for emissions reductions, based on regulations which are subject to the input of various stakeholders. Companies who don’t prepare, are at risk of reaching a regulatory cliff edge with consequences for their operations.
Using the TCFD Recommendations, companies can voluntarily prepare for the effects of future carbon budgets and implement mitigation, adaptation, resource efficiency, pollution reduction and transition plans that are best suited for their inevitable transition.
Companies can comply
Nine out of the ten emitters assed describe how their business strategy might change to address climate-related impacts, with five providing a sufficiently detailed description of efforts such as mitigation, adaptation, resource efficiency, pollution reduction and transition plans. However, only two of the ten companies provide sufficient details of the scenario’s used to inform their strategies.
Understanding Scenario Analysis
Scenario analysis forms the foundation of a company’s strategy and informs the metrics and targets that company might use to assess and manage its climate-related risks and opportunities.
A scenario analysis is a hypothetical construct, or ‘what-if’ analysis, aimed at assessing the impacts of climate change on a company under various conditions. The TCFD recommends that a company should consider a 2°C or lower scenario, which means that it should assess the impacts of climate change based on a trajectory that is “consistent with holding the increase in the global average temperature to 2°C above pre-industrial levels.”
Tools for scenario analysis
The TCFD provides tools, data, models, and guidance to preparers of financial disclosures through the TCFD Knowledge Hub. Industry specific resources are available which can help companies understand and apply scenario analysis, even where a company has not yet developed appropriately granular, business relevant data and tools.
Preserving confidential business information
Releasing confidential business information may be a concern for come companies when disclosing the climate-related scenarios used to inform their strategy. However, the TCFD has highlighted how BHP, Citi bank, BlueScope Steel and others have managed to company with the Recommendations without compromising proprietary information. Companies could use scenarios available in the public domain, such as those developed by the International Energy Agency (IEA) or Intergovernmental Panel on Climate Change (IPCC) as a starting point for scenario building. Scenario’s disclosed by other companies could be used as examples to inform report writers of possible levels of disclosure.
Disclosing Financial Impacts of Scenarios
The TCFD Recommendations set out considerations for assessing financial impacts of climate related risks and opportunities under categories including revenues, expenditures, assets and liabilities, and capital and financing. Based on examples provided by the TCFD, companies might determine the extent of financial impacts by asking how supply chains and distribution channels may be disrupted, and how the likelihood of business interruption changes, due to impacts from climate change. Asset values may also change as a result of transitional risks with financial impacts which should be considered. The cost of transitioning away from coal could require investment in new technologies, changed in research and development spend, and adjustments to capital allocation plans as additional elements for consideration.