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Centre for Environmental Rights

Disclosing the actual and potential impacts of climate-related risks and opportunities on the banks’ and emitter’s businesses, strategy, and financial planning.
TCFD Guidance on Strategy

Key Findings

In 10 out of 15 companies assessed, climate-related risks are viewed as a “material business risk”. The TCFD recommends that these companies disclose the impact of the climate risks on their business, strategy, and financial planning.

Only African Rainbow Minerals, Sappi, and South32 set out how short- medium- and long-term climate-related risks will impact their business, strategy, and financial planning, in their publicly available (mainstream) annual reports.

Six (out of 15) companies disclose how climate risks and opportunities are incorporated into their strategy through efforts such as mitigation, adaptation, resource efficiency, pollution reduction and transition plans.

Out of all 15 companies, ArcellorMittal and ABSA bank do not disclose a strategy for mitigating climate related risks, despite identifying climate change risks for their businesses (albeit to a limited extent).

Only Anglo American and South32 sufficiently describe the scenarios used to inform their strategy. Sasol uses its own scenario but does not adequately address whether its strategy is based on a 2°C or lower scenario, nor does it adequately address areas such as critical inputs and assumptions, timeframes, and potential implications recommended by the TCFD.

12 companies do not describe the scenarios used to inform their strategies, casting doubt over whether their strategies (if any) are sufficient to address climate-related risks.

Risk Disclosure

The companies considered in this report are likely to be highly exposed to climate risks and opportunities as either major greenhouse gas emitters or through their lending activity. Information on what risks and opportunities these companies face and how they affect the organisations’ business, strategy, and financial planning can be used to inform investors’ expectations of the future performance of the companies.

Additional Disclosure

The TCFD recommends that companies disclose “the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material”.

Ten out of fifteen companies assessed explicitly mentioned as a material or principal risk in the annual or integrated report, while the remaining five do not.

The TCFD recommends that companies should not “prematurely conclude that climate-related risks and opportunities are not material based on perceptions of the longer-term nature of some climate-related risks.”

Has the company outlined the risks and opportunities from climate change?

Mainstream reports3 Limited4 CDP only8

Recommended Disclosure (a)

The TCFD recommends that an organisation describes the climate-related risks and opportunities that it has identified over the short, medium and long term and the impact that they will have on businesses, strategy and financial planning.

Climate-related financial disclosures should be provided in mainstream annual financial filings.

Three out of fifteen companies assessed provide detailed disclosure, including timeframes and impacts, with timeframes in mainstream annual reporting, while eight provide their disclosures in their CDP reports. The remaining four provide detailed disclosure in their CDP with some disclosure in mainstream reports, but there is limited detail on timeframes and/or impacts provided.

Best Practice

South32 provides a clear description of its climate-related risks and opportunities in its Approach to Climate Change 2018. This covers policy issues, such as carbon pricing; legal issues such as litigation risk; reputation; shareholder action; technology changes; market changes; and physical risks. These are presented in a table and include time horizons.

Topic Time Horizons Most Relevant Scenario Risks Mitigation and Opportunities
Policy Short, medium and long term

Medium and long term

GC [Global Cooperation (two-degrees)]

RCC [Runaway Climate Change (four degrees)]

Carbon pricing policies including carbon taxes, cap and trade systems and any other regulatory carbon pricing mechanisms may increase costs for companies with liable carbon emissions. We include a short-run regional and long-run global carbon price in our capital allocation and investment evaluations. This contributes to effective and well-informed decisions to manage risks beyond current pricing policies.

Further detail is provided on page 19.

In addition, our voluntary carbon emission reduction targets drive internal processes to identify, evaluate, and implement a range of operational emissions reduction projects on an ongoing basis.

Short, medium and long term

Medium and long term

GC

 

RCC

As our stakeholders, including customers and suppliers, are likely to be subject t similar changes in policy, we may face changing commercial requirements to meet regulatory changes in jurisdictions outside of our own operating environments. Our scenario analysis incorporates potential policy-based impacts on our supply chain to test resilience of our portfolio to these risks. Insights gained from this process are used as an input into our ongoing strategic plans.

We have also calculated and disclosed our annual Scope 3 emissions to ensure that we are aware of the scale and sources o our supply chain emissions. Further detail is provided on page 10.

Short, medium and long term

Medium and long term

GC

 

RCC

Water and biodiversity regulation may become more stringent as pollution concerns or scarcity pressures increase. Through our focus on innovation and technology, we are working to reduce our land requirements, biodiversity impacts, waste, carbon and water usage over time. As our internal voluntary performance standards drive resource efficient operations, we aim to be ahead of policy change and avoid the risk that more stringent future policies could pose.
Legal Medium and long term GC and RCC Increased litigation against governments and companies, either seeking compensation for damages caused to them because of climate change impacts or to force greater action on climate change. We consider that our proactive approach to climate-related risk assessment, risk management and disclosure, along with our diversified portfolio, assist in minimising our relative exposure to climate change-related litigation. However, we monitor legal developments in this space and seek advice on major developments when required.

Strategies and Resilience

According to the TCFD, “the disclosure of organisations’ forward-looking assessments of climate-related issues is important for investors and other stakeholders in understanding how vulnerable individual organisations are to transition and physical risks and how such vulnerabilities are or would be addressed.”

Does the company describe how its strategy might change to address climate change risks and opportunities?

Yes6 Limited7 No2

Recommended Disclosure (b)

The TCFD recommends organisations describe how resilient their strategies are to climate change and that they consider disclosing how their strategies might change to address climate-related risks and opportunities.

Six out of the fifteen companies assessed disclose how climate risks and opportunities are incorporated into strategy through efforts such as mitigation, adaptation, resource efficiency, pollution reduction and transition plans. Seven provide limited disclosures with some disclosure of how climate risks and/or opportunities are incorporated into strategy, but with insufficient detail. Two companies do not disclose any details of how climate risks and opportunities are incorporated into their business strategies.

Does the company describe the climate change scenarios used to inform strategy and financial planning?

Yes2 Limited1 No12

Recommended Disclosure (c)

The TCFD recommends that organisations describe “how resilient their strategies are to climate-related risks and opportunities, taking into consideration a transition to a lower-carbon economy consistent with a 2°C or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks.”

Companies should present three or four scenarios, including a “2°C or lower” scenario, which is a scenario aligned to the objectives of the Paris Agreement to hold the increase in the global average temperature to 2°C above pre-industrial levels. The TCFD also recommends that Nationally Determined Contributions (NDCs), which are the goals of each country to reduce national emissions under the Paris Agreement, as another useful scenario, particularly “in jurisdictions where NDCs are a commonly accepted guide for an energy and/or emissions pathway”, which is arguably the case in South Africa.

Only two of the fifteen companies assessed describe the range of scenarios used (including a 2°C or lower scenario), critical inputs and assumptions, timeframes, and potential implications., in their scenario analysis. One company discloses that scenarios are used, but only limited descriptions are provided and does not describe whether a 2°C or lower scenario is used.

Concerningly, the majority of companies do not provide any indication of “how resilient their strategies are to climate-related risks and opportunities, taking into consideration a transition to a lower-carbon economy consistent with a 2°C or lower scenario.”

Best Practice

Citi Group, which is one of 16 banks participating in the UN Environment Finance Initiative (UNEP-FI) banking sector TCFD pilot project, released its first climate disclosure report in November 2018. The Finance for a Climate-Resilient Future report provides climate scenario analysis of both transition risks and physical risks. Citi is one of the first banks to provide climate scenario analysis, which considers both transition and physical risks.

BHP Billiton’s Our Climate Change: Portfolio Analysis (2015) and Climate Change: Portfolio Analysis – Views after Paris (2016) provide detailed scenario analysis. This includes an assessment of the potential impact on long-term commodity demand in a 2°C world and the potential impact on earnings before interest, tax, depreciation and amortisation (EBITDA).