Businesses have looked at their interaction with the environment for far longer than many would imagine. The history of sustainability reporting can be traced back to as early as the 1960s and 1970s in Europe and slightly later in the United States when organisations started to recognise their role in the society above and beyond profit maximisation. The sustainability movement and reporting gained momentum with a 1987 United Nations report, Our Common Future, better known as the Brundtland Report. This report promoted sustainability as a means of balancing economic and environmental issues and considered the trade-off between short-term economic benefits and long-term impacts on future generations.
Since then, there have been many versions and frameworks for businesses to document and report their interaction with the natural world and society at large. However, the interaction and impact of the natural world on businesses remained unexplored and unchartered. The Task Force on Climate-related Financial Disclosures, better known as TCFD, does just that. TCFD is thus different from many other conventional reporting frameworks and allows businesses to scientifically test their resilience to climate change.
TCFD is as much about risk management as it is about conventional sustainability. While other frameworks have looked at risks arising from a changing climate, they have often failed to bring about the kind of action that is required because they did not speak the same language businesses did. TCFD brings about that action and pushes climate change up the corporate agenda. Every risk is converted to a financial risk, a language best spoken and understood by businesses.
As computational power became cheaper, we have depended more and more on silicon-based intelligence to make better business decisions and ensure better economic outcomes, both in the short term and the long term. A lot of these decisions are based on models that handle different variables and project them in all probable trajectories.
A critical strength of TCFD is that it replicates this tested method of scenario analysis in the context of climate change. Scenario analysis is similar to a virtual simulation that helps to identify and assess the potential implications of a range of plausible future climate states under uncertain conditions. By performing scenario analysis, businesses can look into the future and strategically prepare for it.
The TCFD recommendations help to continuously improve and refine our understanding of climate-related financial risks and opportunities. As George Box very aptly put it, ‘all models are wrong, but some are useful’. TCFD scenario analysis helps businesses understand the risk landscape, and how it could evolve over time. And it is this insight and knowledge about the uncertain world that helps us to turn any risk into a managed risk.
TCFD and scenario analysis could be viewed as risk management tools, however, it would still be naïve to classify TCFD just as a means to manage risks. TCFD’s strength is in helping businesses find opportunities in this fast-changing world, build resilience and spur innovation. Embracing the TCFD framework provides a strong impetus for companies to deepen their strategic thinking and organisational learning around climate change. Using scenario analysis as a tool, company leaders can more effectively communicate their business risk exposure and responses to climate change to their stakeholders. And this positive pressure would encourage businesses, striving with inevitable trial and error, to develop low- and zero-carbon innovations.
In other words, TCFD, if used creatively, can stimulate the process of exploration and innovation, the pursuit of new knowledge, and the generation of new combinations of ideas within a company. If this happens in each and every industrial sector, we would soon be welcoming a decarbonised world!