Sustainability & Climate change

The signing of the Paris Agreement in December 2015, and the speed at which it was ratified, signals a change in the way governments are addressing climate change. National policies are being put in place more quickly to accelerate the transition to a low carbon economy.

Businesses need to be prepared and publish adequate reporting to respond to emerging risks and opportunities generated by climate change. Companies might take into account the physical risks associated with climate change (increase in severity of weather events such as hurricanes, damaging storms and floods.) Such events have already impacted financial markets, especially insurance providers, all around the globe. But rather - and more importantly - climate change presents transition risks, which include emerging regulations, new technologies, shifting supply and demand, and finally, damage to brand value and loss of customer base due to shifting public sentiment. Assessing only physical risks would only (and maybe) suffice for the short-term. Should your organisation strive for the long term, it is quintessential to assess the transition risks it will face. Consequently, insufficient disclosure hinders the capital markets from making well-informed asset allocation and risk pricing decisions, and could pose a financial stability problem.

The target of the Paris Agreement in 2015, which was signed by 194 states and the European Union, was to limit the increase of temperatures below 2 degrees Celsius above the preindustrial level. The Intergovernmental Panel on Climate Change (IPCC) published a Special Report in October 2018 analysing the impacts of global warming and the results of the study revised this 2-degree target to 1.5 degree Celsius. The impacts of this additional 0.5-degree increase in temperatures would be substantially and exponentially worse on, among others, food production, health, infrastructure, migration and ecosystems.

In the same study, the IPCC has highlighted that we have already reached 1 degree increase in the temperatures above the preindustrial level and that today’s rates of decarbonisation are less than half of what’s needed in order to achieve the target.

Climate-related issues have been identified as one of the top five global risks, but despite the broad recognition that climate change represents major risks to companies around the world, disclosures about those risks have been lacking. However, investors, lenders and other stakeholders have voiced their concern and proclaimed that they will no longer tolerate valuations and forecasts, which do not account for climate change risks. Fortunately, this is where the recommendations produced by the Task Force on Climate-related Financial Disclosures come to aid.

What is TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) is an advisory body set up by the G20 to address concerns around insufficient disclosure of climate-related risks and opportunities for businesses. The Task Force is made up of 32 members, including PwC Partner Jon Williams, drawn from a range of industries and countries, with key perspectives as reporters of information or users of such information. The Task Force published its final recommendations in June 2017, which are intended to apply to all companies with listed debt or equity in the G20, and additionally to asset managers and asset owners (recognising that these organisations are typically unlisted).

"The right information allows sceptics and evangelists alike to back their convictions with their capital."

- Mark Carney, Chair of Financial Stability Board and Governor of the Bank of England

The first publication of TCFD recommendations in June 2017 provided context, background, and the general framework for climate-related financial disclosures.

Key Features of TCFD:
  • Adoptable by all organisations
  • Included in Financial Filings
  • Designed to solicit decision-useful, forward-looking information on financial impacts
  • Focused strongly on risks and opportunities related to transition to lower-carbon economy
TCFD shifts the landscape on disclosure in three crucial ways:

1. Away from the traditional backward looking sustainability-focused lens and towards a forward looking financially-focused view

2. Broadening the perspective from a company’s impact on climate change to climate change’s impacts to the company through physical and transition risks

3.  Moving climate-related disclosures into mainstream reporting and away from standalone sustainability reports, thereby elevating such disclosures to require the same rigorous governance processes as financial reporting

Disclosing your company’s activities and intended actions against the TCFD recommendations will help you to demonstrate to your investors and other stakeholders that you are considering climate change’s impact on your business and have appropriate management responses.

Key questions for companies

As companies look forward into 2019 and beyond, we believe 5 key considerations should feature in your plans.

1. Do you understand how climate change, and the subsequent policy response can financially impact your business?

2. What is your current approach to climate issues versus where you want to be?

3. Are you ready to respond tactically and strategically?

4. Have you got the right data and systems in place?

5. Are you in a position to meet investor requests for information?

Why businesses need to act

Most companies disclose backward-looking sustainability metrics such as recycling rates or greenhouse gas emissions (GHGs). The TCFD asks companies to take a forward looking approach to the financial impacts of climate-related risks and opportunities to their business models. These risks and opportunities can arise from the physical impacts of climate change (more frequently or more extreme weather events) but also from regulatory, technological or market trends as the world transitions to low carbon economy.

Physical climate impacts

Although the low carbon transition is underway, recent weather events suggest that businesses still have to deal with the increasingly frequent or severe physical impacts from climate change in the short to medium term. This has implications for all companies with physical assets; and is material for companies in sectors such as real estate, agriculture or transport. Companies whose value and supply chains are dependent on vulnerable sectors would also benefit from exploring what these changing weather patterns mean for their business.

Transition risks

As the world transitions to a low carbon economy, policy, market and technology trends are emerging which present real risks and opportunities for market leaders.

Investor pressure

A major challenge for investors is the lack of good quality climate disclosures that are useful for them to base their investment decisions on. Such investors have been clear about their expectations and are willing to use their voting power to obtain improved information. For example, the Climate Action 100+  initiative, comprising 256 investors with USD28 trillion in Assets Under Management is mobilising to demand better climate disclosure from the companies they invest in.

Emerging regulatory pressure

Recognising that the first step towards management of risk is the measurement of risk, Mark Carney, Financial Stability Board (FSB) Chair, created the Task Force on Climate-related Financial Disclosures (TCFD) in Dec 2015. The TCFD is chaired by Michael Bloomberg and consists of 32 industry leaders, including also PwC Partner Jon Williams. In June 2017, the G20 Task Force on Climate-related Financial Disclosure (TCFD) published its recommendations for how companies should publicly disclose climate-related financial risks and opportunities to the market and regulators in their financial filings. All companies with listed equity/debt within the G20 are included within the scope of the report, including asset owners (such as pension plans) and asset managers.

How we can help?

In our experience, using the TCFD’s framework is a sensible way to start thinking about how your business deals with climate change as an issue.

TCFD Readiness Assessment Diagnostic Tool

In our experience, using the TCFD’s framework is a sensible way to start thinking about how your business deals with climate change as an issue. Our tool helps you understand the alignment of your public disclosures to the TCFD recommendations. It can be used to understand peer comparisons (see first image) and can also show the difference in disclosures between your annual report and other public disclosures (see second image). 

Leveraging our knowledge of the TCFD - PwC Partner Jon Williams is a member of the Task Force - and our experience of helping our clients manage climate issues, we will provide you with:

  • insight on your performance benchmarked against your peers; and
  • strategic and tactical recommendations to position your business to address climate opportunities and risks.

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Climate Scenario Analysis

Do you know how your business might be impacted and what the financial implications are?

Scenario analysis is a useful tool for understanding the climate implications for your business. This means applying a number of possible futures to your business to test strategic resilience and management response options. First movers will be able to align their businesses with emerging growth trends.

We believe that the low carbon transition presents every company with opportunities and risks. Explore our approach to scenario analysis to help inform your thinking. Our proprietary climate scenario models (covering physical and transitional impacts) can help you explore what climate change means for your business. Please get in touch to find out more.

Scenario analysis for financial institutions

As a financial institution, scenario analysis will require an additional lens to understand how your exposure to different sectors will be impacted from a risk and return perspective. Our climate scenario models extend to the financial sector through this additional lens. This allows translating of financial implications for different economic sectors into financial implications for your institution. If you’d like to explore this further, please get in touch using the contact details below.

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Climate governance maturity assessment

Many organisations will be confident in the overall strength of their governance and risk management frameworks. However, it is probable that many will still be tailoring their approaches to reflect the exceptionally wide-ranging set of risk drivers that climate change represents.

Together with the World Economic Forum, in January 2019 we published a set of Principles for Effective Climate Governance, designed to help the reader practically assess and debate their organization’s approach to climate governance and frame their thinking about how to make this approach more robust.

Following widespread uptake of these Principles, we have developed a risk-based review of corporate governance processes, focussing specifically on the applicability of companies’ existing processes to management of climate risks. The review is built around the Principles and considers the maturity of governance processes in relation to each. Once complete, it will provide you with:

  • a rating on the maturity of your organisation’s governance processes in relation to each principle.

  • a set of recommendations for how you can prioritise and improve the areas where maturity is low.

Please get in touch with us, using the contact details below, to help you get started.

More info here: https://www.weforum.org/whitepapers/how-to-set-up-effective-climate-governance-on-corporate-boards-guiding-principles-and-questions

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Our experience with clients

We have worked with many clients to help them understand how climate change impacts their business through the use of scenario analysis. We’ve helped them understand how they could be financially impacted by physical and transitional risks and develop a strategic management response.

Our involvement with the TCFD

PwC UK Partner Jon Williams is a member of the TCFD and our firm has invested resources to support its work. The team has been working closely with the TCFD throughout the development of the framework and recommendations, as well as with running the public consultation and monitoring of TCFD adoption rates. Our PwC Luxembourg TCFD team is working in collaboration with the UK team to meet the needs of the clients, be it in terms of disclosures, gap analysis and scenario analysis.

Our climate expertise

PwC has in-depth expertise in climate change and sustainability, governance and strategy, risk and change management, technology, reporting and assurance. We believe that managing climate change as an issue should be integrated into existing governance structures, strategic approaches and risk frameworks. We will leverage the best combination of climate knowledge and skills alongside our traditional strengths to deliver for our clients.

Contact us

Valérie Arnold

Partner, Head of sustainability, PwC Luxembourg

Tel: +352 49 48 48 2285

Kenny Panjanaden

TCFD Leader, PwC Luxembourg

Tel: +352 49 4848 6078

Shehzad Ahmad Sahib

Senior Manager, PwC Luxembourg

Tel: +352 49 4848 3668

Jan Rosetzky

Senior Associate, PwC Luxembourg

Tel: +352 49 4848 2522