TCFD: Falling behind can cost your company dearly

The framework developed by the TCFD is already mandatory in some jurisdictions and a growing number of large companies are adopting it as a model for environmental risk management. Mid-market companies that take action can boost their value chains, increase credibility with stakeholders and gain greater access to vital financing and investment.

When the Financial Stability Board (FSB) created the TCFD in 2015, its goal was clear: to identify the type of information companies should communicate to provide investors, lenders and other stakeholders with a clear view of climate risks that could affect a company's value.

"The TCFD is playing a key role in bringing clarity to corporate disclosures, driving the biggest change in corporate reporting since the creation of the U.S. Securities and Exchange Commission (SEC) in the 1930s," says Mark Lemon, senior manager of ESG and sustainability at Grant Thornton LLP (USA).

In today's complex regulatory environment, adoption of TCFD recommendations is growing strongly. According to the TCFD 2022 Status Report, support for the framework now extends to 99 countries and virtually every sector of the economy, with a combined market capitalization of some €26 trillion. The report indicates that 80% of companies report on at least one of the 11 TCFD recommendations. But what is the current level of preparedness of medium-sized Spanish companies?

In 2021, the TCFD guidelines laid the groundwork for the creation of the global sustainability reporting framework, driven by the ISSB (International Sustainability Standards Board). Its first set of standards will be published in early 2023.

As Sarah Carroll, head of sustainability reporting at Grant Thornton International Ltd explains: "The quality of the TCFD framework is demonstrated by the fact that the ISSB is using it as the basis for its future standards. The architecture and terminology of the ISSB framework draws heavily on the TCFD guidelines."

Given the urgent need to report on climate impacts and the increasing influence of large companies in their value chains, mid-market companies need to act now to avoid being left behind in this area. The recent study launched by Grant Thornton, which analyzes in detail the level of preparation of medium-sized companies in relation to sustainability reporting, reveals that there is still a lot of work to be done in the bulk of medium-sized companies in Spain. In fact, 32% of Spanish mid-market executives admit that they do not yet report on any aspect related to greenhouse gas emissions and 12% have no plans to do so in the future.  In comparison with other countries, the number of Spanish companies that do not yet measure these aspects is even four points above the European average (28%) and up to 11 points above the global average (22.9%).

It is worth remembering at this point that the International Sustainability Standards Board (ISSB) announced after its meeting last October that it will require companies to provide information on their scope 1, 2 and 3 emissions, so it is clear that there is still some way to go.

As a result, and in comparison with the average European company, Spanish companies still have a long way to go in adopting ESG best practices and, above all, in making their governing bodies aware of the importance of adopting ESG criteria in their medium and long-term strategies, and not just as a mere regulatory obligation. Regulation is going to be increasingly demanding in terms of ESG reporting requirements and companies must anticipate, plan and obtain the necessary data to report and manage their activities in this area, says our expert in sustainability strategy, Jaime Romano.

In this line, our expert in non-financial assurance, Sergi Puig-Serra, confirms that the new regulations will not only require us to report information on the impact of our companies on the climate, but we will also have to set clear environmental objectives in the medium and long term, one of the most important being the reduction of greenhouse gas (GHG) emissions.

The urgent need for TCFD framework

"Investors are looking for companies that act as if 2050 is 10 years from now, not 28 years from now," warns Katerina Katsouli, head of ESG and sustainability at Grant Thornton in Greece.

The message is clear: Investors will bypass those companies that lag behind in adopting the sustainability agenda. Grant Thornton's latest global mid-market report confirms this: improved reputation with stakeholders is a key benefit of climate-related reporting, as indicated by 25% of the companies surveyed.

And the issues go beyond the demands of investors. Laura Tibbetts, head of Grant Thornton's UK financial accounting advisory team, points out that many financial institutions are obliged to link information in their financial statements and loan portfolios to progress made towards the zero net emissions target.

"There is a risk that companies without a credible ESG strategy will either not be able to access finance or will incur very high costs. For financial institutions, the absence of an adequate strategy represents an increased risk," explains Tibbetts.

Katsouli says that important commercial imperatives are at stake. "In 10 years, the European economy will have completely different products and services than today. Companies that invest in environmentally friendly technologies and products will gain a sustainable competitive advantage, while those that do not will face significant development challenges."

Companies that are able to integrate climate change awareness and mitigation into the heart of their organization - from the shop floor to the board of directors - will reap the greatest benefits during this transition period, Tibbetts notes. "The need for accountability is forcing companies to adopt more sustainable behaviors, which in turn makes them more attractive to investors, customers, financial institutions and other stakeholders," he says. "It's a virtuous circle.

Sustainability goes far beyond a mere obligation. Knowing the medium- and long-term benefits of a sustainable strategy adapted to new needs undoubtedly helps its development and implementation. It is particularly revealing that among Spanish managers who do not yet carry out sustainable measurements, 46% confess that they do not know what kind of advantages this would bring them, as do European businessmen, where 33% also express themselves in the same terms.

According to Jaime Romano, corporate governance bodies face an exciting challenge in the coming years, which should lead them to place ESG criteria at the heart of their strategies in order to achieve a clear competitive advantage over their competitors. This fact has already been demonstrated by many international companies that have already adopted and calculated the impact of the implementation of their sustainability strategies; reaching the conclusion that the impact on their results is always positive, together with the greater and better perception that the company generates among its stakeholders.

It also allows them to improve reputational aspects among their stakeholders, attract and retain talent and achieve better financial and economic indicators: to be sustainable is also to be profitable, explains Sergi Puig-Serra.

TCFD framework: main challenges for companies

The benefits of accountability are considerable, as are the challenges involved in complying with the FSB's recommendations. These include complications arising from the TCFD framework itself with respect to the type of information to be reported.

In general, there is widespread awareness among Spanish medium-sized business owners that significant regulatory changes are coming, although at the moment the action plans are not very well substantiated. Thirty-eight percent say that they are still in the initial phase of identifying new developments in order to plan for the new approach, while 36% say that they are already reviewing their structures and adapting internal reporting processes in preparation for the approval of the new standard. Only 25.6% of national executives acknowledge that they are already proactively testing new reporting approaches before the new standards become mandatory.

Our expert, Jaime Romano, points out that the forthcoming regulatory changes are going to go further, not only in environmental aspects, but also in governance and social aspects. Precisely, social aspects will be of paramount importance in the development of business decisions because their actions in this regard will not only affect their own employees, but also their customers, suppliers, regulators and other groups related to the company. Consequently, the sooner companies begin to incorporate their ESG vision, the sooner they will begin to obtain results generated by these actions and improve their positioning in the national and international markets in which they operate.

Entrepreneurs encounter three main difficulties. The first is that companies have little or no experience in accurately analyzing and reporting on the climate change scenario affecting their organizations. This inexperience not only creates risks, but also requires new resources and expertise, either within or outside the company.

Secondly, there is the problem of access to relevant data, which is particularly challenging for smaller companies that have not needed specialized resources in this area.

Third, there is the question of governance: Does the board of directors have the necessary internal processes and controls in place to oversee climate-related issues? Does it take climate issues into account when setting strategy? And how does it measure progress? These questions apply equally to the management team.

National managers are fully aware of the importance of having a truly conscientious team at all levels to adapt to upcoming regulatory requirements on sustainability. In fact, 34% recognize that it will be essential to ensure the integration of sustainability at all levels of the organization, while the same proportion considers it necessary to align the recommendations by creating a specific working group in charge of dissemination to work towards their implementation. For their part, 29% do not forget to focus on developing solid sustainability auditing and control measures.

The communication of sustainability actions is not based exclusively on the generation of a series of data that meet a series of requirements in terms of quality, relevance, materiality, reliability, etc., but must also be endorsed by third parties that guarantee both the process of obtaining such data and its adaptation to the regulatory requirements existing at any given time. This process, together with the irreversible regulatory avalanche that is anticipated in all the countries of our environment, should progressively reinforce the importance of the sustainability areas in companies and their role as support for the decision-making bodies of companies in terms of business decision-making in ESG aspects, adds Jaime Romano.

According to Sergi Puig-Serra, companies should incorporate ESG-trained professionals who are capable of integrating sustainability transversally throughout the organization. Sustainability should not be perceived as specific and temporary actions, but should be part of the company's DNA, its strategy and mission; this process of change must be carried out with the absolute conviction of the highest management bodies of companies, who must be responsible for integrating these aspects into the organization's culture.

Below is a practical guide that illustrates what companies can do to address these challenges.

TCFD - Where to start?

1. Understand the timeframe and complexity.

For example, regulation around climate reporting, which typically includes information on emissions, is coming soon to the UK, the EU, the US and many other parts of the world. But developing and implementing an effective greenhouse gas (GHG) management program is a major project.

Companies should not underestimate the time, effort and complexity of integrating climate issues in-house, especially those entities that have not previously reported in this area. Organizations need to understand from the outset who will be responsible for driving this project forward and ensure that they have the necessary expertise and resources.

2. Define a viable roadmap

The next step in making new reporting processes effective is to develop an appropriate roadmap for the organization to meet its objectives within the required timeframe. Often, companies set ambitious goals without explaining how they will achieve them.

"The company should look at its reporting obligations and the actions it would need to take if it were to be accountable today," Tibbetts advises. "What would that information have to include, and how does it compare with best practices, with peer information and with other competitors in your industry? Think about what you want your report to say, work from that information, and focus on any information gaps that arise during the process."

3. Create an efficient and effective internal reporting framework

Establishing reliable climate metrics requires a solid foundation. If the organization documents the information on which decisions have been based for each part of the process, it will be easier to justify future reporting and verification requirements and will be able to facilitate the necessary processes in the long term for all other stakeholders.