Canada Environmental Trailblazer: Ties bailouts to TCFD reporting

Covid-19 has brought irreversible changes to our society and economic systems. As we turn our attention towards rebuilding resilient economies, government policy on recovery is now top of mind. Bailout conditions in particular are capturing people's attention. Leading the way, Canada has connected state aid with climate action.

Elsewhere, policy makers are turning to the economy, hoping to reopen gradually without creating a significant spike in new Covid-19 cases. In Switzerland, the federal government and banks took part in a program to provide rapid support to the economy
in the form of loans. Similar plans are in place in Sweden, the United States and the United Kingdom. The conditions to qualify for these loans relate to an applicant's financial position at the end of 2019; detailed environmental or social criteria are usually not included, despite calls for it from civil society.

There is increasing pressure to tie environmental performance to receipt of support, particularly when it comes to carbon intensive industries. Social media is playing a key role - hashtags like #greenrecovery are going viral - and the Extinction rebellion campaign #notgoingback focuses on governments around the world who are putting together relief packages for
high carbon industries. Greenpeace requested a stimulus plan which prioritises the transition to a low-carbon economy or a Green New Deal, as communicated by the EU. Meanwhile, global investor groups published a joint statement calling for a sustainable recovery.

In this respect, the approach taken in Canada is interesting and groundbreaking: in order to obtain Covid-19 bailout funds, firms
are required to file TCFD reports. While unique in its approach to state aid, the message resonates with a deeper trend aimed at boosting corporate reporting around climate-related risks and actions. Such transparency can become the bedrock for a resilient economic recovery. Aligning with the TCFD recommendations is a vital step.

What is TCFD and where do I start?

TCFD stands for Task Force on Climate-related Financial Disclosures. The
TCFD recommendations are a global framework which aims to channel private sector efforts to realising the goals of the Paris Agreement: most importantly, by limiting greenhouse gas emissions to prevent warming beyond 1.5 or 2 degrees above pre-industrial levels. The framework is principles-based and can be applied to any sector. It contains a clear focus on analysing and reporting the impacts of climate change on the business model and strategy of a company.

Investors, lenders, insurers and governments around the world increasingly rely on the data emerging from corporate disclosures to assess their value and to inform their investment strategies. TCFD has a five-year implementation period, with most companies incrementally adding to their disclosures during this window. The TCFD recommendations contain four key elements for a company to report on annually in their financial filings or in a separate supplementary report:

1. Governance: Year one TCFD disclosures frequently take the form of a qualitative statement, including who in an organisation is responsible for climate change and how frequently board committees have discussed the topic. Initial disclosures often include a description of the board-level or management training which has taken place on climate science and sustainability.
2. Strategy: Year one and two qualitative TCFD disclosures frequently report how the impacts of climate change have been considered in short- and long-term company-level strategic actions. Climate-related business opportunities, such as a move to renewables in the energy sector, are often included under this element.
3. Risk Management: Year three TCFD disclosures commonly report qualitative and quantitative information on how climate-related physical and transition risks are identified, assessed and managed by an organisation. A materiality-based approach should be adopted, focusing on higher risk areas first. For example, carbon intensive operations and products.
4. Metrics and Targets: Both are reasonably sophisticated as they include quantitative disclosures which are underpinned by global warming scenarios. The third and fourth elements are usually reported towards the end of the five year TCFD implementation period.

There are some great freely
available public resources which provide guides to getting started. Engaging internal Risk and Finance teams is a useful first step. Focusing on the financial sector, TCFD requires obtaining data and analysing scope 3 carbon emissions. i.e. the carbon emissions associated with lending and investment portfolios.

TCFD is quickly
moving to becoming mandatory. From 2020 this is the case for investors who are UN PRI signatories. Countries and regulators will likely follow suit. Therefore, getting ahead of upcoming regulation and investor-led initiatives makes TCFD important for businesses to consider.

While considering TCFD reporting, it is important to keep in mind three T's:

• Firstly, transparency: Reporting carbon emissions and related targets - even if they are not “good news" - is important to maintain credibility and to prevent accusations of green wash.
• Secondly, trends: Standalone static numbers at a point in time are often not useful to readers of Annual Reports. I suggest reporting a two- or three-year time series for quantitative TCFD elements, including explanations of variances at a high level. Continuing to report TCFD consistently and highlighting the rationale for any changes in the basis of preparation is good accounting practice.
• Finally, and fundamentally, transition: Explain how your business has supported the movement to a low-carbon economy.

Of course, there is lots more to do, every single journey starts with a first step and TCFD is no different...crawl, walk, run.