While 32% of the 100 largest companies in North America and 20% in Europe have adopted the TCFD recommendations already, in Switzerland this figure is only 15%, according to a recent KPMG study. These low figures are most likely due to the novelty of TCFD reporting. At a global level, for example, there is a jump of 15% among the 5,200 researched firms alone from 2017 to 2020. It is expected that Swiss companies’ adoption of TCFD will grow significantly over the next years; be it because of the increasing pressure from the Swiss Federal Council and regulators, or in response to demands by investors and other financial stakeholders. In fact, the latter is deemed the more likely driving force.
Regardless of whether they are just beginning with climate risk reporting or strengthening their existing reporting and the underlying implementation, companies should consider certain quality standards in order to meet the need of investors, lenders and insurers. KPMG has developed 12 quality criteria covering four categories: governance, identification and impacts of climate-related risks as well as net zero transition reporting to help companies get a better grasp on what should be reported how: (read more about it here)
So, what does good climate risk and net zero reporting look like?
Governance of climate-related risks: Besides clearly defined board responsibility to oversee the company’s response to climate change, the inclusion of climate change / climate-related risks in the chair’s or CEO’s message in the annual report as well as clear acknowledgement of climate change as a (potential) financial risk to the company is an important signal to investors.
Identification of climate-related risks: In order to inspire confidence among investors that the company is actively working to increase resilience to the impact of climate change, a dedicated section on climate risk (considering both physical as well as transitional risks) in the annual report – or a stand-alone disclosure – is recommended.
Impacts of climate-related risks: Scenario analysis is a powerful tool to understand the risks the company is facing due to climate change, allowing it to plan accordingly. The disclosure of such scenario analysis assumptions and results should encompass different global warming scenarios developed by reputable sources and a short, medium and long-term risk profile.
Reporting on net zero transition: Companies should set out a clear “net zero”-ambition (e.g. the Intergovernmental Panel on Climate Change (IPCC) 2050 deadline or emission reductions and net zero targets following the Science Based Targets initiative, SBTi) and a corresponding decarbonization strategy. In order to maintain and boost investor confidence, reporting should include a transparent communication on whether the company is on track to meet its decarbonization targets.
As part of this TCFD blog series, we will deep-dive into the different groups of TCFD recommendations and provide best practice examples following the 12 KPMG quality criteria for climate risk and net zero reporting.