Asset owners will need high-quality and timely data on climate-related risks to help guide them through the energy transition.
The FSB Taskforce on Climate–Related Financial Disclosures (TCFD) provide a global framework to translate non-financial information into financial metrics. The TCFD has been endorsed by over 238 companies, including 150 financial institutions representing a combined market capitalisation of over US$6 trillion and US$81.7 trillion assets under management.
Yet, what would adopting the TCFD recommendations mean in practice for asset owners? This publication provides technical guidance on:
- the actions for asset owners;
- example of peer asset owner practice on implementing the TCFD recommendations and reducing exposure to climate risk;
- questions to engage consultants or fund managers on TCFD;
- climate scenarios.
Engaging with fund managers on the TCFD recommendations
Asset owners can engage with fund managers on climate-related risks and opportunities and encourage them to support the TCFD recommendations, including asking questions such as:
Organisation-wide support for the TCFD recommendations:
- Does your organisation support the TCFD recommendations?
- If no, please explain the rationale behind this decision
- If yes, when do you anticipate an implementation plan will be implemented?
- Has your organisation included climate-related impacts as part of the board and/or management group’s oversight responsibilities?
- How is progress reviewed, by whom and how often?
- Is there a firm-wide strategy in place to identify the risks and opportunities related to climate change?
- Has the organisation considered the impact of climate-related scenarios on future outcomes in terms of expected risk and return, as well as the identification of new opportunities?
- Has a process been established to assess and integrate climate-related investment risks (transition and physical impacts) into investment decisions?
- What is your process for monitoring these risks over time?
Metrics and targets
- What climate-related metrics, if any, does your organisation use?
- Can you describe how these metrics have impacted on investment decisions?
Climate scenario analysis
Scenarios analysis is the process of estimating the expected value of a portfolio after a period of time. Depending on the availability of the data and the maturity of the process, scenarios can be either for:
- Context exploring (narratives about the future)
- Decision making (forecasting)
Climate scenario analysis is, at present, arguably closer to the former and therefore not necessarily a forecast. The purpose of climate scenarios is to assess the potential earnings impairment of companies (as a result of transition policies, demand changes, physical impacts and other factors) and how this might translate into investment returns in a portfolio. Uncertainty exists in terms of the rate of warming, pace of technology change, future government policy – yet the uncertainty is not infinite. The value of climate scenarios is to test the extremes. Thus, it is important to avoid relying on a single reference scenario, otherwise the analysis risks becoming a prediction.
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Implementing the TCFD recommendations: a guide for asset owners