In just one year, the Task Force on Climate-related Financial Disclosures (TCFD) recommendations have gained significant traction and are now viewed as a mainstream risk disclosure framework.
The recommendations require effective climate change disclosure in annual financial filings covering governance, strategy, risk management, and metrics and targets.
Around 100 firms had already signed up to support TCFD when the recommendations were launched in June 2017. This has now grown to more than 500, with market capitalisation of more than $7.9tn and including financial firms responsible for assets of nearly $100tn.
The planet’s average temperature has already risen about one degree since pre-industrial times and the world is slowly waking up to what will become one of the major business disruptors of the century. With Earth’s climate changing, the TCFD was established to encourage investment-relevant disclosure.
The property industry can’t escape the new realities. The International Energy Association estimated in 2013 that almost two-thirds of global emissions reductions must come from buildings to limit temperature increase to two degrees.
The industry is therefore facing a growing pressure to take action and investors are scrutinising companies with excessive carbon emissions.
In 2018, Landsec published the first of this kind of climate change-related assessment and disclosure, and numerous organisations are expected to follow suit in the coming year.
Understanding your business exposure to climate change
There is also another side to climate risk which investors are starting to consider.
Instead of just looking at how companies’ carbon emissions impact climate change, TCFD recommendations require businesses to consider the financial implications of exposure to climate change for their own organisations.
In other words, TCFD moved the discourse beyond the question of “what is my impact on climate change?” to “how does climate change affect my business?”.
This shift in thinking creates a unique opportunity to put climate change considerations at the heart of corporate risk and governance processes, making it boards’ responsibility and raising legal and fiduciary duty debates.
One could even argue that under the banner of “climate disclosure”, Mark Carney and Michael Bloomberg have established a framework requiring companies to reassess their business strategies in light of climate change.
Specifically, TCFD strengthens the business case for an in-depth portfolio and asset-level risk and opportunity assessment, which is critical for strategic management.
With Willis Towers Watson estimating that 45% of the global investment portfolio value could be lost due to climate risk-related market shifts, it is clearly in one’s self-interest to manage potential risks and opportunities.
Or as Bloomberg puts it in the TCFD’s 2018 Status Report, failing to assess strategic resilience of one’s business and assets under different climate-related scenarios is simply a missed opportunity.
Assessing future climate change risks and opportunities
Given the significant yet uncertain climate change implications, it is no longer sufficient to value or manage real estate assets based only on present risks. Acknowledging complexities of climate change assessments, TCFD introduces future scenario planning.
From the physical risks perspective, both acute and chronic risks should be reviewed. This involves an assessment of the risk of natural disasters and weather trends.
Transitional risks, such as changes in policy and carbon taxation, technological shifts, changing occupier demands or negative outlooks for some sectors, should also be assessed to inform business and portfolio management strategies.
Where identified, opportunities to participate in government initiatives, invest in new asset classes, or use renewable energy sources should be considered.
With scenario planning becoming a new buzzword, a number of initiatives have been established to support the industry.
One thing to keep in mind, however, is that each portfolio, or even asset, might be exposed to different risks and opportunities and assessments should be tailored to time frames and material issues specific to the business.
For example, retail portfolios will face different transitional risks to those of industrial assets, or properties in the North of the UK may be more exposed to physical flood and wind risks than properties in the South East, which will suffer higher temperature rises and cooling demands.
Different financial implications would also apply, varying from increased operation costs (due to water, energy, or maintenance costs), changes in occupancy rates (due to efficiency and location discounts/premiums), or even a total loss of value (due to extreme weather and natural disasters).
Portfolio and asset resilience
Having a clear view of your business exposure to climate change will allow you to determine best strategies for risk mitigation, property management, divestment or new acquisitions.
To put it in the words of Sir Francis Bacon, knowledge is power, and obtaining this knowledge early will ensure your portfolio resilience, open opportunities, and minimise the risk of stranded assets or lower returns.
Strategies could include:
■ Risk transfer: review insurance terms and strengthen relevant clauses, utilising still favourable market terms.
■ Risk mitigation: identify key investment needs to ensure building resilience, considering changing cooling demands, flood risks, etc. In addition, revisit current property management processes to identify energy efficiency opportunities.
■ Risk avoidance: review acquisition processes to inform investment decisions.
■ Risk disposal: consider disposals of high-risk assets or tenant covenants across your portfolio.
With a strong commercial case to take action, in addition to the well-understood environmental pressures, one can only hope that businesses will recognise this unique opportunity presented by TCFD.
It reaches beyond just disclosure requirements, and it is a great chance to engage senior executives and inform business strategies to ensure resilience and sustained returns, while helping to mitigate climate change.
