The question was asked recently: “What impact do you think the UK implementation of Taskforce on Climate Related Financial Disclosures (TCFD) reporting by 2025 for firms will have? “
My immediate answer was “I don’t know.” After more reflection, my answer is a slightly more nuanced: “I don’t know, it depends.” Here are the nuances:
Listed firms are already obliged to report material risks to their business, and climate change is an obvious material risk, so the effect of new rules should overall and in general be not that significant. However, if the TFCD ensures more rigour, then the impact will be that well managed companies that have already understood, prepared for and reported climate change risk should benefit. Conversely those that have been in denial or avoided fullest reporting, may suffer as their strategy (or lack of it) is exposed. Good, it could help flush out poor practice, unmitigated climate risk and reduce investment uncertainty.
The impact of TCFD is less about whether firms have significant climate risk or opportunity, measured in some absolute terms, than about the assessment of the capability and agility of the management to adapt.
However, that assessment is made more difficult by the persistent complexity of the future business environment. In fact, some direct climate risks may be relatively easy to calculate or state, but how do you reckon for the impact of new disruptive technology that it might drive, legislative or social change, political meanderings or conflict? Conducting a STEMPLE analysis, TCFD might help nail one E, but the rest is no more predictable than it ever was.
The superior TCFD scrutiny may have other effects. Firms that want to clean up may simply dispose or cease operations of the dirty bits. They then pass into the hands of more sanguine private owners, foreign listed companies or be displaced by less visible state or private enterprises outside UK jurisdiction. At best, unwanted UK operations might find themselves with new international owners. For various reasons this has already happened, look at: steel, cement, chemicals, airlines, aircraft, ships, nuclear power, textiles, electronics and automotive. Many such operations may thrive, but increasingly their future destiny, and of their local supply chains, will depend on decisions made outside the UK.
One big and enduring UK concern might be that the additional pressure on reducing risk or uncertainty might further encourage “safe” bets rather than long terms punts, within companies or by outside investors, thereby supressing small and exciting UK ventures which might have the technology for a zero-carbon future. It would be unfortunate if the UK effect of TCFD, was to lead to a well-audited and totally transparent progressive decline, than equip us for a messy, daring and successful leap into a prosperous and zero-carbon world.
So, there we are: “I don’t know, it depends.”