The new Recommendations of the Task Force on Climate-related Financial Disclosures (FSB-TCFD) and the IIRC’s <IR> Framework speak the same language. The two frameworks have the same spirit and intent, and the disclosure content recommended by the TCFD can feed into mainstream annual financial reporting as well as Integrated Reporting. This was evident in discussions last week at the ProDurable Conference in Paris where I joined AXA Insurance and Total S.A. in a panel organised by Utopies Consulting.
In regards to strategy, guidance by the TCFD on the impact of climate risks and opportunities states: “Organizations’ disclosures should reflect a holistic picture of the interdependencies among the factors that affect their ability to create value over time.” This reflects exactly the approach of the <IR> Framework, with its emphasis on integrated thinking, interconnections between different types of capitals involved and the ability to create value in the longer term. Requiring disclosure on scenario planning is the way in which the TCFD underlines the need for a forward-looking, longer-term focus.
While the TCFD Recommendations address both risks and opportunities, inevitably its entry point is risk. The whole creation of the Financial Stability Board (FSB) comes against the background of global financial crisis and the attempt to affectively address systemic risk. Looking at the mandate of the TCFD and its Recommendations, this special interest in systemic risk, consistent categorisation of climate risks and the appropriate pricing of such risks in determining “decision-useful” information is evident.
The <IR> Framework lends itself to a balanced coverage of both risks and opportunities. At the heart of the <IR> Framework is the business model. While the TCFD Recommendations do not refer to business model, the <IR> Framework centrally expects an organisation to describe its business model. Normally the description of a business model starts by describing how your enterprise will help its customer to solve a certain problem she/he has. That description of the solution offered through a defined value proposition and business model means that the whole reflection kicks off with opportunity in mind.
Note also difference yet complementarity with respect to intangible assets. The TCFD expects enterprises to consider their assumptions underlying cash flow analyses used to assess asset impairments. It refers to goodwill, intangibles, and fixed assets. Inevitably the Recommendations show greater interest in tangible assets and physical risks. Here again the <IR> Framework is highly important in enabling more nuanced discussion of intangible assets across all industrial sectors. An important driver behind the birth of the <IR> Framework was the desire to better define and assess intangible assets. Recommending a multi capitals model, the IIRC enables a more targeted coverage of intangible assets.
Researching key material topics reported by DJSI industry leaders since three years, Materialitytracker has found that two top issues they report on are climate or energy and people or talent management. With its reference to for example intellectual capital, social and relationship capital, the <IR> Framework provides an excellent tool for addressing the intangible assets implied by these topics. This is of special interest to service industry sectors. It would be interesting to see how the heavier industries focused on by the TCFD report in future on the possible impact of climate risks on their intangible assets, including their reputation. It is often in these areas where accounting is more of an art than an exact science, and where the strategy bullet bites the hardest.