TCFD reporting can deliver significant business benefits beyond compliance

Infrastructure businesses that embrace the TCFD-related climate disclosures should find it easier to raise capital, will stand a better chance of winning public contracts, and will be better prepared to meet the challenges in decarbonising their operations.

TCFD can be a springboard to remaining competitive

A study by the Net-Zero Infrastructure Industry Coalition, with the support of Pinsent Masons, has found that many infrastructure asset owners and operators, construction contractors, professional services firms and suppliers active in the infrastructure sector view TCFD climate disclosures primarily through the lens of compliance.

This is perhaps unsurprising – after all, a growing number of law makers and regulators globally are imposing climate-related disclosure obligations on businesses, with many of the legal and regulatory duties building on recommendations made by the TCFD.

The deeper and more mature an organisation’s implementation of TCFD requirements, however, the more opportunity there is for that to act as a catalyst for change and drive a wide range of business benefits.

Finance and investment

The quality of climate disclosures will impact the confidence investors and lenders have in an organisation’s approach to climate risks and opportunities, and hence provide greater opportunity for access to capital. Infrastructure businesses we interviewed gave examples of the success of capital raising linked to green KPIs, and we would expect the market for green financing to mature in its expectation of wider climate performance, transparency and data quality.

Investors have greater awareness than ever before of the strategic risks of poor climate change practice, and the opportunity in good practice. High quality and transparent disclosure will give confidence to their decisions. Organisations mature in this area can expect to enjoy greater confidence from their investors as a result. Conversely, those with poorer transparency can expect higher and perhaps more volatile costs of capital.

Strategy, resilience and risk

A thorough and purposeful analysis of all aspects of activity is quite likely to surface risks and opportunities that might not otherwise have been captured. This might apply especially to so-called ‘scope 3’ emissions – those arising indirectly from what a business does.

For example, in the case of constructing a highway, scope 3 emissions will arise from downstream supply-chain operations such as for the production of cement and concrete and steel as well as for the construction processes related to subcontractors. Over time, those emissions might incur additional cost through environmental taxes, or perhaps impact the organisation’s social licence to operate as society’s position on climate change continues to evolve. Surfacing these risks allows more informed development of organisational strategy, and a mature understanding of its evolving risk landscape.

The thorough analysis of scope 3 emissions should also facilitate a systematic understanding of supply chain dependencies, and in turn supply chain resilience. Exploring the extent to which owned assets might be exposed to weather risk is similarly a starting point to understand systemic resilience. In turn this should lead to improved strategic resilience, by driving a disciplined approach to thinking about plausible futures and the organisation’s response to them.

Customers, employees and growth

As government at all levels seeks to use available levers to meet their own climate ambitions, we expect to see a gradual tightening of prequalification criteria for public tenders, and over time an adjustment to bid evaluation criteria. One infrastructure operator told us that the joint ability of itself and suppliers to add value to its climate ambitions is important to future partner selection.

The stance of an organisation with respect to climate is also increasingly important to its appeal to many actual and potential employees. Many organisations we interviewed discussed how millennials and younger staff especially seek employers whose values reflect their own, and with whom they can make their own distinctive contributions to reducing emissions. For many in these generations, climate is at or near the top of lists of issues they consider important. A proactive approach to emissions reduction, enabled by TCFD reporting, can transform the employee narrative, easing recruitment and retention and creating better performance outcomes from motivated people, that unlock growth.

The insights created by systematic understanding of climate related risks might also point to new sources of competitive advantage, or the potential for new products and services. At one level these could be solutions that enhance clients’ resilience, at another this might include reshoring elements of supply chains and bringing premium resilience products to market.

Legal and regulatory

There is pressure at board level and from PR teams to make commitments on climate change, but organisations can sometimes struggle to deliver on them. This creates a risk of accusations of greenwashing and of not fulfilling promises. TCFD reporting ensures data is surfaced, allowing the organisation to better understand current performance, and set meaningful improvement objectives.

The construction sector is responsible for a vast volume of extracted materials and resources – think aggregates, cement, steel, copper, aluminium, glass, structural clay and petro-carbons that go into chemicals, plastics and adhesives that are used by the construction sector, not to mention the energy required to process raw materials into construction products.

As awareness increases in society of the macro picture around planetary degradation, materials use and geopolitical issues, we also expect to see an ever-increasing tightening of organisations’ freedom to operate, as well as stakeholder and societal pressures to change. A mature approach to TCFD reporting will place organisations in a strong position to further develop reporting as regulation changes, and indeed to explore and realise the benefits as well as mitigate the risks of these emerging challenges.

Insight

A full picture of the organisation’s climate related risks can help better direct and prioritise effort to where it can have the greatest carbon benefits, and perhaps also open minds to possibilities in new markets with carbon profiles more suited to the organisation’s aspirations. This will help direct investment to where it can have the greater impact.

Active efforts to drive carbon reduction tend to lead to new ways of thinking about old problems. Looking afresh at established methods and processes, especially when empowered by more accessible data, can drive step changes in efficiency and effectiveness, and establish new best practice, as well as saving carbon. In addition, carbon saving can be a powerful motivator, and help drive wider dissemination and use of best practice more effectively than normal business change efforts. For example, work undertaken by Anglian Water and Mott MacDonald on a capital programme over a period of several years cut carbon by 54% and cost by 22%.

TCFD can help drive better data flow, particularly on climate related risks to individual physical assets, allowing better prioritisation of mitigation planning over decades. Likewise better data can also help organisations understand the carbon being embedded into capital projects through design and materials selection, both to drive down embedded carbon, and to evaluate and learn from the performance of novel materials and solutions in use.

This better data flow helps organisations understand their assets and risk profiles better, and also paves the way for transition to a circular economy, where a granular understanding of asset potential and materials usage will need to become the norm. The circular economy is currently more discussed than enacted and it will be inevitable very soon that the construction sector’s typically linear business model will need to rapidly transform into a circular business model.

TCFD and the business imperative

TCFD requirements bring rigour to understanding how climate change could impact organisational sustainability. Climate risks are often not priced into valuations. However, we expect this to be only the beginning. Degradation of natural capital is a planetary and business issue of comparable scale currently being explored by the Taskforce for Nature-related Financial disclosures (TNFD), and there are comparable global concerns around further pandemics, anti-microbial resistance, and other matters, not to mention the impacts of geopolitics.

The recently released UK government’s Roadmap for Green Finance makes clear that climate risk disclosure is only a part of a rapid shift to wider disclosures about sustainability under the forthcoming sustainability disclosure requirements, an integrated framework for disclosures on sustainability across the economy, all expected to be based on the thinking of TCFD, and in place for 2024/5.

These issues present potential risks to business resilience. There is a business imperative to look more strategically at the risks to our operating environments in the face both of recent events and mounting scientific evidence. TCFD can be a catalyst for this, bringing resilience into the mainstream of business planning whilst at the same time demonstrating business responsibility to stakeholders.

Pinsent Masons, as part of the Net-Zero Infrastructure Industry Coalition, has highlighted the evolution of infrastructure climate-related financial disclosures in a new guide that is designed to help infrastructure companies implement the recommendations made by Taskforce for Climate-related Financial Disclosures (TCFD) – and leverage opportunities from doing so.