TCFD is A First Step. We must not stop here.
Jyoti Banerjee was invited to contribute an op-ed to a TCFD report from Newton, a long-term active manager owned by Bank of New York Mellon. Here’s the text of his article, as published in Newton’s 2020 report.
In January 2020, Dr Phil Hammond was feeling quietly confident about the virus news emerging from Wuhan.
A Cambridge-educated medical doctor, with a sideline in comedy, Hammond looked back at the world’s experience in dealing with a previous SARS (severe acute respiratory syndrome) epidemic in 2003, and felt that with better virus-tracking capabilities and superior technologies, the world should do just fine in coping with the new virus. Hammond went so far as to predict on Twitter that Covid deaths in the UK would be far less than the annual average of 800 deaths caused by people falling down staircases.
The good doctor has never been able to live down that forecast. In a matter of a few short months, the UK had exceeded the staircase death figure well over one hundred-fold, en route to becoming the country with the most Covid deaths across Europe.
Why do we need to talk about Covid in a discussion about climate reporting?
Simply because across the world we have even less of a track record to draw upon in how to deal with a climate disaster compared to addressing a SARS pandemic. We have never before addressed a challenge that offers an existential threat to life on earth.
To make things worse, the threat is caused by the way we have organised human, economic and social systems on Earth. So, addressing the threat requires us to be willing to change, and to change at a never-before-encountered scale.
Right now, the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) represent the strongest ask of corporates on the actions they are taking to deal with the climate emergency. A recent report from the Climate Disclosures Standards Board found that 68% of Europe’s 50 largest companies (representing a combined market capitalisation of US$3.5 trillion) referenced some disclosure aligned to TCFD in their reporting, but that the disclosures were partial. Only 18% provide clear disclosures on their resilience to different climate scenarios and just 4% clearly define risks over short, medium and long-term horizons.
“The TCFD’s scope relates only to climate. We have other crises, just as significant coming our way: biodiversity loss, species extinction, the depletion of raw materials, the ending of food harvests.”
It would be a mistake to think of TCFD only as a reporting process. A company needs to demonstrate that it has built climate into its planning, strategy, governance, management, risk and scenario analysis processes – first for itself, and then for everybody else. The report that emerges is simply evidence and a reflection of the processes in place working effectively.
But let’s be honest. The TCFD’s scope relates only to climate. We have other crises, just as significant, coming our way: biodiversity loss, species extinction, the depletion of raw materials, the ending of food harvests. Of course, all these emergencies are related to climate, but they are also related to each other in deeply systemic ways.
As Chris Rapley, head of the Climate Action Unit at University College London explains, it would be folly to think that we can somehow address the climate emergency without also tackling the other crises we face. That would be like children removing wooden blocks from a Jenga tower and somehow hoping that the integrity of their tower remains intact. Children learn very quickly that a structurally undermined tower cannot stand. But collectively we live in hope that if somehow we can replace fossil fuel with renewables we can avert the carbon crisis and nothing else about our system needs to change.
Witnessing change in finance
ESG’s ascendancy is a strong signal that the finance community has begun to recognise the convergence of societal and commercial value. However, the problem with the entire ESG construct is that while investors make their investments in projects that are 'less bad', they are still contributing to the degeneration of natural resources through pollution, extraction and biodiversity loss.
Even when a long-term horizon is sought in investment decisions, the short-term operation of the entire system undermines those decisions. Incremental micro-steps by individual organisations or collectives will not change the system’s outcomes (See: ESG is a dead end. Do we care?)
The upshot is that we have plenty of data about companies, but we are unable to use this data to derive meaning about their systemic impacts. We focus on value creation when in practice such a focus masks massive destruction of systemic (and ultimately entity) value.
The focus on ESG has undoubtedly shifted the debate and demands a broader understanding by investors of the way a business is run. However, as a mechanism to limit or repair damage to life and the planet, it is inadequate: ESG does not offer a compelling vision of an alternative system, or a direction we need to take.
At North Star Transition we propose that, given the current levels of environmental harms and threats, and the need for market participants to survive, an economy (or system) needs to be regenerative. What would a future regenerative economy and financial system look like? And what would this mean for major financial institutions and their success? What can it do to help bring about such a future?
We have set up a Finance Transition Lab to go “beyond ESG”. The Finance Transition Lab began in June 2021 with a series of dialogues, followed by the co-development of action-orientated initiatives in parallel with the exploration of the fundamentals needed for a new system that supports regenerative outcomes. Come and join us. It’s the least we can do together to avoid falling down the metaphorical stairs that Dr Hammond did.
Newton’s full TCFD report is available here: TCFD report - Newton (newtonim.com)
