This is a common question that many Financial Institutions (FIs) face when trying to broach Task Force on Climate-Related Financial Disclosures (TCFD) and Science-based Targets (SBTs) together. The new Science-based Target Initiative (SBTi) Financial Sector and TCFD reporting guidance provides a clear answer with practical actions for private equity firms, asset managers, asset owners, and banks to harmonise SBT setting with climate-related risk and opportunity disclosures and transition plans.
Where should I start?
From a regulatory standpoint, the Guidance helps to join different regulations and initiatives, for example, countries legislating TCFD and the Glasgow Financial Alliance for Net Zero (GFANZ) best practice guidance for developing a net zero transition plan.
It has been designed to help FIs at all stages of climate maturity, whether they:
- Have no existing alignment with either the TCFD or SBTi frameworks
- Are committed to the SBTi but are not disclosing in line with the TCFD
- Disclose in line with the TCFD but are not committed to the SBTi
Why do we need SBTs and TCFD?
For Financial Institutions (FIs) that haven’t started with either setting SBTs or aligning with TCFD, the Guidance is particularly useful in understanding how investment portfolios are impacted by climate risks, an ‘outside-in’ perspective, versus how they impact the climate, an ‘inside-out’ perspective. This is helpful for those wanting to align with TCFD to understand the impacts from the climate, while also setting SBTs to limit their impact on climate.
Setting SBTs inherently decreases risk exposure to transition risks, such as a sudden carbon tax, by reducing GHG carbon emissions in the first instance. On the other hand, TCFD offers an opportunity to understand through scenario analysis how, for example, a sudden carbon tax could impact their investment portfolios financially.
TCFD doesn’t stop there, it also offers FIs an opportunity to understand the risks from physical climate change and opportunities that climate change presents more generally and report on this from a carbon and climate risk perspective. This Guidance ultimately steers FIs toward setting metrics and targets for avoiding risks, optimising opportunities and aligning with the science for a just transition.