Get started with the TCFD, don't wait for perfection

Here are 5 key insights from Ørsted's experience of implementing the TCFD recommendations, which help companies disclose on the impacts of climate change on their business.

More and more, investors want to know the climate impacts of the companies they invest in. The recommendations of the Task Force on Climate Related Disclosures (TCFD) intend to help companies to provide investors with just such information.

Ørsted is committed to tracking and responding to the actual and potential impacts of climate change on the resilience of our business. We were among the first 500 companies globally to join the TCFD. We have since identified 5 ways in which companies can get started with implementing the recommendations.

In 2018, we conducted a TCFD gap analysis which showed we were largely aligned with the TCFD recommendations and decided to endorse the recommendations in Fall 2018. A TCFD working group comprising six departments was set up to implement low-hanging fruits that could improve TCFD-alignment in the Ørsted Annual Report 2018 (p.16-17). We implemented quick-win outcomes, such as better reporting on existing climate-related risk processes and improving climate-related key performance indicators in CEO and CFO incentive schemes.
A climate scenario analysis followed in 2019 to identify and assess the potential impact of the following scenarios on the company’s business and address the company’s most significant and complex TCFD-related reporting gaps:
  • 5-2°C temperature rise by 2100, anticipating a world that succeeds in meeting global climate targets, with efficient transition to a low-carbon future
  • 3-4°C temperature rise by 2100, anticipating a world that wants to take climate action but struggles to implement.

Physical and transitional aspects were both addressed, with outcomes documented in the Ørsted Annual Report 2019 (p. 63).

So, what are the 5 steps to get started? 
  • 1. Use TCFD to provoke internal thinking and improve external reporting
    The TCFD implementation process has helped us improve internal understanding of climate-related risks and opportunities and provide additional decision-useful climate-related information to investors in the Annual Report.

    Early in the process, it emerged that Ørsted was largely TCFD-aligned but needed to get better at, for example, reporting on the process for defining climate-related risks, disclosing scope 3 emissions and conducting scenario analysis. In the first example, the annual reporting team had to bridge gaps between existing practices on financial reporting with what investors are looking for in terms of climate disclosure. Secondly, the ESG Accounting team executed a project with Sustainability to map Ørsted’s scope 3 greenhouse gas emissions, which made it possible to begin reporting on, and set the company’s first ever target for, value chain emissions. Thirdly, conducting a climate scenario analysis heightened internal understanding of climate risks and the value reporting on these risks can bring to investors.
  • 2. Realistic scoping is key 
    Climate scenario analysis provides information that could help investors take climate-related risks into account when they invest and avoid stranded assets. Therefore, the scenario analysis must focus on the most material risks to the business and on those TCFD recommendations that have most relevance for the business.

    For Ørsted, that meant focusing especially on the physical impacts of climate change for the company’s offshore wind business, which accounted for 87% of EBITDA in 2019. We qualitatively assessed physical impacts of a warming climate, such as changing wind patterns, sea-level rise and extreme waves and weather, as well as climate-related transitional impacts on markets, regulation, technology and reputation. The supply chain and other business units were not assessed. We concluded that our offshore wind business is well-positioned to manage potential climate-related risks under both scenarios, for primarily two reasons:

    • Due to engineering safety factors integrated into the design, offshore wind farms are resilient to physical climate change impacts, such as sea level rise and more extreme weather.
    • Rapid technological advances in the offshore wind industry allows for climate-related risks to be factored into the design of offshore wind farms.
  • 3. Bring experts together from across your business 
    Implementing scenario analysis requires bringing together people from parts of the organisation that normally may not have many reasons to collaborate. Six teams were brought together for the initial TCFD implementation: the sustainability team, the risk team, ESG Accounting, strategy, investor relations and the annual reporting team.

    The subsequent scenario analysis was conducted through research, interviews and an internal workshop with relevant subject matter experts from the Offshore business unit. Cross-cutting collaboration helped build a nuanced picture of the gaps in assessing potential climate-related risks and how to close them systematically, in reporting and in practice.
  • 4. Work constructively with the best available science 
    Climate science is a complex and growing field of knowledge. Employees in specialised roles, such as construction engineers or environmental data specialists, might find it difficult to work with the lack of precision in different climate change models. Since existing scientific research on climate change is still evolving, we found that the most useful approach is to simply work as constructively as possible with the best available science from trusted sources.
  • 5. Don’t wait for perfection, get started 
    It is better to begin the work of TCFD alignment rather than waiting for methodological perfection. At Ørsted, we took the leap into the then largely unknown TCFD landscape and were subsequently named a best practice case in the TCFD Status Report 2019 (p.80-83), which highlighted our disclosure on strategy and metrics & targets. We recommend taking the leap!

    This article was first published as a case study on the TCFD Knowledge Hub