The Time to Align with CDP and TCFD Is Right Now

Written By Matthew Novak, Senior Consultant

January 12, 2022

The new year is here—and with it comes new corporate climate risk disclosure requirements. The US Securities and Exchange Commission (SEC) is poised to put its new rules into effect this year. While the specifics of the requirements are not yet known, we have strong indications of what to expect—and all evidence points to the growing importance of alignment with today’s most popular climate risk reporting frameworks: the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework and the CDP questionnaire.

Why we believe CDP and TCFD are more important than ever.

Back in August, SEC Chair Gary Gensler telegraphed in broad brush strokes what the forthcoming SEC requirements will entail, specifically signaling that the new climate disclosure regime should be inspired by the (TCFD) climate risk reporting framework. In addition, with the recent growth of TCFD and the CDP questionnaire, climate risk reporting has become standardized in recent years. There is no reason to believe that the SEC will reinvent the wheel. So, its disclosure requirements are highly likely to align with the four basic categories that these two frameworks already collectively emphasize, which are as follows:

  1. How companies impact the climate quantified through greenhouse gas emissions and emissions reduction targets
  2. How climate change could impact the company through risk assessments and disclosure of risk management processes specifically tied to climate-related risks and opportunities
  3. The integration of climate-related risks and opportunities into business strategy, which is often coupled with utilizing scenario analysis specifically as it relates to future climate-related impacts
  4. The governance of climate-related risks and opportunities within an organization both on the board and within management

Until the SEC requirements are officially released, we will not know to what extent each of the four categories will be addressed. However, Gary Gensler has said publicly that the SEC disclosures will almost certainly be included in the annual Form 10-K, which will make the new disclosures auditable.

Get started sooner than later.

There will most likely be a grace period for companies to comply with the new SEC disclosure requirements. However, depending on where your organization is at and the geographic footprint of your operations, calculating greenhouse gas emissions and setting targets could take several months and potentially longer if your business is looking to calculate scope 3 emissions throughout the value chain. Assessing climate-related risks and opportunities and determining which risks are the most salient may take a few months longer still. Finally, establishing management responsibilities and board oversight will depend on how often the board meets and will require deeper understanding of the most pressing climate risks, which, again, takes time.

While all of this may seem as daunting, there are several steps you can take to jump start your climate change strategy. Responding to the CDP questionnaire and aligning to the TCFD framework—preferably sooner than later—is one of the most important. Taking these steps now will provide a guidepost to how organizations can begin tracking, reporting, and integrating climate-related risks into the longer-term strategy, which are some of the keys to preparing for compliance with upcoming SEC requirements. Plus, ESG rating agencies focus quite heavily on climate risk. So, the sooner your company can begin this process, the sooner you’ll see ESG rating scores increase in this area.

Is one framework more important than the other?

Currently, best practice is to both answer the CDP questionnaire and align with TCFD. This is partly because some stakeholders prefer one framework while some prefer the other. For example, BlackRock specifically wants companies to align with TCFD. However, if your company has business clients that answer the CDP questionnaire, those clients can request that your organization fill out the CDP questionnaire. In addition, if your organization is interested in completing RFPs, an increasing number of potential RFPs are being tied to one or both climate-related framework.

The bottom line is that both frameworks matter. Adopting them both is the best way to cover all your bases.

Consider responding to the CDP questionnaire first.

The good news is that the work you do for one framework can help simplify and expedite what you need to do for the other. While there are many similarities between the two frameworks, the CDP questionnaire is more granular and data-focused with sections not just about greenhouse gas emissions, but also about the sources of energy consumption. The TCFD puts a heavier focus on climate risk management and integrating those risks into business strategy.

While the CDP process can be intense, it makes sense to start here for several reasons. First, the questionnaire is only open from April through the end of July, so it’s important to hit this window. In addition, it is often easier to begin tracking the relevant data, and then using that data to gain buy in from the internal stakeholders who will need to be involved in business strategy discussions and decisions. Because of the granularity of the questions, the CDP provides responding companies deeper insight into what climate risk means. As climate-related risks become a larger focus internally, companies will be better positioned for alignment with the TCFD framework, which can be disclosed publicly at any point during the year.

Framework alignment is challenging work that you won’t regret doing.

It’s easy for organizations to feel overwhelmed by climate risk management and reporting, especially with two separate frameworks to adopt. However, climate change will impact every business over the long-term. Getting ahead of it in the short-term is the best way to ensure your organization’s sustainability, improve your ESG scores, and prepare for compliance with auditable disclosure requirements that will (very soon) no longer be optional.

Keep in mind that you don’t have to go it alone. Specialized consulting firms like Clermont Partners can help. At Clermont, we focus on meeting your company where it is at, working hand-in-hand with internal teams to drive the right discussions while building knowledge and confidence on how to collect the relevant information and publicly report it. Reach out to start the conversation. And see how we can help you make these critical climate risk management steps much easier to take.

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