TCFD Alignment Maturity Assessment
YouTube presentation can be found here: TCFD Alignment Maturity Assessment - build your resilience in climate-related corporate governance
Over the past few decades, the level of thinking and altruism that has gone into developing the sustainability reporting frameworks and standards has been both laudable and monumental. Whilst these frameworks & standards have succeeded in their intention to bring structure to the interpretation & disclosures of sustainability risks, they have come at the cost of some confusion across the business community.
In trying to understand this confusion better I spoke to some business leaders on the matter. From this investigation, it seems that the frameworks and standards are understood, as is the approach to selecting a suitable framework. However, there is an obvious hesitancy to invest in the organisation’s sustainable development. Where does this hesitancy come from? From these conversations I believe that if you remove all the factors around capacity, knowledge, techniques, budget and so forth, there are two main reasons for this hesitancy in selecting a framework and then actually adopting it:
There is a sense of shooting in the dark – “…How can we as an organisation ensure that our commitment to such an investment will not eventually require a radical pivot in the coming years, especially given that the sustainability reporting landscape is still evolving”.
There is an identity issue - For example, not to digress; but if you give someone an action plan to quit smoking or lose weight, then such actions are likely to be futile or just a temporary façade until we address the problem at the level of the patients identity and their core values. This concept can be experienced in organisations too where such actions in the absence of consideration to the corporate identity are akin to that same superficial façade, better known as Greenwashing.
This confusion reveals the fragility of jumping into an incumbent sustainability framework & standard without considering the organisations identity and culture in the context for Sustainable Development. It will eventually turn out out to be chaotic and come at the cost of scale and crucial innovation, unless your organisation is able to measure their adoption, in a structured, repeatable, manageable, and optimisable manner. For this to happen, we need to use an enterprise level methodology; a methodology rooted in sustainable development but behaves like an anchor point.
How can the TCFD Alignment Maturity Assessment help your organisation now? Before I answer this, we need to quickly get a little more context into the TCFD itself and then stabilise the terms around frameworks and standards.
A quick introduction to the TCFD
The Taskforce on Climate-Related Financial Disclosures (TCFD) has been convened by the G20 Countries to address the climate related risks on the global financial system. They have done this by publishing comprehensive guidance for businesses on their climate-related financial disclosures. This guidance is principles based rather than rules based, allowing organisations enough flex to transition their business with minimal impact, maximum benefits and increased alignment to the TCFD requirements.
The TCFD guidance is a framework rooted in four main pillars, namely 1. Governance 2. Strategy 3. Risk Management and 4. Metrics & Targets. Within each of these pillars are guiding statements. For example, under the 1. Governance pillar, if an organisation can a) describe the boards oversight of climate related risks/opportunities and b) describe the managements role in assessing and managing risks/opportunities; it would be considered that the organisations is somewhat aligned to the Governance pillar.
There are 11 similar validation statements across all 4 pillars. Of course, it is certainly not just a case of confirming against these 11 statements whereby you become TCFD aligned. Whilst the TCFD implementation guidance then goes into some further detail, herein lies the problem of ineffectiveness through scale, organisational biases and a lack of objectivity.
Framework or standard?
Today it is not uncommon for business leaders to refer to Sustainability Frameworks and Standards interchangeably. People can often use the same words and refer to different things, so even though sustainability reporting is an evolving landscape, it would make sense to stabilise the terminology before we revert to the TCFD assessment.
The TCFD is not a reporting standard, rather it is a framework of structured recommendations to help businesses get a forward-looking lens into their climate risk exposures. Becoming aligned to the TCFD recommendations can be achieved through the adoption of certain standards. In other words, if organisations are to deliver against the four pillars of the TCFD, the TCFD suggest using a reporting standard.
Reporting standards: The more established and prominent standards are the ISSB (consolidating SASB and the IIRC) the GRI, CDP, CDSB and the ISO, each with their own purpose, scope, reporting channels and audience appeal - These organisations are referred to as Standard Setters. For example, if your organisation is using the CDP’s disclosure platform, you are likely to appeal to investors with a bias towards water utilisation, forest information and of course climate risks. Given that the issue of sustainability has impacts that are wider than just climate-change, it becomes necessary for an organisation to adopt a comprehensive standard, not only manage their climate-related risks & opportunities but also manage their social relationships/impacts; especially given that societies have an unbreakable relationship with climate. For such comprehensive coverage, the GRI may be adopted for as they offer a wider scope to help your organisation, they appeal to all audiences and stakeholders whilst capturing the essence of sustainability in its Environmental, Social & Governance (ESG) related context. In summary, the TCFD recognise the standard setters as a necessary mechanism to align with the TCFD guidance.
Even though these incumbent standards continue to evolve, they are comprehensive enough to cover most sectors and help organisations align with the TCFD recommendations. It should also be noted that national level supervisory or legislative authority will supersede and even direct an organisations choice of which standards are to be adopted. Therefore, given the global authority that these standard setters have already attained, they have become a necessary component to enable national regulators and government ministries. Take for example the UK’s supervisory guidance for Asset Managers where we see the FCA’s Sustainability Disclosure Requirements (SDR) have directed adoption of the ISSB’s reporting standards as the core component to baseline corporate disclosures.
The challenge with TCFD is the fact that its adoption/alignment is a journey and without a TCFD specific maturity assessment, that journey cannot be measured with precision. The static nature of questionnaires offered by standard setters are not adequate to meet the complex demands of organisational processes. The TCFD is reliant on these incumbent reporting standards to achieve its outcomes but those standards do not incorporate (scaleable) objective measures. For example, an organisations execution of a process (or initiative) can evolve through various phases of maturity where, at its lowest level; an organisation runs chaotic processes/initiatives. At this lowest level of maturity, the business has pockets of awareness (about these processes/initiatives) but they are not defined across the enterprise hence they cannot be managed and certainly cannot be optimised. Given the low latency and dynamic nature of data lineage (and thus the dynamic nature of materiality), your organisation absolutely must be measuring against these incremental levels of TCFD alignment.
It is also important to mention that the philosophical underpinnings of the TCFD framework are different from the GRI, ISSB, CDP and so on. Not least because the TCFD guidance is hinged to climate-related risks, has G20 coordination and therefore lends itself to be enshrined in domestic legislation. So, this is precisely why the TCFD is best placed as an organisational anchor into sustainable development.
How did it get confusing? Well, I have my own idea on this. These standards are designed, created and governed by core principles and concepts; or in other words, these very standards are built through their own native frameworks. This why we see these two terms used interchangeably but with different intentions. All standards are built from a framework but not all frameworks are standards. Furthermore, business leaders may lack the trust that a framework questionnaire would objectively measure those very dynamic and complex processes that only they really understand. Thirdly, the materiality debate is being pulled about and given framework selection is driven by the materiality assessment, it has been seen to create some confusion (albeit not the biggest reason).
Coordinating the frameworks & standards: Across these frameworks and standards, there has been Statement of Intent to Work Together Towards Comprehensive Corporate Reporting and the mappings into the TCFD recommendations can be found in this document on Page 19 & 20.
A concluding analogy: think about the TCFD as your organisations map, the Standard Setters as the roads/pathway and Sustainability as the destination.
The current approach to sustainable development initiatives:
We currently hear about how organisations start their sustainable development approach summarised as follows:
1. Conduct a materiality assessment – i.e. identify climate related topics which your audience need to know about.
2. Gap analysis - map out their associated processes and underlying technologies and data points which drive material topics.
3. Select an appropriate framework and then start/continue a programme to align to that chosen framework.
4. Aggregate this knowledge into the strategy, scenario development, risk management and targets and tie back to TCFD.
Of course, this is a very blurry summary because scenario development for example, would be a programme within itself; but these short few points capture the essence of the current thinking.
On the face of it, this approach may seem fine; but eventually you will need to demonstrate very specific TCFD alignment factors to asset owners, asset managers and your vast community of stakeholders. Asset owners are increasingly aware of tick-box exercises versus the objective endorsement of sustainable development. Our aim with the TCFD Alignment Maturity Assessment is to enable your TCFD alignment without compromising the necessity to scale and leverage opportunities to innovate along the journey. So, at that moment of shareholder engagement or when TCFD is enshrined in Law; it will not suffice to merely report that “we are using ISSB, GRI to deliver TCFD”. Every single business leader that I have spoken to, without fail has recognised the threat of tick-box exercises and how this concept is now being patched over with a false sense of legitimacy.
How does our TCFD Alignment Maturity Assessment work?
Please look at the following five validation statements below. We use these part of our TCFD alignment maturity assessment. This specific example related to the Governance Pillar and relates to a real use-case. I encourage you to also think about your organisation too and think about what option would you select from fully true/partially true/false? Let’s go…
The board have alerted the management teams regarding their need to monitor and disclose progress against the goals and targets related to climate issues. The global business is aware and a budget has been assigned to achieve this. Fully True / Partially True / False
We have a repeatable process in place that enables the board to monitor progress against the goals and targets related to climate issues. However, this process is not yet defined across the organisation nor is it referenced in our disclosures Fully True / Partially True / False
In our disclosures we can demonstrate that the board have a defined method of monitoring progress against goals and targets related to climate issues, but scheduled monitoring is yet to be embedded in board activities Fully True / Partially True / False
In our disclosures we can demonstrate how the board monitors progress against the goals and targets specifically related to climate issues and how the board quantifies these climate issues. Fully True / Partially True / False
In our disclosures we can demonstrate how the board monitors progress against the goals and targets specifically related to climate issues and how the board can adapt its monitoring process dynamically* with external climate related issues. Fully True / Partially True / False
As you can see, from the results above, this organisation was already quite mature in their TCFD alignment (Governance Pillar) where comment #3 was Partially True. Therefore, comment #4 and #5 would default as False. Each statement has a key word which is consistent across all TCFD pillars and there are 250 such statements in the Governance pillar. In this example, you will see that the key word in comment #3 is = “defined”, where the client is able to demonstrate a “defined” method which requires improvements. We then review this on a quarterly basis and when the client can eventually confirm that comment #3 is Fully True, we then run an assessment on comment #4 which was False. Note that a higher-level execution plan would be created to continue the maturity towards comment #4. All in all, by using this assessment you will not be ticking off a standard-setter statement that applies to a sector or industry, but you will have this tool to essentially weave into these standards.
Do we really need this?
It is important to understand at this point that this TCFD maturity assessment is predicated on the need to retain the business DNA and organisational culture. It does not, and philosophically cannot replace the need for an established standard, especially the incumbent standards. The need for this assessment is therefore a necessity in its own right, not only to help you further embrace the requirements of the standard setter but to be able to measure & track your commitments in real, process driven business terms.
Let’s continue to assess the need for a TCFD Alignment Maturity Assessment, by exploring the limitations of the standard.
If we were to, for example, use the CDP (CC1.1 to CC1.2a) framework questions we will notice that there is an attempt to curb subjectivity by asking you to select an option from the table (for example C1.1.b). Let’s look at the main issue with this approach in light of business processes - After selecting an option in the table, how will your organisation continue to manage and measure against it objectively, on a quarterly basis? Of course, by answering that CDP question positively, you will eventually tick off the TCFDs recommendations to “Describe the board’s oversight of climate-related risks & opportunities” as per the guidance within the Governance Pillar. However, asset owners are astute and care about the depth in your answers. They also recognise the limitations in tick-box exercises and are measuring against this trap.
In our TCFD maturity assessment we use a structured assessment hierarchy. We start at the lowest level of alignment which is “a sense of awareness about sustainable development”. The assessment then walks up incremental statements to the highest level of alignment where the organisation has “a dynamically optimisable process for monitoring specific climate issues”. So for example, regarding the Governance Pillar, please consider whether your process to inform Management or Boards about climate related issues is standardised internally? will this process be repeatable? or will it be defined enterprise-wide? At what level of maturity do you sign off as TCFD aligned? Again, I reiterate that the CDP, GRI, ISSB and other frameworks/standards will eventually deliver your TCFD alignment in at face value. However, we must note that these standards address the sector and industry level and your business will be towed through your sustainable development like a caravan.
So, whilst your sustainability development initiatives may be born in the lens of the standard setters, but they cannot live in this lens, nor can they live in the lens of the audience for your disclosures. Just like your company balance sheet and cashflow statement offers a realistic snapshot into the future financial prospects of your organisation, a comprehensive TCFD alignment maturity assessment offers the necessary equivalent in your Sustainable Development.
The scale of the assessment:
These TCFD Alignment Maturity Assessment has validation statements which are structured in Blocks. So 5 statements is equal to 1 Block. We call this a Validation Statement Block (VSBs). In our TCFD Maturity Assessment for the Governance Pillar there are over 50 blocks to consider meaning an assessment of (at least) 250 validation statements in just the Governance Pillar of the assessment. I expect this will soon become 750-1000 statements over the four pillars, so we absolutely welcome support in helping us test these in your organisation. We will then work on a quarterly basis to review the maturity in your alignment with the TCFD recommendations. Furthermore, we have also started training other consultants to use this assessment tool and it will be available on (the currently dormant) www.esgtools.com in 2022.
Each statement also has its corresponding probing questions so, once the full maturity assessment is released, we can train your staff and license it in-house which would be more cost effective than having an advisor perform the work.
If you would like to test some of these statements in your organisation, or want to initiate a full TCFD Alignment Maturity Assessment, then please do not hesitate to reach out through my contact form.