Our fourth blog in the Managing the risks and opportunities of climate change in the TMT industry series will home in on what we see as key climate priorities for the TMT industry.
Climate risks – and the opportunities associated with those risks – are in a constant state of flux. The physical impacts of climate change, shifting ESG and reputational pressures, the potential effects on the cost of capital, and the employee value proposition that will help companies thrive through transition are among the factors shaping how TMT companies will need to respond.
A good starting point is to become familiar with the TCFD framework and produce a TCFD report.
As outlined in our third blog, Facing up to climate-related risks and pressures, the TCFD is of growing importance as it is being embedded into regulatory reporting requirements. Such reporting is mandatory in Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland and the UK, where TCFD-aligned disclosures became mandatory in April 2022. The G7 nations have also openly supported mandatory reporting based on the TCFD.
At the heart of climate disclosure requirements is the need to understand whether the risks and opportunities from climate change are given sufficient prominence in the corporate governance and strategic planning. TCFD reporting focuses attention on a forward-looking view of corporate exposure to climate change exemplified by the inclusion of plans for “transitioning to the low carbon economy” into the expected strategy disclosures under the TCFD framework.
Businesses that look upon TCFD as a distracting compliance-only framework will not receive the full benefit from the effort involved. Those that look beyond the framework will enjoy resilient climate risk strategies that put businesses in a strong position to thrive in changing times.
The use of scenario analyses is particularly important in modelling future risk exposure as well as testing the resilience of an organisation’s strategy. Transition and physical risk analyses need to be delivered together so that both transition and adaptation plans are coordinated.
The Financial Stability Board (FSB) TFCD 2021 status report showed that, relative to other industries, the TMT sector had ground to make up on disclosures. Of the companies making disclosures (including reporting through 2020), around a quarter had reached the recommended level on ‘strategic risks and opportunities’ and the ‘strategic impact of climate change including use of relevant metrics and targets’, although fewer have been able to demonstrate the resilience of climate-related strategy. Progress on governance and operational risk management, however, was lagging behind. This disparity poses the question of whether climate risks (current or forward looking) are being sufficiently and accurately identified, assessed and managed. Fast forward to 2023, the percent disclosing information aligned with metrics and targets increased 67%, improving the industry picture somewhat. Please refer to the Financial Stability Board (FSB)’s 2023 report for details.
A further point flagged in the report was that sectors considered to be less carbon intensive disclose less. They noted that across all five regions, technology and media companies had significantly lower levels of disclosure compared to companies in other industries. The lowest level of reporting was on resilience of companies’ strategies under different climate-related scenarios (Strategy c). Yet as technology is described as a key enabler of a transition to net zero, there is both a risk of not keeping pace, and an opportunity to accelerate and support the transition of other sectors.
The growth in net zero targets and in climate risk analysis by the financial services industry is driving an increased demand for quality disclosure data. Regulators are also increasingly mandating climate-related disclosure. This pincer movement is focusing on risk assessment and management, portfolio alignment to the 2015 Paris Climate Agreement pathways and emissions, and the use of benchmarks and indices.
As we have discussed previously, greenhouse gas (GHG) emissions are now in the cross-hairs of global regulators. A TMT company that fails to manage emissions can face both public and investor backlash and serious penalties. While technology has contributed to climate change, it is worth reminding ourselves that new and efficient technologies can help reduce net emissions going forward. Back in 2019, it was shown that readily-available technological solutions already existed for more than 70% of today’s emissions.
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|Why climate priorities are essential for the global TMT sector