This article is sponsored by Eaton.
Expectations for climate action are undeniably heating up for businesses. In the first half of 2021, there has been an increase in headlines about the impacts that investors, banks and governments are having on companies’ climate policies. Consider:
- Asset managers and investors managing nearly $9 trillion announced their adoption of the Net Zero Investing Framework, pledging carbon neutral portfolios and operations by 2050.
- A Dutch court ruled that Royal Dutch Shell’s 2050 net-zero goal was insufficient, and the company must reduce its greenhouse gas emissions by 45 percent by 2030 to meet targets set by the Paris Agreement.
- The White House issued an Executive Order on climate risk and the U.S. Securities and Exchange Commission declared it is reevaluating disclosure rules to include “consistent, comparable and reliable information on climate change.”
- The European Commission is developing rigorous climate reporting standards slated for 2023.
- Finance ministers of the G-7 called for making disclosure of climate-related financial risks compulsory for companies.
These historic shifts in how companies are expected to do business underscore the benefits of voluntary, science-based climate action and disclosure. And it’s becoming clearer that iterative climate action is no longer seen as enough.
Leading companies are committing to science-based greenhouse gas reductions targets alongside carbon neutral aims while also disclosing their climate-related risks and strategies. Climate action, once seen an appendage to corporate strategy, is fast moving to the core.
Helping shape this shift for both corporations and government entities are the reporting recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD, established by the Financial Standards Board in 2017, was created to improve reporting of climate-related financial risks and information.
Today, intelligent power management company Eaton published its first standalone TCFD Report, which includes the company’s governance, strategy, risk management and metrics for climate related risks and opportunities. Here’s our approach and what we learned along the way.
Eaton formalized TCFD as part of its sustainability strategy
Eaton chose to formalize its commitment to climate disclosure by making it part of its long-term sustainability strategy and targets. We are committed to disclosing climate change risks, not only to be transparent, but also to contribute to public discourse on this critical topic. We announced our 2030 sustainability targets in July 2020 during a time when we were grappling with the implications of the unexpected COVID pandemic. It became clear that climate change was an emergency that we could see coming and that, unlike the pandemic, we could take urgent action now to be part of the collective response to mitigating it. As such, Eaton is responding to the pressing need for climate action and to its stakeholders’ expectations of transparency with our sustainability strategy.
The company’s 2030 sustainability targets include a 1.5-degree Celsius science-based greenhouse gas reduction target along with a commitment to transparently communicate sustainability progress. A vital part of that commitment is understanding and disclosing our climate risks using the TCFD standards. Eaton is proud to be among the more than 2,000 companies officially supporting TCFD.
Eaton took a systematic approach
Using the TCFD disclosure framework, we took a methodical approach to our analysis and disclosure process.
- We created a TCFD taskforce. This group was representative of various functions within our company, and we all educated ourselves on the TCFD standards and climate scenario analysis. We also conducted a gap analysis of our current disclosures.
- We sharpened our focus. We leveraged those with experience in climate scenario analysis and climate change impacts. Those experts helped us analyze our business from many angles to understand, at a macro level, where we should narrow our focus. We looked at our operations geographically, reviewed our critical supply chain materials, and our customers and end-markets to sharpen our focus and select which climate scenarios should inform our analysis.
- We conducted climate scenario analysis using climate experts. We used credible climate scenarios from the Intergovernmental Panel on Climate Change, academia and proprietary sources to inform our climate scenario analysis and used that data to inform our climate scenario analysis workshops. From there, we were able to develop four unique pathways to a potential 1.5-degree future with varying impacts to our industry and our business.
- We examined our climate related physical and transition risks and opportunities. Using primarily the International Energy Agency’s Sustainable Development Scenario along with other climate science data, we examined our climate related physical and transition risks. This exercise helped us identify gaps in risk management and future mitigation approaches that we plan to integrate into our enterprise risk management and business continuity management programs. This was also a good way to confirm how our business strategy positions us to take advantage of climate-related opportunities.
The TCFD disclosure process was enlightening. It is eye-opening to see how pervasive the risks are across our businesses globally — potentially affecting everything from Eaton’s physical assets such as our property, plants and equipment, to the impact on our supply chain, employees and customers.
The process revealed serious insights related to the impact climate change has across our operations and businesses. Physical risks such as weather pattern changes are real and could be detrimental to our operations and employees and could disrupt global supply chains. Transition risks such as changing regulations and government policies already have begun and can affect many businesses and industries. However, once you understand the risks, you can plan to mitigate them and ensure that your employees, customers, suppliers and your overall business are prepared for the worst.
In terms of climate-related opportunities, we’re well-positioned to capitalize on some of the most significant growth trends of our lifetime — an energy transition driven by climate change, increase of electrification and explosive growth in digital connectivity.
3 pieces of advice for other first-timers
- Companies should not approach the TCFD disclosure as a narrow climate change reporting exercise but rather view this as a new key element of their strategic planning process. Evaluate not only the significant risks to their businesses but also the enormous new opportunities for new technologies and business models — and set them up for long-term success.
- Familiarize your company with scenario analysis as a planning tool, which entails using a structured framework to challenge your company’s prevailing view of the future. Ask yourself, what if the response to climate change unfolds in these alternate ways? That can be a very challenging exercise.
- View the assessment of climate risk and opportunity as an iterative process. As the science is further refined and understanding evolves, companies will need to update their analysis and subsequent disclosures periodically. But you need to get started. Early adopters likely will be at a distinct advantage given the current expectations and pending regulations.
Eaton’s newly published TCFD report can be found here.