With climate change impacts on the rise, physical, and transition climate risks pose a substantial threat to exposed businesses. In particular, in a globally interlinked economic system, the risks of physical climate impacts affect supply and production chains as well as sales markets.
Swiss businesses, especially capital-intensive ones, and supply-chain-dependent sectors operating in more vulnerable parts of Switzerland and the world face the biggest impacts. Due to the consequences caused by the materialization of these risks, companies, stakeholders, and financial markets require clear, comprehensive, and high-quality insights on the financial risk due to climate change.
One framework to disclose such risks and opportunities has been created by the Task Force on Climate-related Financial Disclosures (TCFD), an expert group mandated by the Financial Stability Board. This framework covers the four pillars ‘governance’, ‘strategy’, ‘risk management’, and ‘metrics and targets’, and has quickly been adopted as international best practice.
Since the publication of the recommendations in 2017, momentum behind the framework has grown significantly worldwide, now totaling:
So far, some Swiss companies have already adopted TCFD requirements on a voluntary basis with supporters increasing from 8 in 2018 to 61 in 2022, mostly from the financial service sector. Also, size seems to play a role with 65% of SMI companies already following the TCFD framework.
Apart from mandatory disclosure, the TCFD framework is also a means of preparation for the future, from identifying climate change risks to designing climate change mitigationand adaptation plans, as well as realizing opportunities. The forward-looking aspect of TCFD disclosure makes it a powerful instrument for internal decision making and external stakeholder engagement on climate-related financial risks and opportunities, their impact and targets set to address them. This allows a company to communicate its strategy and better link climate disclosure with governance.
An aspect often neglected by TCFD supporters is physical climate risk. Over the past years, however, the intensity, frequency, and impact of extreme climate and weather events has increased. According to the World Economic Forum’s 2022 Global Risk Report, damages from extreme weather and climate are perceived and identified as the second most severe risk and 5 of the 10 most severe risks are related to climate. To further reinforce the incorporation of physical climate risk into Swiss companies’ operations and disclosure, exposed companies need to put appropriate governance structures and targets in place. A mean to reach the desired outcome can be by designing appropriate incentives.