Get started with the TCFD, don't wait for perfection

The TCFD implementation process has helped us improve internal understanding of climate-related risks and opportunities and provide additional decision-useful climate-related information to investors in the Annual Report.

Early in the process, it emerged that Ørsted was largely TCFD-aligned but needed to get better at, for example, reporting on the process for defining climate-related risks, disclosing scope 3 emissions and conducting scenario analysis. In the first example, the annual reporting team had to bridge gaps between existing practices on financial reporting with what investors are looking for in terms of climate disclosure. Secondly, the ESG Accounting team executed a project with Sustainability to map Ørsted’s scope 3 greenhouse gas emissions, which made it possible to begin reporting on, and set the company’s first ever target for, value chain emissions. Thirdly, conducting a climate scenario analysis heightened internal understanding of climate risks and the value reporting on these risks can bring to investors.

Climate scenario analysis provides information that could help investors take climate-related risks into account when they invest and avoid stranded assets. Therefore, the scenario analysis must focus on the most material risks to the business and on those TCFD recommendations that have most relevance for the business.

For Ørsted, that meant focusing especially on the physical impacts of climate change for the company’s offshore wind business, which accounted for 87% of EBITDA in 2019. We qualitatively assessed physical impacts of a warming climate, such as changing wind patterns, sea-level rise and extreme waves and weather, as well as climate-related transitional impacts on markets, regulation, technology and reputation. The supply chain and other business units were not assessed. We concluded that our offshore wind business is well-positioned to manage potential climate-related risks under both scenarios, for primarily two reasons:

• Due to engineering safety factors integrated into the design, offshore wind farms are resilient to physical climate change impacts, such as sea level rise and more extreme weather.
• Rapid technological advances in the offshore wind industry allows for climate-related risks to be factored into the design of offshore wind farms.

Implementing scenario analysis requires bringing together people from parts of the organisation that normally may not have many reasons to collaborate. Six teams were brought together for the initial TCFD implementation: the sustainability team, the risk team, ESG Accounting, strategy, investor relations and the annual reporting team.

The subsequent scenario analysis was conducted through research, interviews and an internal workshop with relevant subject matter experts from the Offshore business unit. Cross-cutting collaboration helped build a nuanced picture of the gaps in assessing potential climate-related risks and how to close them systematically, in reporting and in practice.

Climate science is a complex and growing field of knowledge. Employees in specialised roles, such as construction engineers or environmental data specialists, might find it difficult to work with the lack of precision in different climate change models. Since existing scientific research on climate change is still evolving, we found that the most useful approach is to simply work as constructively as possible with the best available science from trusted sources.

It is better to begin the work of TCFD alignment rather than waiting for methodological perfection. At Ørsted, we took the leap into the then largely unknown TCFD landscape and were subsequently named a best practice case in the TCFD Status Report 2019 (p.80-83), which highlighted our disclosure on strategy and metrics & targets. We recommend taking the leap!

This article was first published as a case study on the TCFD Knowledge Hub