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2 posts from June 2017

29 June 2017

Bringing climate-related reporting in from the cold

After eighteen months of drafting and consultation, the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures, commonly known at the TCFD, has now released its final report of recommendations. The brainchild of Mark Carney, Chair of the FSB and Bank of England Governor, the recommendations seek to improve decision-making by investors, lenders and insurers in respect of the climate change impacts on companies and so manage the potential risks to financial stability. But will a nearly 200-page report drafted in under a year by 32 private sector individuals, including this author, really have such an impact?

Well, the answer is yes. The recommendations cover the broad areas of how boards and management govern climate change and how they integrate it into their strategy, businesses, financial plans and risk management. It also asks that companies disclose various metrics and targets relating to climate change, ranging from carbon emissions to executive remuneration.

Perhaps the most innovative aspect is the proposal that companies consider how their businesses will fare under different climate scenarios, including the 2oC outcome that the Paris Agreement seeks to meet.

The eagle-eyed will notice a few differences to the draft Phase II report, in response to the public consultation. The most substantial of these relates to materiality: the report clarifies that the recommended disclosures on strategy and metrics & targets are subject to materiality tests, and in the case of non-financial companies, need only be disclosed where annual revenues exceed $1 billion. Where these are non-material they can be disclosed outside of annual report and accounts. The disclosures for governance and risk management remain for all companies regardless of materiality. There has also been some simplification of metrics & targets for non-financial sectors, to provide clarity and consistency; an encouragement for further development of metrics in the financial sector, clarifying the link to financial impacts; and providing additional guidance and standard scenarios to ease implementation.

So, what happens next? After all, the recommendations are voluntary, so why might companies adopt them if governments, at least in the short term, are unlikely to regulate?

The answer lies in the power of the markets, and more precisely that of investors. Asset owners, such as pension funds whose equity and debt holdings make up a large chunk of the capital markets, sit at the top of the investment and credit chain. They sit to win or lose by the decisions they make in respect of the companies they invest in, and how these companies in turn manage the physical and transition risks - and opportunities - arising from climate change. The early signs are that they, and the asset managers who represent them, are taking this seriously: a slew of heavyweights, from Blackrock to Aviva, Axa and Legal & General, have all issued statements making climate a top engagement priority and promising action if companies do not disclose in line with the TCFD recommendations. And in recent weeks they have turned words into action, for example with Exxon and Occidental in the US.

But it's not just investors who will bring pressure to bear on companies, requiring them to better disclose the impacts of our changing climate. Ratings agencies, who were already making progress with ESG and green bond ratings, also have the opportunity to see how better disclosure by companies can enable them to consider the financial impacts of climate change in credit and equity ratings. In addition, stock exchanges and securities regulators will have the ability to encourage or mandate better climate disclosure in listings; take the Brazilian exchange, B3, as an example where a voluntary “disclose or explain” approach has resulted in some 70% of listed companies making ESG disclosures.

And finally, I turn to my own profession. The consultancies and auditors can work at two levels: firstly with the main accounting standards boards translating climate-related disclosures into financial ones; and secondly with clients both advising on the implementation of the recommendations and working with them to integrate these disclosures into financial reports.

It is only through these four market “levers” - investors, ratings agencies, stock exchanges and consultancies - that we can bridge the gap between voluntary disclosure and mandatory reporting. And it’s entirely appropriate to take this path, giving the market the opportunity to develop consistent, comparable disclosures and providing companies the encouragement to do so. After all, a carrot is easier to eat than a stick.

Jon Williams

Jon Williams | Partner, Sustainability & Climate Change
Profile | Email | +44 (0)20 7804 3978


More articles by Jon Williams

12 June 2017

Industry 4.0 as an enabler of the Circular Economy: preventing the waste of value and permitting the recovery of value from waste

Once upon a time, we were all farmers – we produced little waste and what was produced was mostly biodegradable. Then the first industrial revolution occurred. Powered by the steam engine, the by-product of manufacturing was unprecedented amounts of waste. Ever since, our economy has essentially been a linear one: a one-way street in which we take resources from nature, make them into products, and then eventually dispose the very products we created as waste.

Now we are witnessing the fourth industrial revolution, this time driven by digitalization and the huge volumes of data it generates. And whereas the first industrial revolution introduced waste, the fourth has the potential to eliminate waste altogether. It supports circular business models that only consume renewable resources and keep materials from finite stocks in an infinite loop.

Scarcity is driving the circular economy

One of the drivers in the shift towards a Circular Economy, is the volatility in resource costs, mostly as it introduces risk - increasing prices, reducing quality and certainty of supply - that could ultimately impact the bottom line. This is one reason why Danone, for example, prefers bio-based rather than fossil-based plastics for the dairy product packaging. Supply risk factors also play an important role in Apple’s ambition to end its reliance on mined resources, using recycled materials such as aluminum, copper, tin, and tungsten instead in its devices. Scarcity also prompts authorities to impose tighter environmental standards on producers and consumers in order to reduce the use of resources.

Recovering value is key

Circular business model transformations however are not primarily about resource conservation or waste reduction. The essence of turning linear models into circular ones is to not only prevent loss of value, but also recover it. The diagram below shows that when feedback loops are shorter (i.e. the smaller the circles), more value is recovered. For example, the scrap value of a smartphone is only a few dollars worth of precious metals. But taking a refurbishment approach means that when a defunct smartphone is refurbished with a new touchscreen, a battery and a software update, it's worth several hundred dollars again. There is a strong business case to integrate circular economy models into business as usual and strategy.

170518-165551-SW-OS_diagram_pg 4_v5

A pervasive shift in customer behavior

In addition to an increasing awareness of the need to adopt more sustainable ways of living, the primary driver behind the transition to a circular economy is a change in customer behavior. Consumers increasingly prefer access to a service above ownership of the goods that provide it (e.g. mobility versus cars). And we see companies adopting the same reasoning in order to remain agile in a fast-changing and uncertain world, unencumbered from investing in costly infrastructure.

Enabled by technological breakthroughs

Whereas the main driver is a change in customer behaviour, the main enabler of many circular strategies are technological breakthroughs. Social platforms for example facilitate sharing of an ever wider array of services and goods, from a place to stay during a city trip using Airbnb and city-to-city car sharing with Blablacar to borrowing a neighbour's power tool via Peerby Go.

Where Industry 4.0 meets the circular economy

This is where the transitions to Industry 4.0 and the circular economy reinforce each other. The various technologies under the umbrella of Industry 4.0 serve as a major enabler of circular strategies. At the same time, this contribution to a circular economic model gives the development of Industry 4.0 purpose and momentum. The following examples show how this may occur in practice.

1. Internet of Things (IoT) & data analytics: Products that are connected to the IoT allow manufacturers to control and analyse their performance at a distance and collect usage data. This provides a foundation for many circular business models:

  • Car sharing platforms require data about the whereabouts, the usage and the condition of each car.
  • In Products-as-a-Service (PaaS) models, manufacturers retain ownership and the responsibility for the flawless operation of their equipment. They can only do so when they are able to monitor and analyse performance at a distance. In addition, PaaS models allow capacity to be tailored to fluctuating demand, and provide manufacturers an incentive to produce goods that are durable, which should both help to reduce waste.
  • Circular strategies like recycling, remanufacturing and parts harvesting likewise require the collection and analysis of data about the usage and condition of parts.

2. Robotics: Human errors are the most common cause of product errors, both during the initial manufacturing process and in the use of the product. Advances in robotics allow manufacturers to employ robots in an increasing number of applications, thereby increasing yield and reducing waste, as well as extending product life times.

3. Additive manufacturing or 3D printing: The use of 3D printing for the on-demand production of spare parts improves maintainability and extends the life cycle of products and equipment. It also affects product design in that future 3D part maintenance can be built in to the process.

What is becoming increasingly clear, is that where Industry 4.0 and the circular economy meet, the waste of value is prevented, and the value of waste is recovered.

To find out more about the Circular Economy and what businesses can do, go to: www.pwc.com/circularbusiness 

Jan-Willem van den Beukel | Manager, Sustainability & Climate Change
Email | +31 (0)88 792 46 58