Upcoming climate reporting to trigger strategic reviews

This issue affects the same Swiss companies that are subject to the new non-financial reporting rules as per the revised Swiss Code of Obligations (CO) – that is, publicly traded companies or financial institutions supervised by FINMA with at least 500 FTEs and either a total balance sheet of CHF20m or total revenues of CHF 40m (on a consolidated basis including controlled entities abroad). There are more than 200 such companies in Switzerland.

Among the affected companies, the sense of urgency should be highest among those that have not yet embarked on a journey to become TCFD-ready.

Climate change is one of the great challenges faced by humanity.  

In this context, 194 nations signed the Paris Agreement in April 2016, pledging to implement actions to limit global warming to “well below” 2 C, ideally 1.5 C . While supra-national discussions on the implementation specifics have continued since then – most recently at COP27 in Egypt  – many countries have started acting, by developing their own targets and action plans.

The European Union (EU), for example, has written into law a requirement to become “climate neutral” by 2050 and to cut greenhouse gas (GHG) emissions by 55% by 2030 . Switzerland has published a climate strategy that aims at net zero emissions by 2050 and a reduction by half by 2030, with partial counting of its emissions abroad   .

There is strong consensus that to achieve these targets, more transparency on the climate impact of business activities is required. Consequently, over the course of 2022, many countries introduced new rules on non-financial reporting requirements – both in Switzerland (revised Code of Obligations ) as well as in several foreign jurisdictions that are important for Swiss businesses (e.g. in the EU with the CSRD , or in the UK with its TCFD-based climate-related disclosure regime ).

As a result, by now, most large Swiss companies are aware that external reporting requirements are changing. Thanks to the captioned ordinance, it is now clear what level of detail is expected of such reporting – that recommended by the TCFD.

However, in our view, the implications go beyond reporting, for the reasons outlined below.

The TCFD’s specific disclosure recommendations are too comprehensive to discuss in this blog post. 

The key aspect to be aware of is that although the TCFD is a disclosure framework, it will indirectly result in increased pressure on companies with a sub-par climate contribution. Originally, the TCFD was born out of the desire to enable investors, lenders and insurance underwriters to assess risks related to climate change . As such, its core aim is to improve the quality of disclosures – it does not directly mandate taking climate action. However, the powerful idea applied by lawmakers in making the TCFD the regulatory baseline is that once companies begin to disclose better, the pressure on low performers to improve will increase, as their sub-par performance becomes visible when the “lights are turned on”.

Besides such an indirect effect, the TCFD framework also explicitly asks for reporting on areas that will require a strategic review to be able to properly report on them, for example:

1. Governance: the TCFD asks to describe the role of the board and management in relation to assessing climate-related risks and opportunities. In our experience, such governance is not sufficiently institutionalized at many public large Swiss corporates. Consequently, there will likely be a need to redefine roles and responsibilities at the highest levels of the organization for many.
2. Strategy: the TCFD asks for disclosure of climate-related risks and opportunities, with an explicit recommendation to perform scenario analysis covering both physical as well as transition risks. Such scenario-based analysis is new to many organizations and will be a challenge for many. Moreover, investors will review the declared risks and opportunities and will look out for whether they are properly reflected in the overall corporate strategy – for example, if a key transition risk relates to the carbon footprint of your products in a world with higher carbon prices, do you have a proper decarbonization plan, or are you planning to re-shuffle your product portfolio towards lower carbon products?
3. Metrics: the TCFD mandates the disclosure of GHG emissions (Scope 1, Scope 2 and in many cases Scope 3), as well as relevant future targets. Today, only about one third of Switzerland’s largest 100 companies say that they report in line with TCFD recommendations – meaning two thirds don’t. Setting credible decarbonization targets will require significant strategy work for many companies, as they will need to explore available technologies enabling decarbonization, model the cost impact on its products, consider to what extent such costs can be passed on to customers, think through the viability of business and operating model re-design (e.g. circular-economy based models that require new ways of interacting customers and suppliers), etc. 

We suggest Swiss companies make use of the remaining 12 months before the ordinance enters into force by applying a two-pronged approach entailing:

1.  A corporate strategy review, led by the board or by the CEO, considering:
   

• Customers: are your customers changing their purchasing behavior in favor of low-carbon products/suppliers? Have they set any Scope 3 reduction targets that will trickle down to you? Are any new market segments emerging in a low carbon-world?
• Competition: what’s your climate-related ambition and performance compared to your competitors?
• Investors: considering your capital structure, how are the expectations of your investors or lenders changing? Can becoming more sustainable lower your cost of capital?
• Regulation: what regulation can be expected in your sector over in the mid-term that will change the economics of your business? (e.g. plastic taxes, carbon pricing, regulations requiring repairability or recycling, etc.)
• Employees: to what extent is becoming a better climate performer a potential value driver in terms of improved attraction and retention?
• Technology: to what extent do your current processes and technologies enable you to monitor and actively manage your climate performance appropriately? Are any new technologies emerging that might be game changers to your sustainability transformation?
• Suppliers: what is the role of your suppliers in relation to your climate-related performance? 
• Governance: do you have clear roles and responsibilities? Are these roles prominent enough to enable you to effectively drive and coordinate cross-functional transformation?
• Physical risks & transition risks: how exposed are you to risks stemming from climate change, both in terms of physical risk (in a world where serious climate change materializes) and transition risk (in a world where increasingly aggressive mitigating policy action is taken)?
• Decarbonization: what would it take to decarbonize your business to align with the ambitions of the official Swiss climate targets ? What implications would such a decarbonization path have across your business and operating model?

2. A reporting readiness assessment, led by the responsible for reporting (e.g. CFO), focused on understanding the asks of the TCFD, how those compare to current reporting contents and procedures (gap analysis) and how potential gaps can be closed.

In combination, these two workstreams will enable CEOs to derive actual value out of what might seem as a “tick-the-box” exercise only at first. They will realize through this process that both the risks and opportunities from climate change are real and already visible today, demanding adaptation and mitigation measures along their entire value chain.

By following this two-pronged approach, companies can minimize the risk of being “caught in the headlights” once TCFD-based reporting starts. In combination, these two workstreams will enable them to clearly communicate to stakeholders that they understand and proactively manage their climate-related risks – while being ready to capture the opportunities presented by a lower carbon world.