In recent years, the Task Force on Climate-related Financial Disclosures (TCFD) has gained momentum as a framework for companies to disclose their climate-related risks and opportunities. While initially focused on financial institutions, the TCFD framework has expanded to include all sectors, including the supply chain. Companies that fail to report climate-related risks may face negative consequences, including reputational damage and a loss of investor confidence. Incorporating TCFD reporting into supply chain management is becoming increasingly important. This article will explore best practices and challenges associated with this integration.
The rationale for pursuing supply chain resource efficiency remains robust from a business perspective.
The presence of risk has always been inherent in the functioning of global supply chains. However, with the advent of climate change, the implications of this risk have become more pronounced and extensive. The escalating frequency of extreme weather events, such as droughts, wildfires, and floods, has heightened the potential hazards to supply chains, jeopardising their capacity to meet the requirements of both consumer and commercial markets. To counteract this challenge, companies must acquire and regularly update their understanding of the short-term, medium-term, and long-term climate-related risks embedded in their supply chain. These actions will enable them to proactively identify and manage these risks and ensure the resilience of their supply chains.
Best Practices for Incorporating TCFD Reporting into SCM:
- It is crucial to map its end-to-end operations and identify assets and dependencies that are operationally critical and vulnerable to extreme weather events, to enhance the supply chain’s resilience. By doing so, it would be possible to develop a data-driven resiliency plan based on weather-related risks at the regional and site level. This exercise would benefit assets and primary suppliers in high-risk geographies like coastal or dryland regions.
- For companies considering or actively pursuing acquisitions, it is becoming increasingly important to establish a comprehensive due diligence process with a strong focus on ESG considerations, particularly concerning supply chains. Creating a playbook for such a process is crucial for its effectiveness. Such a playbook entails evaluating the target’s resiliency to extreme weather events and developing contingency plans accordingly. By doing so, medium- and long-term operational risk can be reduced, and the buyer can avoid overpaying for the asset.
- Incorporating climate-related mitigation strategies into a company’s overall business contingency plans is crucial for preparing situational responses and crisis plans in the event of weather-related disruptions to operations. Conducting frequent forecasting and scenario planning, supplier audits, and simulations can help to identify supply chain vulnerabilities.
- Identification of supply chain vulnerabilities. For example, this could involve identifying alternative trade routes in a drought disrupting maritime shipping on primary routes. Similarly, pre-screening alternative suppliers may be necessary if primary suppliers’ assembly plants are at risk due to tropical cyclone patterns. Stress-testing response plans to ensure business continuity in a storm taking a storage facility or data centre offline may also be necessary.
- Use technology to streamline reporting: The amount of data required for TCFD reporting can be overwhelming, particularly for companies with large and complex supply chains. Technology, such as automated data collection and analysis tools, can help streamline the reporting process and ensure accuracy.
The evaluation and disclosure of climate-related operational risks and the endorsement of resources linked to implementing the carbon neutrality goal by 2040 fall under the purview of Supply Chain, Quality, and Global Operations executives.
Challenges Associated with Incorporating TCFD Reporting into Supply Chain Management:
- Limited data availability: One of the biggest challenges associated with incorporating TCFD reporting into supply chain management is the limited availability of climate-related data. Many suppliers may need more resources or expertise to collect and report on climate-related risks and opportunities, making it difficult for companies to fully assess the climate-related risks associated with their supply chain.
- Lack of standardisation: Another challenge is more standardisation in TCFD reporting. There is no standard format or methodology for reporting despite the TCFD framework’s guidance. Standards can make comparing and analysing data across different supply chains difficult.
- Resistance to change: Incorporating TCFD reporting into supply chain management requires a significant shift in mindset and approach. Some suppliers may resist this change, particularly if they perceive it as an additional burden or expense.
Incorporating TCFD reporting into supply chain management is becoming increasingly important as companies face growing pressure to disclose their climate-related risks and opportunities. To effectively integrate TCFD reporting into supply chain management, companies should identify climate-related risks and opportunities, develop a reporting strategy, collaborate with suppliers, and use technology to streamline reporting. However, there are also challenges associated with this integration, including limited data availability, lack of standardisation, and resistance to change. Companies that successfully navigate these challenges are likely to benefit from increased transparency and improved risk management in their supply chain.
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