Climate and ESG: Manifest Climate Explains the Similarities and Differences

Manifest Climate, a leading climate technology solutions provider, highlights why climate goes beyond ESG and how the TCFD can be applied to both.

Considerations related to Environmental, Social, and Governance (ESG) factors, as well as climate, are regularly conflated, but there are important distinctions and connections between the two. These differences are crucial to understand for investors who want to make wise business decisions.

In this blog, Manifest Climate lays out the differences between ESG and climate and how they relate to the Task Force on Climate-related Financial Disclosures (TCFD).

Defining ESG

ESG spotlights three specific sets of historically non-financial considerations that fall outside of what is traditionally considered in investment decisions. While ESG-related risks have become increasingly material to company performance, their definitions differ among firms and investors. As a result, there’s no easy way to screen for these types of risks, which could lead to companies subscribing to multiple ESG databases, as opposed to one that’s universal.

ESG issues, which could be considered a ‘catch-all’ term for companies’ non-financial priorities, come about in a variety of ways. They could impact a business’s ability to obtain operation permits, as well as gain and retain employees and customers, among other things. Importantly, ESG issues tend to be intertwined with each other. For example, North American oil and gas pipeline development often faces opposition from environmental and Indigenous groups, with the former opposing these developments for environmental reasons and the latter opposing them for social, environmental, and economic reasons. Reactions to these protests can include regulation, litigation, and the review of permits, which all fall under environmental and social considerations.

Today, investors and other stakeholders are increasingly focused on the Environmental pillar of ESG.

Manifest Climate’s perspective: Amid global climate disruption, the ESG lens is best used alongside or on top of climate-focused planning and investment strategies. In other words: Start by identifying and responding to your business’s climate risks and opportunities. This may give you the foundational knowledge required to strengthen your company’s ESG outcomes.

Defining Climate

Climate change is a systemic risk, meaning it threatens to undermine and fundamentally reshape the systems that underpin human civilization and the biosphere.

Climate-related physical risks will transform the earth’s atmosphere, oceans, cryosphere (snow and ice), land surface, and more. On the other hand, climate-related transition risks — actions taken by human societies to mitigate climate change — have the potential to shake up the global economy. The risks could result in trillions of dollars of losses to businesses, though they also have the potential to make certain businesses more profitable than ever.

While these risks and opportunities will manifest differently across regions and  sectors, each and every business will be affected. Many have already been impacted.

Since climate change is all-encompassing, it should not be considered a subset of the ‘E’ in ESG. It is a risk factor that intersects with — and exacerbates — all three ESG categories, as well as all traditional financial risks.

The Relationship between ESG and Climate

Both ESG and climate issues have increasingly been on the radar of investors and policymakers.

How they compare

Financial institutions are facing increased demand for products that have a positive impact on ESG considerations and do not exacerbate certain ESG-related concerns. To meet this demand, a variety of ESG-related financial products have emerged, including loans and bonds, funds, and exchange-traded funds (ETFs).

To support the development of impact-focused financial products, as well as the integration of ESG and climate considerations into lending and investment decisions, financial institutions have turned to ESG and climate analysis. They’re also calling on organizations to disclose their ESG and climate-related issues. Specific climate-related metrics are critical to effectively respond to climate-related risks and seize climate-related opportunities.

Manifest Climate’s perspective: Nearly USD$7trn is needed annually in clean energy infrastructure to meet the Paris Climate Agreement’s decarbonization goals. Furthermore, climate action is expected to generate USD$26trn in direct economic gain by 2030, while 130 countries have made or are considering net-zero commitments. This means they will have to make significant investments in decarbonization. It also means there are many climate-related financial opportunities for firms to explore. Manifest Climate can help guide businesses through these opportunities.

How they differ

Although both ESG and climate disclosures are high in investor and regulator demand, the demand for climate disclosures — especially those in line with the TCFD — exceeds the demand for ESG information. This is because the risks of climate change — and the methods for quantifying its metrics and targets —  are better understood than certain ESG issues.

Climate change and ESG are not a zero sum game. Although there’s some regulatory demand for ESG disclosures, financial regulators worldwide are beginning to demand climate-related disclosures that are aligned to the recommendations of the TCFD. The G20 endorsed the use of this disclosure framework in summer 2021. As of this writing, the G20 still hasn’t endorsed a sustainability/ESG reporting framework.

The G20 hasn’t made an ESG reporting framework endorsement because there is no widely-accepted framework for broad ESG reporting. In contrast, the TCFD recommendations, published in 2017, have been embraced by the world’s largest asset managers, regulators, and companies that are disclosing climate-related information.

Manifest Climate’s perspective: The viability and resilience of business operations is tied to effective and consistent climate action. Since climate risk is a permanent and evolving macro risk, it cannot be effectively addressed as a subcategory. Your traditional risk management toolkit is incomplete without a comprehensive climate lens.

The TCFD’s role

The recommendations of the TCFD are intended to surface businesses’ climate-related risks and opportunities. Other voluntary disclosure frameworks are focused on broader ESG disclosure, though they haven’t yet achieved stakeholder buy-in at the same scale as the TCFD.

Why? One reason is the widespread demand for better information on how businesses could be impacted by climate change from investors and other stakeholders. This reflects the growing awareness of climate science and the efforts of policymakers and civil society to make companies understand the implications of climate change.

The TCFD is also backed by the Financial Stability Board, an international body of financial regulators, and has been endorsed by the G20 countries.

Climate and ESG disclosure are not mutually exclusive. In fact, the TCFD’s recommendations can be used as building blocks for broader ESG disclosure frameworks. For example, the International Sustainability Standards Board (ISSB) is developing a global baseline of sustainability-related disclosure requirements for companies around the world. It started with climate-related disclosure requirements that are based on the TCFD — but it won’t end there. It simply recognizes that climate-related disclosure can inform and enrich other ESG disclosures down the line.

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About Manifest Climate

Manifest Climate is a climate intelligence SaaS platform that combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to provide best-in-class climate guidance at scale.