Since the publication in June 2017 of the “Final report: Recommendations of the Task Force on Climate-related Financial Disclosures”, global companies, NGOs and industry groups worldwide have started implementing this framework. To date, 457 public and private companies support the TCFD recommendations, representing 7.9 trillion USD.
In September 2018, the TCFD decided to check up on the progress made to improve and standardize climate-related financial disclosure and released its “Status Report.” For this study, the report focused on eight actor groups: banks, insurers, asset managers, asset owners, as well as companies in the energy, transport, materials & buildings and agriculture sectors.
The key takeaway is that environmental issues are being reported on, however the financial implications of climate change on business is being neglected.
On one hand, the majority of companies report on at least one recommendation. On the other hand, few companies disclose details on the cost of physical and transition climate risks and do not include information on business resilience with regards to climate change scenarios.
The Carbone 4 report: “Scenario-based analysis: a powerful tool for analyzing the resilience of your business” discusses the importance of this type of disclosure for business strategy.
It is interesting to note that disclosure is sector dependent: concerning climate-related metrics, non-financial companies have a higher level of disclosure compared to financial companies. Concerning risk management, banks have the highest level of disclosure and the building & materials sector the lowest. Regional differences are also apparent: Europe has by far the highest level of disclosurecompared to other regions.
Takeaways by group:
|Banks/insurers||Mainly disclose information on climate-related risk and banks focus on opportunity KPIs related to green bonds and green investments.|
|Asset managers||Disclose very little information regarding the green house gas emission intensities of their investments.|
|Asset owners||Mainly disclose information on risks and opportunities; however fail to disclose climate resilience information.|
|Energy firms||Highest overall level of disclosure out of the eight groups. Notably, scope 3 green house gas emissions are often reported on.|
|Transport firms||Mainly disclose information on risks and opportunities.|
|Building & materials firms||Highest level of disclosure regarding metrics and targets. Notably, firms often report on the evolution of metrics over several years.|
|Agriculture firms||Mainly disclose information regarding metrics and focus on physical risks in order to disclose information on the impacts of climate change on water and natural resource accessibility.|
The objective of the TCFD recommendations is to be both usefulfor financial users of this information and practicalfor companies to disclose.
In order to render the disclosure “decision-useful”, investors and analysts have suggested several improvements. The use of scenario-analysisin order to determine business resilience has been identified as useful; in particular, a scenario that includes a high carbon taxis important. Concerning metrics, both relative and absolute targetsare requiredin order for investors to grasp how close a company is to achieving a climate-related goal. In the banking sector, climate risks and in particular physical risksare currently being overlooked and require more attention. Carbone 4’s report: “How can physical climate risks be integrated into company reporting” discusses the importance of physical risk analysis for business strategy. Finally, the financial disclosure on the expenditures required to achieve targets is crucial information for investors.
In order to render disclosure as practical as possible, standardization is seen as necessary. This is being achieved in two ways. Firstly, NGOs and global companies are getting together by sector to mainstream sectorial disclosure: e.g. The WBCSD has joined forces with companies from the oil and gas industry to help standardize disclosure and the UNEP FI is currently working on standardized reporting in the finance sector. Secondly, global reporting guidelines are becoming more aligned with the TCFD framework. This year, both the CDP and the PRI modified their reporting criteria in order to integrate the TCFD recommendations.
The TCFD recommendations are being implemented worldwide, climate-related financial disclosure is improving and climate reporting is becoming standardized. However, much work is to be done in order for investors and analysts to be able to make properly informed decisions with enough credible and useful information on climate. The more the adoption of these recommendations increases, the easier it will be to mitigate the climate impacts and adapt companies to a changing world.