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The Rise of the Taskforce for Climate-related Financial Disclosures (TCFD)

Progress, challenges, opportunities and solutions for firms

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January 5, 2021

Introduction

The recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD) first published in 2017 form a framework for corporate reporting. The objective is to provide a consistent framework for companies to publicly disclose how they are responding to risks and opportunities related to climate change to a range of stakeholders.  In doing this it supports the effective allocation of investment to companies who have positioned themselves best with respect to these same risks and opportunities. This article examines current global progress on reporting, future trends, opportunities for firms and solutions to common challenges based on UL’s experience providing software and advisory services to a range of companies.

Firstly, a brief overview, the TCFD framework has four pillars [1].

  1. Governance: The organization’s governance around climate-related risks and opportunities.
  2. Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning.
  3. Risk Management: The processes used by the organization to identify, assess and manage climate-related risks.
  4. Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities

Most of the disclosure is qualitative discussion with some quantitative reporting around greenhouse gas emissions. The disclosures can be integrated throughout an annual report or in a standalone TCFD section.

Current progress and future trends

The TCFD framework was originally introduced as a voluntary framework in 2017 and since then it has seen widespread adoption across industries. In its third progress report issued in September 2020 the FSB summarizes how far it has come [2]:

  • Over the past 15 months (to September 2020), the number of organizations expressing support for the TCFD has grown more than 85%, reaching over 1,500 organizations globally
  • Over 110 regulators and governmental entities from around the world support the TCFD
  • Several jurisdictions including New Zealand, the EU and the U.K. have taken steps to make TCFD reporting mandatory for certain entities
  • Nearly 60% of the world’s 100 largest public companies support the TCFD, report in line with the TCFD recommendations, or both.
  • As part of Climate Action 100+, more than 500 investors with over $47 trillion in assets under management are engaging the world’s largest corporate greenhouse gas emitters to strengthen their climate-related disclosures by implementing the TCFD recommendations
  • Companies’ disclosure of the potential financial impact of climate change on their businesses and strategies remains low
  • Expert users find the impact of climate change on a company’s business and strategy as the “most useful” for decision-making

What is clear across these points is that TCFD’s adoption originally driven voluntarily is now increasingly driven by mandatory requirements. To add to this, private firms in addition to listed firms are increasingly being included in mandatory TCFD regulation. For example, the U.K.’s Joint Government-Regulator TCFD Taskforce Interim report included large private firms in the scope of future mandatory TCFD requirements.[3]

The completeness and quality of disclosures currently varies significantly especially between large and small firms[4]. As more companies join, guidance & tools improve, and best practice permeates these aspects will improve significantly. As comparability improves and in tandem with advances in machine learning it is expected that ESG ratings and research firms will start to issue ratings for firm TCFD disclosures. This will present both challenges and opportunities for firms.

Challenges and opportunities for firms

To assess challenges and opportunities, we split firms into three groups: advanced reporters, listed firms with no/limited reporting and private firms.

Firstly, advanced reporters already reporting to the TCFD framework will see increasing focus on the quality of their reporting as investors benchmark across industry and identify gaps in strategy and risk management. Secondly, tracking between TCFD and private disclosure on the same topic, primarily CDP, which requires more in-depth climate disclosure, will become essential. Failure to adequately track responses could expose these firms to legal risk from inconsistent communication. The opportunity for companies is large as those who can demonstrate leadership on effectively managing the risks and opportunities of climate change are likely to gain significant investment versus those that cannot. To demonstrate this point BlackRock, the world’s largest asset manager with ~US$7 trillion assets under management[5], updated its investment stewardship principles[6] in late 2020, to emphasize that climate change is a central part of its investment strategy[7].

Listed firms outside advanced reporters cover a wide range of companies with differing levels of non-financial disclosure, from purely mandatory to a range of voluntary standards. In this group, the majority will meet basic requirements. The primary challenge and opportunity here will be effectively embedding what is being disclosed in annual reports into business strategy, risk management and governance. Firms who say one thing in their TCFD reporting but who are exposed as not following through are likely to be penalized heavily by the financial markets.

Private firms will face the biggest challenge in reporting to the TCFD requirements[3]. This is because historically they largely been exempt from mandatory non-financial reporting and public investor pressure to report to voluntary standards. For some this will mean they will need to develop entirely new capabilities e.g. around climate-related scenario analysis and processes e.g. to incorporate climate change into strategy and operations. Also different to the other groups they may often be calculating their greenhouse gas footprint for the first time.

Across all these firms the opportunities are significant and go far beyond annual reporting, climate change is a real and present threat. Regardless of investor focus companies who take steps to reduce risk and go after opportunities will generate significant long-term value.

Solutions

While the TCFD disclosure is relatively unstructured as compared with ESG reporting standards such as the Global Reporting Initiative (GRI), there are elements of the reporting process which can be streamlined through technology. From our experience and working with clients these are split into three areas:

  1. Quantitative carbon footprint data collection and verification
  2. Qualitative response creation workflow across functions and user types
  3. Consistency in TCFD and private non-financial reporting e.g. CDP

We have built these capabilities natively into our UL sustainability software solutions. As you start or aim to improve your TCFD disclosure consider UL solutions which are designed and deployed with companies across industries and sizes from first time reporters to sustainability leaders.

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References

[1] https://www.fsb.org/2019/06/tcfd-report-finds-encouraging-progress-on-climate-related-financial-disclosure-but-also-need-for-further-progress-to-consider-financial-risks/#:~:text=The%20TCFD%20was%20established%20by,their%20climate%2Drelated%20financial%20risks.
[2] https://www.fsb.org/wp-content/uploads/P291020-1.pdf
[3]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933783/FINAL_TCFD_ROADMAP.pdf
[4] https://www.fsb.org/wp-content/uploads/P291020-1.pdf
[5] https://www.blackrock.com/sg/en/introduction-to-blackrock
[6] https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-engprinciples-global.pdf
[7] https://www.cnbc.com/2020/12/16/blackrock-makes-climate-change-central-to-investment-strategy-for-2021.html

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