- The TCFD recommendations have been backed by over 250 businesses worldwide, representing more than $6.5 trillion in market capitalisation.
- Investors use disclosures as an insight into their investments over the long-term and to mitigate risk clusters within their portfolios.
- The importance of ensuring long-term stability of portfolios in the wake of climate change is going to continue increasing.
- TCFD disclosure will provide insight in the stability of portfolios against the worst-case scenarios, such as emerging regulations leading to non-compliance, increasing insurance and liability costs and stranded assets.
- The disclosures are now used by governments across the world as well as being spearheaded by the largest pension funds globally.
The impact of TCFD has been to mainstream climate risk assessment into the finance world.
Which brings with it a larger awareness of integrating other environmental, social and governance factors into investment decision-making. The TCFD framework has pushed the finance industry to understand the impacts of these factors and publicly disclose them to help regulate the market through open communication.
What has been the uptake of the Taskforce on Climate-related Financial Disclosure (TCFD) Framework, and is it changing corporate decision-making, or has it merely become a tick-box exercise?
The rapid growth in awareness is promising however the incorporation of TCFD beyond awareness has been slower, but we expect this to shift as internal uptake and stakeholder pressure continues to mount. = Disclosure against the recommendations is expected to be a 3-5 year journey therefore it’s unsurprising that the initial uptake seems slow.
Many companies are starting from a place where non-financial and financial haven’t been considered together so it’s a huge undertaking to even get their house in order before their first disclosures. From a company perspective, it’s not the disclosures which are the most important it’s the internal learnings and awareness that are valuable, as well as the new processes and monitoring structures. This applies for all ESG reporting frameworks.
The uptake in TCFD is being driven by senior stakeholders which bodes well for the framework becoming a respected and embedded tool in corporate decision making. The complex and lengthy process of developing the disclosures and verification requires authentic embedding of governance and strategic approaches to tackling climate impacts, it simply cannot be left to be thought of as a ‘tick-box’ exercise. Doing so would place a company at a disadvantage as the TCFD framework becomes the regulator in how companies approach their climate impacts and the key communication tool for market regulation.
Which sectors are leading in implementation? What are the opportunities and what are the risks for companies of disclosure?
The TCFD targets mainly the banking, finance and insurance sectors and so naturally we see the largest uptake from companies within these sectors. Given the TCFD was founded to increase sustainable funding and investing it is these sectors that stand to lose the most through transitional and physical risks impacting their investments under various climate scenarios.
The real estate sector is also beginning to disclose against the TCFD framework given the high physical risks imposed on their balance sheet items. The disclosure applies best on a materiality basis, therefore if an organisation can reasonably expect that climate risk would significantly influence investor decisions or the financial statements, they should determine the relevant disclosures.
The main hurdle companies are grappling with is the nervousness of having accurate data given the uncertainty of the topic and disclosing it for use by external stakeholders. Given the scrutiny and robustness of the data and audit processes which they are familiar with, disclosures on a topic of high uncertainty and inclusion of forward-looking disclosures is a difficult first step. However the disclosures present an opportunity to highlight the company’s understanding of its contribution to climate change and the impact of climate change on its operations. The disclosures allow investor to select companies who are mitigating and adapting to climate change proactively which presents a huge opportunity for companies looking for funding or investment.
What are the biggest challenges in reporting?
Historically, businesses are used to reporting on past data and trends so TCFD’s requirements to forecast scenarios with a high degree of uncertainty is a challenge for businesses. The reporting of forward-looking information is critical to ensure effective communication within the market however assigning a financial value to a non-financial risk or opportunity is a new way of thinking for many businesses. Insurance firms, for example, have been forecasting risk trends like this for decades so it comes somewhat more simply however for general businesses, climate risk is a new concept.
There is also often a lack of data and information on which to make judgements, which also means it poses difficulties in providing supporting evidence given the assumption based nature of forward-looking statements. Some companies worry that it means they will be required to disclose what they deem as competitively-sensitive information and perhaps most importantly there are some concerns around continuous disclosure and director responsibility over the information disclosed.
How are jurisdictions regulating to support TCFD implementation?
We are seeing a shifting alignment of all ESG frameworks to include the TCFD requirements. For example, GRESB has a resilience module, CDP has incorporated the TCFD style questions, UNPRI has made TCFD reporting mandatory for its signatories and there is the Corporate Reporting Dialogue as a working group to align the various ESG frameworks. The UK government was one of the first to endorse the TCFD recommendations and are looking to disclose themselves in line with the framework.
A report by the House of Commons Environmental Audit Committee included an explicit recommendation that “The Government should set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities in line with the TCFD recommendations on a comply or explain basis by 2022.” Whilst we are awaiting a development on this, it’s a powerful signal to the market to start to gear up for disclosure. Further, the London Stock Exchange aligned its ESG reporting guidance to the TCFD recommendations back in 2017 therefore the structure and support is there in all the right places. We just need the rubber seal to make the reporting mandatory and we will see a huge uptake in disclosure and better investment decision making.