Yesterday, the FSB’s Task Force on Climate-related Financial Disclosures, commonly referred to as the TCFD, issued its third status report describing companies’ progress in aligning with the TCFD recommendations. While the TCFD has observed great momentum in the global adoption and support of its recommendations since its last status report in June 2019, it states progress is still needed. The TCFD finds that there remains an urgent demand for consistent and comparable reporting, and companies’ disclosures remain low regarding the potential financial impact of climate change on their businesses and strategies. TCFD Chair Michael R. Bloomberg adds that “[t]he work that governments and businesses are doing to address the devastation caused by the coronavirus is also an opportunity to build a stronger, more resilient, and more sustainable economy – and transparency and disclosure have an important role to play.”
Framework’s Purpose. In June 2017, the TCFD released its final recommendations, which constitute a voluntary reporting framework designed to aid companies in developing and disclosing consistent and comparable climate-related financial information, as we explain more fully in a prior blog post. The recommendations focus on the business risks and opportunities associated with climate-related matters. The TCFD framework enables companies, who so choose, to integrate climate-related information into their financial statements, including those filed with the SEC. The TCFD contends that better disclosure not only assists companies in allocating their capital more efficiently, but also furthers the transition to a more sustainable, lower-carbon economy.
Relevance to the U.S. Markets. Investors generally seek climate-related disclosures that are consistent, comparable, decision useful and financially material. With no line item climate-related disclosure framework legally mandated in the United States, investor demand has increased for companies to report voluntarily climate-related information around one framework. Some major investors, such as BlackRock and State Street Global Advisors, either require or strongly encourage companies to adopt the TCFD recommendations for assessing their climate-related risks and making their climate risk disclosures. Moreover, the TCFD’s increasing international appeal and popularity has made the framework relevant particularly for large companies operating globally. According to the report, nearly 60% of the world’s largest public companies support the TCFD, report in line with the recommendations, or both.
Key Takeaways of the Report.
- Globally more than 1,500 organizations—companies, financial institutions and governments—have expressed support for the TCFD framework, representing an increase of over 85% since the second status report published in 2019, which we previously discussed.
- Larger companies are more likely to disclose information aligned with the recommendations. On average across the TCFD recommendations, 42% of companies with a market capitalization over $10 billion disclosed at least some information that aligned with each TCFD recommendation in 2019. These companies’ disclosure levels exceeded 50% for certain information related to strategy and climate-related metrics under the TCFD’s recommendations.
- The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk. Further, the TCFD found that industries with the greatest exposure to material climate risk provided the highest levels of TCFD disclosure.
- Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both.
- In fiscal year 2019, energy companies and materials and buildings companies provided more TCFD-aligned disclosures compared with other sectors, with an average level of 40% for energy companies and 30% for materials and buildings companies.
- One in 15 companies that the TCFD reviewed using AI assistance disclosed information on the resilience of their strategies.
- Expert users identified the “most useful” decision-making information as the impact of climate change on the company’s business and strategy. The report also includes other information deemed useful by expert users that the TCFD believes could provide companies with helpful insight or a roadmap. The TCFD states that “expert users” include members of the financial sector and others who are well versed in the TCFD framework and regularly use climate-related information in making financial decisions.
New Guidance Available. The TCFD has released two new guidance documents to aid companies in their disclosures:
- Scenario Analysis for Non-Financial Companies. The TCFD intends for this guidance to assist non-financial companies interested in using climate-related scenarios. The guidance includes practical, process-oriented approaches for climate-related scenario analysis and ideas for disclosing the resilience of company strategies.
- Integration of Climate-Related Risks into Risk Management Processes. The TCFD created this guidance to help companies that are interested in integrating climate-related risks into their existing risk-management processes and making disclosures related to these processes in alignment with the TCFD recommendations.
Feedback Requested on Financial Sector Metrics. The TCFD has begun a consultation period ending January 27, 2021 to receive feedback on climate-related metrics for the financial sector. More information is available on the TCFD website.
What’s Next? The TCFD will deliver its next status report to the FSB in September 2021. In the upcoming months, the TCFD will continue to promote and monitor adoption of its recommendations. Lastly, it will consider the feedback received through the public consultation on the financial sector and determine appropriate next steps, which may include publicly sharing the consultation results with participants’ names omitted.