Lack of progress on climate-related disclosures means TCFD recommendations should be “explicitly” embedded.
Two thirds (68%) of large European firms are currently only partially compliant with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), according to a new Climate Disclosure Standards Board (CDSB) report.
Released this week, ‘The State of EU Environmental Disclosure in 2020’ analyses climate-related disclosures by the 50 largest listed firms in the European Union, with a combined market capitalisation of US$3.5 trillion, under the EU Non-Financial Reporting Directive (NFRD).
Just 18% of the 50 companies are providing clear disclosures on their resilience to different climate scenarios and 96% do not define short–, medium– or long-term time horizons, prompting the international consortium to call for further regulatory change.
The report noted that 74% of companies considered both physical and transition risks within their disclosures, but only 4% clearly disclosed risks over different time horizons. Although it reported an increase in the implementation of a “double materiality perspective” of up to 38% (from 8% in 2019), the CDSB said “this did not necessarily improve the quality of disclosures”.
“The rules of the game must be transformed to fully integrate sustainability at every step of the financial value chain, and that’s why the [European Commission] has prepared the Renewed Sustainable Finance Strategy for early next year,” said EU Financial Services Commissioner Mairead McGuinness.
“One of the priorities of the renewed strategy will be to strengthen the foundation for sustainable investment and the review of the NFRD [in 2021] is crucial,” McGuinness continued.
The report concluded that investors’ ability to integrate relevant climate-risk information into their decision-making according to EU rules is inherently limited “without further improvements to the NFRD on TCFD, risk and materiality”.
Recommendations for review
The CDSB outlined six key recommendations ahead of the European Commission’s (EC) finalised proposals for the revision of the NFRD.
Most notably, it called for TCFD recommendations to be “explicitly” embedded into the NFRD “as non-binding guidelines are not driving uptake at the necessary pace and scale to support investor decision-making”.
Furthermore, the report said the NFRD should “remove the exemption allowing the non-financial statement to be reported outside the mainstream report”. This would more efficiently allow for accessibility, consistency and comparability of future disclosures.
The CDSB added that the focus on climate was to the detriment of issues surrounding biodiversity, water and forests, and called for these issues to be further addressed in the revision of the NFRD in order to support wider EU policies.
Companies should continue to be incentivised to tackle environmental and climate issues, the report added, “through ambitious policies, rigorous due diligence processes [and further] policy coherence” between the NFRD review and the upcoming EU initiative on corporate governance.
“The sustainability reporting landscape is moving towards harmonisation and common standards. The work of the EC is important in achieving this goal and we will continue working closely with Europe to develop leading approaches and internationally to develop a global baseline that works for all,” said Mardi McBrien, Managing Director at CDSB.
Separately, the board of the Investment Company Institute (ICI), the US-based trade association for investment firms, unanimously approved a statement encouraging US public companies to provide enhanced ESG reporting and urged firms to provide disclosure consistent with the recommendations of the TCFD and the standards of the Sustainability Accounting Standards Board (SASB).
Fidelity outlines TCFD progress
Based on the TCFD’s “four pillars” of recommended disclosures (governance, strategy, risk management, and metrics and targets), investment firm Fidelity International has released a report detailing its progress in non-financial climate-related reporting following its pledge of net zero emissions by 2040.
Fidelity’s inaugural ‘TCFD Annual Report’ highlighted the growth of its Sustainable Family of Funds (SFF) from just one in November 2018 to eight as of mid-2020, two of which are thematic funds focused specifically on climate change.
Future commitments include the implementation of a Sustainability Performance Indicator tool, which will enable Fidelity to more accurately measure company reporting of greenhouse gas emissions and removals, and the launch of new climate change voting and engagement policies in 2021.
Jenn-Hui Tan, Fidelity International’s Global Head of Stewardship and Sustainable Investing, said investment managers had to provide the same level of climate-related transparency “as the clients we serve and the companies in which we invest”.
“By working within the TCFD framework, Fidelity International and companies around the globe can make a significant contribution to a much more detailed and comprehensive understanding of climate-related financial risks and opportunities. A higher quality of reporting will in turn create an enhanced appreciation of and consideration for the role that climate change may play in companies’ current and, even more crucially, future prospects,” Tan said.