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Firms Falling Short of Full Climate Disclosure

TCFD marks five years of progress, but warns too few are delivering decision-useful climate-related financial information.

Businesses round the world have stepped up their reporting of climate-related financial risks – but are still coming up short of the recommended breadth of disclosures.

Five years into the life of the Task Force on Climate-related Financial Disclosures (TCFD), it reported a steady increase in reporting by firms on this subject, in its latest annual status report.

But, as the TCFD noted, “while 80% of companies disclosed in line with at least one of the TCFD-recommended disclosures for fiscal year 2021, only 43% disclosed in line with at least five”.

It added: “These levels of disclosure fall short of the TCFD’s 11 recommended disclosures.”

The release of the annual report coincides with a call by the head of the Financial Stability Board, the international coordinating body that set up the task force in 2017, for global co-ordination of future rules on climate-related risk reporting to prevent regulations differing widely from one jurisdiction to another.

Importance of interoperability

Board Chair Klaas Knot, in a letter to the finance ministers and central bank governors of the Group of 20 major economies, wrote: “The development of climate-related corporate disclosures provides a unique opportunity to avoid harmful fragmentation and create a global baseline standard that enables users to compare and aggregate exposures across jurisdictions.

“Interoperability between the common global baseline and national and regional jurisdiction-specific requirements will be essential. This needs to be built in early on, and certainly before frameworks are finalised and become hard to adjust.”

The FSB, established in the wake of the 2008 financial crisis, also published a final report on supervisory approaches to climate-related risks and a progress report on climate-related disclosures, which breaks down trends and improvements in reporting across national and regional authorities.

On being set up, the TCFD’s stated aim was that “financial risks and opportunities related to climate change will become a natural part of companies’ risk management and strategic planning processes” through widespread adoption of its recommendations.

Despite reporting in line with its recommendations being mandated in several jurisdictions, including the UK, the latest report shows there may still be some way to go.

Europe in the lead

The task force used artificial intelligence to review the reports of 1,400 companies across eight industries and five regions. It found big differences both in terms of disclosures across sectors and from the various parts of the world.

Of the 11 recommended disclosures, companies in energy, materials and building, banking and insurance led the way, reporting, respectively, 43% of these disclosures, 42%, 41% and 41%.

The agriculture, food and forestry sector scored 37%, consumer goods firms 33% and the transport industry 32%. Bottom of the table were businesses involved in technology and media, at 15%.

Broken down geographically, the report noted that: “Europe remains the leading region for disclosure.” The continent has an average score of 60% of the 11 recommended disclosures, and the report states: “Europe’s leadership is likely driven by increasing public sector attention to climate-related issues and requirements for climate-related reporting.”

Asia-Pacific scored 36%, North America 29%, Latin America 28% and the Middle East and Africa 25%.

Larger companies most willing to disclose

The TCFD commented on “encouraging” disclosure developments: “In North America, the average level of disclosure for the companies reviewed was 29% for fiscal year 2021 reporting, growing 12 percentage points since 2019. Notably, the number of North American companies was much larger than the number of companies in other regions (687, versus 42 in Latin America for example) and incorporated a higher percentage of smaller companies and media and technology companies compared to other regions.

“The highest area of disclosure for North American companies was on information on their climate-related risks and opportunities at 61%, which was higher than all other regions except Europe.”

A key finding of the report was that larger companies were considerably keener or more able to make disclosures than smaller ones: “Larger companies are more likely to disclose TCFD-aligned information than smaller ones. Forty-nine percent (49%) of the companies reviewed with a market capitalisation greater than US$12.2 billion disclosed information aligned with the TCFD recommendations for fiscal year 2021. Meanwhile, 29% of companies with a market capitalisation in the bottom third (less than US$3.4 billion) disclosed in line with the TCFD recommendations.”

A middle group capitalised at between US$3.4 billion and US$12.2 billion showed 37% disclosure.

The users’ perspective

The report examined the value of TCFD disclosures to shareholders. It concluded: “Investors and others use disclosures in decision-making and pricing. Based on the TCFD survey, 90% of investors and other users incorporate climate-related financial disclosures in financial decision making, and 66% of these indicated such disclosures factor into the way they price financial assets.

“In addition, based on a literature review, there is a growing body of evidence that climate-related risks are beginning to affect prices for certain types of assets.”

But, again, there is room for improvement. “Nevertheless, the task force remains concerned that not enough companies are disclosing decision-useful climate-related financial information, which may hinder investors, lenders, and insurance underwriters’ efforts to appropriately assess and price climate-related risks.”

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