Adoption of reporting framework bolstered by regulation and national commitments to mitigating climate risk, says status report.
The Task Force on Climate-related Financial Disclosure (TCFD) has updated its implementation guidance for the first time since 2017. A revised annex includes supplemental guidance on decision-useful disclosures by the financial sector across TCFD’s four reporting pillars – governance, strategy, risk management, and metrics and targets – but also updates universal and sectoral reporting requirements.
As part of the new guidance, asset owners are required to describe how they engage with investee companies on their climate-related disclosures and to outline the extent to which their assets, funds and investment strategies are aligned with a well below 2°C temperature scenario. Asset owners must also disclose the total greenhouse gas (GHG) emissions produced by the assets they own, where data and methodologies allow.
The new guidance is supplemented by seven categories of cross-industry metrics that have been identified through a consultation process as most important for assessing climate-related financial impacts: Scopes 1-3 emissions; climate-related transition; physical risks; opportunities; capital deployment; internal carbon price; and remuneration. These seven categories will allow for increased standardisation and comparability in reporting, the TCFD said. They will also apply across current, historical and forward-looking disclosures.
The Task Force only broadly defined these metric categories in order to allow for “maximum flexibility” for organisations, industries and jurisdictions to develop and adopt specific climate-related metrics, the Annex noted. It acknowledged that the current ability of organisations and industries to do this will vary and that the current state of methodologies and data will need to evolve.
Depending on the organisation, the metrics needed within each category will be different. For example, investors reporting on Scopes 1-3 emissions will need to measure financed emissions by asset class. In comparison, an electric utility company can measure emissions per MWh of electricity produced.
The revised guidance does not extend the scope of reporting to firms’ impacts on the climate, unlike other voluntary disclosure schemes, such as the Global Reporting Initiative, that emphasise the importance of ‘double materiality’ – reporting both on the impacts of climate on the business as well as how business activities may contribute to climate risks.
The Task Force said that organisations reporting in line with TCFD guidelines should look to implement the changes to their reporting “as soon as possible”.
A strong transition plan
Following consultations in the summer on climate-related metrics and data and forward-looking metrics, the TCFD also published its ‘Guidance on Metrics, Targets and Transition Plans’ report, which provides guidance for organisations disclosing plans and progress for the transition to a low-carbon economy.
“The Task Force recognises that an organisation’s transition plan is one component of its strategy to address its climate-related risks and opportunities and believes its recommendations implicitly cover the key aspects of transition plans,” the report noted.
The TCFD outlined five fundamental principles for strong transition plans: alignment with business strategy; use of quantitative metrics and targets; insight into governance processes; actionable initiatives to drive plan forward; and disclosure of limitations, constraints and uncertainties in the plan.
These key characteristics were decided following a review of existing materials published by groups such as Climate Action 100+, the Transition Pathway Initiative and the Institutional Investors Group on Climate Change.
The five considerations are supplemented by high-level and specific disclosure requirements split across the framework’s four main pillars, including scenario analysis, temperature goals and prioritised opportunities.
Transition plans should be periodically reviewed and updated, the TCFD said, and reported annually to stakeholders.
“Importantly, an organisation’s transition plan should reflect its individual circumstances, including relevant industry-specific information. The TCFD recognises the transition to a low-carbon economy will have industry-specific nuances and encourages industry associations and others to develop industry-specific guidance on transition plans as needed,” the report added.
By having a clearer overview of investee companies’ transition plans, investors will be able to more accurately predict their own performance in line with forward-looking temperature scenarios, thus helping them ensure their overall portfolio is on track for less than 2°C of warming.
“As countries and companies around the world set net zero targets, the TCFD framework is increasingly becoming the foundation for standards and requirements needed to chart the transition to the low-carbon economy,” said Mary Schapiro, Head of the TCFD.
Path to global standardisation
Launched by the Financial Stability Board (FSB) in 2015, the voluntary framework now has global backing from organisations with a combined market capitalisation of over US$25.1 trillion, a 99% increase since last year, according to the TCFD’s fourth Status Report.
Reviewing over 1,650 companies’ reports across 69 countries and eight industries, the Task Force determined that TCFD-aligned reporting increased by nine-percentage points between 2019 and 2020, compared to a four-percentage point growth the previous year. Of the world’s largest 100 companies, 83 now support or report in line with the TCFD’s recommendations.
This accelerated growth in support and adoption has largely been the result of international standard setters, regulators and policymakers incorporating TCFD-aligned recommendations within their own climate-related efforts.
In June, the Group of Seven (G7) said they supported moving towards mandatory climate-related financial disclosures that align with existing TCFD recommendations.
The following month, the Group of 20 (G20) said they would work to “promote implementation of [climate] disclosure requirements or guidance, building on the FSB’s TCFD framework, in line with domestic regulatory frameworks”, to pave the way for future global coordination efforts”.
The International Financial Reporting Standards (IFRS) Foundation is currently designing a global sustainability standard also building upon the TCFD framework and the work of sustainability standard-setters.
“As the IFRS Foundation continue to develop a global sustainability reporting standard, working with an alliance of standard-setters, I am pleased that they will be able to draw from the strong work of the TCFD,” said FSB Chair Randal K. Quarles.
The Task Force will deliver its next Status Report to the FSB in September 2022.