TCFD: Year One

Since the Task Force on Climate-Related Financial Disclosures released its recommendations in June 2017, more than 457 companies with an aggregate market capitalization of over $7.9 trillion have expressed their support. That includes 287 financial firms, responsible for assets of nearly $100 trillion. Governments in countries including Belgium, France, Sweden, and the UK, along with financial regulators in Australia, Belgium, France, Hong Kong, Japan, the Netherlands, Singapore, South Africa, Sweden, and the UK, have also expressed their support for the recommendations.

However, the success of the disclosure framework will be measured not by how warmly it is welcomed, but rather how extensively it is adopted. Released last week, the TCFD’s 2018 Status Report provides an early indication.

The TCFD’s status report examines how companies and financial firms have met its core recommendations across different industries and regions with varying reporting requirements. Its review comprises two elements: (i) an artificial intelligence (“AI”) disclosure review in which AI technology was used to determine the TCFD disclosure alignment for 1,750 large companies, exclusive of asset managers and asset owners; and (ii) a disclosure practices review led by a small group of members to review the disclosure of 200 large companies, comprising 25 representatives from each of the TCFD’s eight company groups. The TCFD notes that the sample of companies in the disclosure review is intentionally slanted toward companies more likely to disclose information on climate change, which was specifically done to illuminate how large companies are disclosing.

Key Takeaways

A year on, the TCFD has six key takeaways:

The majority disclose some climate-related information.

Most reviewed companies disclose information in alignment with the core element of at least one of the recommended disclosures in their financial filings, annual reports, or sustainability reports. Some companies even address the core element of all 11 recommended disclosures.

Financial implications are often not disclosed.

Although qualitative information and project-specific disclosure is relatively common, the Task Force found that companies are not meeting the demand for quantitative information on climate-related financial risk.

Information on strategy resilience under different climate-related scenarios is limited.

Out of all the Task Force’s disclosure recommendations, scenario analyses (that is, descriptions of the resilience of a company’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario) have seen the slowest adoption rate. While the Task Force notes that climate-related scenario analysis is relatively nascent, it believes that it is critical to make disclosure more decision-useful.

Disclosures vary across industries and regions.

Although the core recommendations were designed for implementation across all regions and industries, the Task Force found that disclosure has exhibited obvious geographical and industry clustering. For example, North American companies tend to disclose the board’s role in assessing and managing climate-related issues, while Asian companies are more likely to disclose management’s role.

Disclosures are often made in multiple reports.

TCFD-aligned disclosure is typically provided across multiple reports, including both routine annual and financial reporting. Most disclosure is provided in sustainability reports, which are also far more likely to contain climate-related metrics and targets. However, in cases when disclosure is spread out across multiple reports or included in very lengthy reports, the TCFD suggests that companies develop a system of indexing the disclosure to make it more easily navigable. Because of these decentralized reporting practices, the TCFD found it difficult to understand how climate-related projects were relevant to the companies’ overall strategies. Absent a clear and explicit link to strategy, such projects may appear to be focused on cost cutting and good PR.

Observations by Size and Industry

As would be expected, the results of the AI review indicated that the amount of TCFD-aligned disclosure provided by each company generally corresponded to its size, in terms of annual revenue. A majority of large companies provide two of the recommended strategy disclosures, including a description of climate-related risks and opportunities and their business, strategy, and financial planning impacts. Further, the majority of large companies provide disclosure aligned with all three of the recommended metrics and targets categories. However, regardless of company size, there were limits to the extent of disclosure provided. Few large companies describe how processes for identifying, assessing, and managing climate-related risks are integrated into their overall risk management. Descriptions of strategic resilience taking into consideration climate-related scenarios, including a 2°C or lower scenario, are even more rare.

The hand-picked disclosure practices review revealed a litany of industry-specific insights. Banks, for example, are more likely than companies in any other industry to include TCFD-aligned disclosure in their financial filings. While only a minority of companies in the energy group provide information on climate-related issues outside of sustainability reports, they excel in relation to governance disclosure; the majority of the 25 reviewed energy-related companies disclose information about the board’s oversight, while some even mention how the board integrates climate-related issues into strategic and business objectives.

Acronym Association

One of the topics which arises most frequently in our engagements with issuers is survey fatigue. Companies often tell us that they want to see a universal framework for reporting sustainability disclosure, including climate risk. As such, we were particularly interested in the Status Report‘s review of how the TCFD is aligned with existing reporting frameworks asking for climate-related disclosure, including SASB, CDSB, PRI, and CDP.

Following the integration of 14 TCFD-aligned climate-related indicators into the PRI’s 2018 reporting framework, risk management disclosure has been provided most commonly (74%), while metrics disclosure is least common (30%). As less than a third of PRI respondents are publicly disclosing any information related to the PRI climate change indicators, information accessibility also has room to grow.

The report also provides an update on how markets have responded to CDP’s introduction of 25 new TCFD-aligned questions. Preliminary results indicate that roughly three quarters of CDP respondents answered at least 21 of the 25 questions, while only 2% answered 12 or fewer. This is a strong endorsement of the TCFD’s recommended disclosure, given that the CDP carries a reputation for designing surveys that are progressively difficult for companies to ace year-over-year.

In light of Glass Lewis’ announcement that we will be integrating SASB materiality guidance into our proxy papers, we note that the SASB standards are among the most common tools cited by the TCFD for identifying climate-related risks and metrics. SASB provides an educational resource for firms interested in learning more about how to align with the TCFD’s general recommendations through the use of the industry-specific SASB standards.

The Road Ahead

As the financial implications of climate change become more apparent to investors, their consideration of this issue is increasingly relevant to companies. As such, the impetus is on companies to ensure that they are providing decision-useful disclosure concerning the bottom line impacts of climate change.

To assist preparers looking to hone their existing TCFD-aligned disclosure and encourage firms which have not yet taken part, the TCFD Knowledge Hub will act as a repository for publicly available resources, events, and case studies on TCFD-aligned disclosure.