TCFD: Businesses worth $2trn back final climate disclosure recommendations

The TCFD developed a voluntary framework for companies to align climate-related risks with financial filings, to give investors greater transparency when backing businesses financially. Following an 18-month consultation period, TCFD has today (29 June) released its final recommendations report.

Already, more than 100 business leaders from companies such as Bank of America, PepsiCo and Kering, collectively worth more than $2trn in assets under management, have committed to implement the recommendations.

The TCFD’s chair, Michael Bloomberg said: “Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important.

“The Task Force brings that framework to the table, helping investors evaluate the potential risks and rewards of a transition to a lower carbon economy. We’re pleased to see so many businesses and investors around the world support the recommendations of the TCFD and hope others will be encouraged to join our initiative.”

The main aims of the report are to bring climate-related information into mainstream financial reports and to encourage both financial and non-financial organisations to adopt recommendations, which are tailored to a range of scenarios.

The Task Force was launched in December 2015 by Bank of England governor Mark Carney and released a draft report of its recommendations for climate-related disclosure a year later. In the following months, more than 300 responses from respondents in 30 countries have addressed the report to strengthen and streamline the implementation of the recommendations for businesses.

TCFD developed four “widely adoptable” recommendations on climate-related financial disclosures that are applicable to organisations globally; although the latest report notes that utilities, transport, buildings and agri-businesses would benefit most from the recommendations.

Firstly, businesses should structure disclosures around governance, strategy, risk management, and metrics and targets to give investors a wider scope for examining risk. These areas would create the foundation for a flexible and immediate adoption of mitigating practices, while promoting climate issues to senior management.

Secondly, businesses should collate and present data in a transparent manner that brings the “future nature of issues into the present” through scenario analysis, adding extra support and understanding of the financial sector’s exposure to climate-related risks through portfolios.

Flexible approach

The final iteration of the report adds a sense of flexibility for businesses to implement the recommendations. A range of scenarios has been introduced by the 32-member Task Force, including one that caters for a 2C or lower pathway targeted by the Paris Agreement.

Flexibility has also been added to account for the costs of transitioning to a low-carbon economy, which includes fluctuations to emission pricing and the capital expenditure on new technology. Companies are also implored to develop short, medium, and long-term time frames used for scenarios.

The report also offers different recommendations depending on the location and size of a business. Organisations with an annual revenue of more than $1bn in the non-financial sectors should “consider conducting a more robust scenario analysis” to assess strategies.

Likewise, companies should make financial disclosures in line with national requirements. If certain elements aren’t compatible, the Task Force encourages these to be added to other official company reports.

For example, most G20 jurisdictions legally require companies with public debt or equity to disclose material risks in their financial reports— which includes climate-related risks. But, the absence of a standardised framework for disclosing climate and financial risks creates confusion about what information should be included. The TCFD report establishes the framework to capture wider ranges of data.

FSB Chair Mark Carney said: “The Task Force’s recommendations have been developed by the market for the market. They set out the disclosures that a wide range of users and preparers of financial filings have said are essential to understanding a company’s climate-related risks and opportunities. Widespread adoption will provide investors, banks and insurers with that information, helping minimise the risk that market adjustments to climate change will be incomplete, late and potentially destabilising.”

TCFD suggests that the value at risk, as a result of climate change, to global manageable assets ranges from $4.2trn to $43trn between now and the end of the century. Investors already fear that the next financial crisis will be climate-related. In fact, Carney has claimed that close to $7trn will need to be spent on new green infrastructure across the globe in order to cut carbon emissions over the next 20 years.

The Task Force is actively encouraging companies to work toward greater alignment of frameworks and to develop applicable 2C transition scenarios that can support other firms. The TCFD has also proposed that it continues its work until at least September 2018.

Recommendation reaction

With 60% of the world’s biggest investors taking steps to protect their portfolios, companies are already reporting climate-related information under other frameworks – such as those provided by CDP.

The TCFD hopes to provide frameworks that create no extra work to report through multiple standards, and factor which has been welcomed by CDP’s chief executive Paul Simpson, who described it as a “landmark” moment to drive climate risk through capital markets.

“The TCFD recommendations are a springboard to delivering the commitments of the Paris Agreement,” Simpson said. “Embedding climate information in all corporate financial filings will engage boards around the world. The TCFD’s leadership will act as a further ‘enabler’ for companies and investors in the push for a sustainable economy. As a next step, we would encourage the G20 to look at mandating regulatory disclosure.”

The Climate Disclosure Standards Board (CDSB) has been advocating for similar targets as the TCFD for the past 10 years. The Board’s chairman Richard Samans added: “We believe there is a clear value to businesses implementing the TCFD recommendations. Companies can become more resilient to the systemic risks that climate change creates and improve their relationships with investors and other stakeholders by collecting, assessing and reporting information about climate-related financial risks and opportunities.”

While the business case is being driven by the Task Force, groups are still calling for policy support to help integrate climate risk as a mainstream business considerations.

The Aldersgate Group’s executive director Nick Molho commented: “These recommendations on standardised voluntary disclosure will act as an influential guide for investors and businesses across the economy. However, in light of the urgency of tackling climate change, mandatory regulations remain essential to ensure that climate-related disclosure is widely adopted in the near future and is consistent and comparable between companies of a same sector.

“Given the UK’s aim to become a hub for green finance, the government should take note of the ambition of these recommendations and strengthen the breadth and scope of its own mandatory carbon reporting regulations in line with the industry standard.”  

Matt Mace