A 'roadmap for improvement': TCFD's third status report

3 minunte read 03.11.2020 Kate Hilder, Mark Standen

The TCFD's third status report welcomes the fact that adoption of the TCFD recommendations is on the road to becoming mainstream, but the report also makes clear that significant challenges remain.

Key takeouts

The TCFD's latest status report tracking progress toward the alignment of company disclosures with the TCFD recommendations has identified a significant increase in support for/adoption of the recommendations. The report makes clear that though this is a welcome development, significant challenges remain.
The effectiveness of disclosure from a user perspective is highlighted as a key challenge/improvement area. The report identifies examples of the specific types of climate-related information that 'expert users' would find most useful in decision making and gives examples. The TCFD suggests that the these insights could be used as a ‘roadmap’ by preparers to improve their reporting going forward.
Another challenge highlighted in the report is the need for more standardisation of reporting requirements, to meet the demand for more consistency/comparability in reporting and to 'minimise the burden for reporting companies'.;
Additional guidance: The TCFD has released additional guidance to support implementation of the TCFD recommendations.
Consultation launched: Separately, the TCFD is consulting on proposed forward-looking climate metrics for financial firms.

Overview

The Task Force on Climate-related Financial Disclosures (TCFD) has released its third status report tracking companies' progress toward aligning their disclosure with the TCFD recommendations.

The report provides an overview of current disclosure practices and the extent to which they align with the TCFD recommendations, identifies the 'top implementation issues' and outlines what climate-related information 'expert users' are looking for to assist them in their decision making.

A key message is that though global adoption and support for the recommendations has significantly accelerated since the release of the last report and looks set to continue, challenges remain. A key challenge is ensuring that reporting is effective from a user perspective, especially in light of the demand for greater consistency and comparability in reporting.

Commenting on this, TCFD Chair Michael R Bloomberg said,

'Going forward, it will be important to bring more standardisation to reporting requirements across different countries and jurisdictions, in order to minimise the burden for reporting companies and maximize the value of disclosure for investors'.

Mr Bloomberg suggests that global efforts to recover from the economic damage of the COVID-19 pandemic offers an opportunity to progress solutions to these challenges.

Some key takeaways

On the way to becoming mainstream

The report found that support for the recommendations has gained significant momentum globally since the release of the last report, a trend which the TCFD welcomes and hopes to see continue going forward.

There has been an 85% uptick (almost 700 organisations) in the number of organisations supporting the TCFD recommendations since the release of the last report.
Nearly 60% of the world’s 100 largest public companies now support and/or report in line with the TCFD recommendations.
This is matched, the report comments, by increased investor demand for TCFD disclosure and growing regulatory pressure. According to the report, over 110 regulators and governmental entities globally support the TCFD recommendations as do central banks and supervisors through the Network for Greening the Financial System.
The report found that asset manager and asset owner reporting to their clients and beneficiaries 'is likely insufficient'. The report states that,

'While TCFD-aligned reporting by a sample of asset managers and asset owners increased over the past three years, the Task Force believes reporting by these organisations to their clients and beneficiaries may not be sufficient and that more progress may be needed to ensure clients and beneficiaries have the right information to make financial decisions'.

Providing decision-useful climate-related information: Where companies should focus their efforts

Though disclosure of climate-related financial information has increased since 2017 and progress has been made both in terms of the number of companies reporting the quality of reporting, the report makes clear that improvement is urgently needed.

Part B of the report (p27) outlines what specific types of climate-related information investors, lenders, and others (the report refers to this group collectively as expert users) find the most useful for decision making.

The top three most useful disclosure elements from a user perspective

Expert users ranked disclosure of: 1) information about how climate related issues have affected business and strategy; 2) 'key metrics on climate related issues for most recent period and historical periods'; and 3) 'the material climate-related issues identified for each sector and geography' as the top most useful climate-related information from a decision making perspective.

The TCFD suggests that companies may find this information helpful in the context of approaching their reporting going forward.

The graphic at p31 of the report ranks the 'top ten' most useful disclosure elements from most-useful to less-useful.

TCFD Initiatives to Support Implementation

Additional guidance released: At the same time as releasing the report, the TCFD also issued additional guidance - Task Force on Climate-related Financial Disclosures Guidance on Scenario Analysis for Non-Financial Companies; and Task Force on Climate-related Financial Disclosures Guidance on Risk Management Integration and Disclosure – to assist organisations in implementing the recommendations.

Consultation on proposed forward-looking climate metrics for financial firms: The TCFD also issued a consultation paper seeking feedback on proposed forward-looking climate metrics for financial firms. The deadline for submissions was 27 January 2021.

[Sources: T CFD media release 29/10/2020; 2020 Status Report: Task Force on Climate-related Financial Disclosures]