Task force on climate-related financial disclosures - 2022 Status report
The Task Force on Climate-related Financial Disclosure (TCFD) was created in 2015 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. The FSB itself was established in 2009 by the G20, an intergovernmental forum comprising 19 countries and the European Union (EU). The FSB works to address major issues related to the global economy, such as international financial stability, climate change mitigation, and sustainable development. The FSB succeeds the Financial Stability Forum and is mandated to promote financial stability by coordinating national financial authorities and international standard-setting bodies. By encouraging coherent implementation of strong regulatory, supervisory and other financial sector policies across sectors and jurisdictions, the FSB aims to foster a level playing field.
In 2017, the TCFD published recommendations, providing a framework for companies and other organisations to disclose climate-related issues more effectively through existing reporting channels. These recommendations on climate-related financial disclosures are being widely and voluntarily adopted and are applicable to organisations across sectors and jurisdictions. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial reporting.
Following the publication of the TCFD recommendations, the FSB asked the TCFD to continue its work, to promote the adoption of the TCFD framework, to provide further guidance, to support educational efforts, to monitor climate-related financial disclosure practices in terms of their alignment with the TCFD recommendations, and to prepare annual status reports. This newsflash covers the 2022 annual report, the fifth of its kind since the publication of the Task Force’s recommendations.
Progress in reporting
In its recommendations, the TCFD determined the disclosure of 11 types of information, divided in 4 broad categories: governance, strategy, risk management and metrics and targets:
The governance pillar relates to the disclosure of a company’s governance around climate-related risks and opportunities.
Strategy covers the actual and potential impacts of climate-related risks and opportunities on a company’s businesses, strategy and financial planning.
Risk management information relates to the identification, assessment and management of climate-related risks.
Metrics and Targets relates to information on the tools that a company relies on to assess and manage relevant climate-related risks and opportunities.
The TCFD 2022 status report gives an overview of the progress made by companies to implement these disclosures since the Task Force’s recommendations were adopted.
First, the TCFD finds that an increasing number of companies are disclosing TCFD-aligned information.
Second, the amount of information that is being disclosed by companies is increasing each year. For fiscal year 2021 reporting, 80% of companies disclosed in line with at least one of the 11 recommended disclosures in the TCFD recommendations. However, only 4% disclosed in line with all 11 recommended disclosures and only around 40% disclosed in line with at least five.
Following the 2021 status report, regulators and international standard setters have also started to use the TCFD recommendations when setting up climate-related reporting requirements and standards. For instance, this year, the US Securities and Exchange Commission proposed changes to enhance and standardise climate-related disclosures for investors. This would mean that registrants would be required to include certain climate-related disclosures in their registration statements and periodic reports. The information that registrants would need to disclose covers climate-related risks which are reasonably likely to have a material impact on their general business and information on the registrant’s greenhouse gas (GHG) emissions.
According to the Task Force, a key driver of progress in corporate climate reporting is the increasing demand from investors for companies to disclose information in line with TCFD recommendations. This statement is best illustrated by the group Climate Action 100+: a group of more than 700 investors responsible for $68 trillion who are engaging the largest corporate greenhouse gas emitters to implement the TCFD-recommend disclosures.
In terms of regions, Europe remains the leading region for TCFD-related disclosures. European companies disclosed at 60% on average across the 11 recommended disclosures, which is 24 percentage points higher than the next highest region (Asia Pacific). In addition, European companies have the highest level of disclosure (81% of European companies disclosed their climate-related metrics, 75% disclosed information on their climate-related risks and opportunities and GHG emissions, and 74% disclosed their climate-related targets). This is likely due to the increasing public sector awareness of climate-related issues and requirements for climate-related reporting.
Two recent EU initiatives illustrate this increased focus by regulators. In April 2021, the European Commission issued a proposal to amend and extend the actual reporting requirements. The amendment will take the shape of a directive, the Corporate Sustainability Reporting Directive (CSRD). The text, that reached a provisional agreement, will extend the scope of the companies required to disclose. The CSRD sets financial year 2024 as a start date for the reporting requirements.
In addition, in January 2022, the European Banking Authority published its final draft implementing technical standards on disclosing ESG risks. These standards are designed for large financial institutions that issue securities on a regulated market in any EU Member State.
Although big steps have been made in the past five years, the Task Force however believes that more urgent progress is required to improve transparency on the actual and potential impact of climate change on companies.
Finance as an enabling factor for the energy transition
Under the 2015 Paris Agreement, the participating countries agreed that to address climate change it would be necessary to maintain global temperature rises to well below 2°C and to pursue efforts to limit these rises to 1.5°C. According to the IPCC report published earlier this year, the world is heading for a temperature rise well above 2°C, based on current policies and commitments. In its own assessment report, the IPCC referenced the TCFD as an example of guidance on information-exchange.
The TCFD 2022 status report emphasizes the importance of finance as an enabling factor for the energy transition. The report indicates that financial institutions and markets still highly underestimate climate-related financial risks. This limits the reallocation of investments in virtue of the low-carbon transition. More transparency could help capital markets with climate financing. However, more qualitative information needs to be provided to accurately price climate-related risks and opportunities.
Last year, in October 2021, the TCFD published its Guidance on Metrics, Targets and Transition Plans, to follow up on commitments made by companies to achieve net-zero and to meet investors’ demands for more decision-useful information. The document provides guidance to those preparing climate-related financial disclosures and key information for those developing a transition plan. After all, it is critical for companies to include climate impact and associated mitigation and adaptation scenarios in their strategy and business plans.
Disclosure practices
Next, the TCFD 2022 status report provides an overview of the current disclosure practices, their compliance level with the recommendations and the improvements made over the past five years. The Task Force uses AI technology to assess more than 1,400 large company reports that were publicly available from sectors all around the world. In 2022, the TCFD also surveyed asset managers and asset owners to obtain information on reporting practices, on companies’ efforts to implement TCFD-aligned disclosure processes and on how companies are perceived by investors and other users. The results were encouraging, but in the light of what is necessary, still insufficient.
The following points summarise the progress made on disclosures over the past 5 years:
companies are increasingly disclosing climate-related information in financial reporting;
preparers and users of these disclosures are increasingly viewing climate-related issues as mainstream business and investment considerations;
the number of companies implementing the recommendations is growing and the types of information disclosed are being expanded and further developed;
disclosures are becoming more complete and the pricing of climate-related issues is becoming more appropriate.
Over the past 5 years, the TCFD has seen significant momentum around the adoption of and support for its recommendations. Significant progress has been made. Climate-related issues are becoming a natural part of companies’ risk management and strategy. Therefore, the rate of disclosures has increased steadily, as has the information disclosed. Disclosures are now made in a way that is more tailored, appropriate and complete for companies’ use.
The EU and the TCFD
It is clear to see that the TCFD disclosures and EU initiatives on financial reporting go hand in hand. In 2014, the European Commission (EC) passed Directive 2014/95, otherwise known as the Non-Financial Reporting Directive, laying down rules on the disclosure of non-financial and diversity information for large companies. In 2017 and 2019, the EC published non-binding guidelines on non-financial reporting and climate-related information reporting, building on the aforementioned directive. In these guidelines, the EC recognises the TCFD recommendations as authoritative on the reporting of financially material climate-related information. The EC encourages companies to implement the TCFD recommendations and the 2017 and 2019 guidelines are aligned with the TCFD disclosures.
Furthermore, the previously mentioned proposal for the Corporate Sustainability Reporting Directive (CSRD) aims to build on and contribute to international sustainability reporting initiatives such as the TCFD initiatives. By the EU’s own admission, EU sustainability reporting standards should be developed in constructive, two-way cooperation with leading international players such as the TCFD. They should be aligned with their initiatives as far as possible while also taking into account European specificities.
Conclusion
Companies are making progress in disclosing climate-related information in line with the TCFD recommendations. This is in part due to support received from regulators and standard setters who are using the recommendations as a basis for their rules and standards. European companies can take heart for having achieved the highest level of disclosure.
Nevertheless, in the TCFD 2022 status report, the Task Force expresses concern that more progress is needed in disclosing decision-useful, climate-related financial information. This information is crucial to help investors, lenders and insurance underwriters to appropriately assess and price climate-related risks, and to drive climate-conscious and sustainable investments.
You can read the full report here.
