In its newly released “2019 Status Report,” the industry-led Task Force on Climate-related Financial Disclosures (TCFD) details “encouraging progress” on climate-related financial disclosure, but also the need for further progress when considering financial risks.
While the commitment to implementation is encouraging, actual disclosure still faces challenges. Most notably, the preparers surveyed find disclosing scenario analysis assumptions difficult and lack standardized metrics and targets.
The TCFD was established by the international Financial Stability Board in 2015 to develop “a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks.” It has developed 11 recommendations on climate-related financial disclosures that are applicable to organizations across sectors and jurisdictions. Those recommendations are structured around four thematic areas:
- Governance: The organization’s governance around climate-related risks and opportunities.
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
- Risk Management: The processes used by the organization to identify, assess, and manage climate-related risks.
- Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
To better understand current climate-related financial disclosure practices and how they have evolved, the Task Force’s new status report used artificial intelligence to review data from more than 1,100 companies in 142 countries in eight industries over a three-year period. It also conducted a survey on companies’ efforts to implement the TCFD recommendations, as well as users’ views on the usefulness of climate-related financial disclosures for decision-making.
While the research found some of the results of its disclosure review and survey positive, there were “concerns that not enough companies are disclosing decision-useful climate-related financial information.” The review of financial filings, annual reports, integrated reports, and sustainability reports found that:
- disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors;
- more clarity is needed on the potential financial impact of climate-related issues on companies;
- of companies using climate change scenarios, the majority do not disclose information on the resilience of their strategies; and
- mainstreaming climate-related issues requires the involvement of multiple functions.
“The Task Force continues to provide a forum for market participants to develop and use a valuable private-sector solution to assess climate- related business risks. The increased participation levels confirm the value of these voluntary disclosures, allowing the public, markets, and investors to better monitor risks,” FSB Chair Randal Quarles, vice chairman for supervision of the Federal Reserve Board, said in a statement.
Added former New York City Mayor Michael Bloomberg, chairman of the TCFD: “We remain encouraged by the continued growth in the number of companies adhering to the guidelines of the TCFD. It means businesses are better informed about the risks they face, and investors are more capable of making sound decisions. However, we’re also clear-eyed about the serious threat that climate change poses. In order to keep people out of harm’s way, and build a more resilient global economy, we need more companies to follow their lead and soon.”
The Task Force is also considering additional work to clarify elements of the TCFD’s supplemental guidance, develop process guidance around how to introduce and conduct climate-related scenario analysis, and identify business-relevant and accessible climate-related scenarios.
Nearly 800 organizations have expressed their support for the TCFD recommendations, a more than 50 percent increase from the publication of the first status report in September 2018.
The Task Force also conducted a survey on companies’ efforts to implement the recommendations. Ninety-one percent of the 198 survey respondents that identified as preparers of disclosure have decided to “fully” or “partially” implement the TCFD recommendations, with 67 percent stating their companies plan to complete implementation within three years. Seventy-six percent of users stated they are already using climate-related financial disclosures in their decision-making process.
The full 2019 Status Report is available on the TCFD website.