TCFD Recommendations: What Do You Need to Know?
Last updated 30th April 2019 - By Elina Yumasheva
With over 824 signatories as of July 2019, The Task Force on Climate-Related Financial Disclosure (TCFD) is pushing companies to publicly disclose on their climate-related risks and opportunities.
Established in 2015 by the Governor of the Bank of England Mark Carney in response to a G20 request to understand the financial implications of climate change better, the TCFD is chaired by Michael Bloomberg.
The Task Force bridges the gap between the corporate and finance communities as it invites companies to disclose how climate related issues can impact their business. The latter then helps investors, lenders and insurers to better assess climate-related risks and opportunities in their decisions.
In less than four years, the TCFD signatories account for $7.9 trillion in an average market capitalization per company according to the Task Force. The Task Force majority is predominantly represented by financial services firms, however, it has already managed to attract some of the biggest players from finance, utilities, extractives, consumer goods, technology, and other industries. Support is increasing daily all over the world: at the end of April 2019, TEPCO became the first utility company in Japan to support the TCFD recommendations.
As of today, TCFD members include the likes of; Diageo, PepsiCo, Unilever, Morgan Stanley, BHP Billiton, Akzo Nobel, Vale, Kering, Shell, Burberry, M&S, EDF, Engie, Salesforce, Qantas Airways, ING, and many others.
TCFD Recommendations and Framework
As Carney explains, 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.”
However, the ultimate purpose of the TCFD recommendations is to enable sustainable investments. Bloomberg explains:
“Increasing transparency makes markets more efficient and economies more stable and resilient.”
The TCFD Framework
Source: TCFD Recommendations Report (click to open)
The TCFD signatories commit to disclose their activities across four main areas, including;
- Governance - how companies are governing climate change-related risks and opportunities
- Strategy - looking into what actual and potential impacts climate change can make on business, strategy, and financial planning
- Risk management - identifying the process an organisation is using to5 identify, assess and manage climate-related risks
- Metrics and targets to assess and manage climate-related risks and opportunities.
Practical tools, insights and technical expertise is provided by the TCFD knowledge hub and the Climate Disclosure Standards Board (CDSB) – a consortium of businesses and NGOs advocating inclusion of climate change-related disclosure into financial reporting.
The TCFD and the EU Non-Financial Reporting Directive (NFRD)
The relevance of climate-related risks is well perceived by regulators, and particularly by the EU Commission. The latter has released a Consultation Document on the Update of the Non-Binding Guidelines on Non-Financial Reporting in February 2019.
Update: Datamaran submission to the NFRD public consultation
On 10 June 2020, Datamaran responded to the European Commission on Non-Financial Reporting Directive, focusing on the application of the materiality principle.
Our response can be articulated on four main pillars:
- Materiality shouldn’t be considered exclusively as a reporting activity, but should be regarded as the foundation for a more complete strategic risk management process.
- Technology has a dramatic impact on resource efficiency while ensuring accuracy of analysis, quality and auditability of data, and comprehensiveness of insights.
- ESG rating agencies or investors should take into account a company’s materiality determination process, and not penalize lack of disclosure on non-material indicators.
- Data driven materiality, based on a robust standardized procedure, would allow to move beyond idea that companies’ accountability consists in along list of indicators to disclose on, and bring it back where it belongs - to the Board.
Mapping of the NFRD Requirements and TCFD Recommendations. Click enlarge.
Source: Consultation Document on the Update of the Non-Binding Guidelines on Non-Financial Reporting (click to open)
The document mentions the Task Force on Climate-related Financial Disclosure 53 times over 33 pages, while pointing out the limitations of the TCFD. The reason lies in the fact that, in the race to be the “best policy maker” around climate action, the new Non-Binding Guidelines are setting the stage for the NFRD to “absorb” the TCFD.
In September 2018, 15 months after releasing its final recommendations, the Task-Force released its first Status Report, to measure the progress made so far by the signatories. The analysis shows that, while the majority of companies disclose climate-related information, few of them disclose the financial impact of climate change on the company. In addition, disclosures vary consistently across regions and industry. As the report mentions:
“a higher percentage of non-financial companies reported information on their climate-related metrics and targets compared to financial companies; but a higher percentage of financial companies indicated their enterprise risk management processes included climate-related risks”.
A recent Datamaran study confirmed this scenario, finding that twice as many non-financial services signatories report on climate change with a high emphasis compared to financial services. The gap between both groups of TCFD signatories has been stable throughout the years with no sign of widening or closing, as both showed an incremental growth for the past five years:
Annual dynamics of high emphasis mentions around Climate Change and Air Quality among the TCDF signatories.
Further findings include that, in 2018, financial services saw a 10% drop in high emphasis reporting on greenhouse gases but saw a 14% rise in climate change disclosure.
Are Companies Disclosing on Climate Risks?
In line with the World Economic Forum (WEF) Global Risks Report 2019, the growing number of TCFD signatories confirms that climate-related risks are increasingly becoming more material.
The WEF report outlines that, out of the top five risks that will have the most impact and/or are likely to happen, three are identified as climate-related, for example extreme weather events and Climate Change mitigation and adaptation. Yet, despite this warning, the majority of companies are not reporting on their impact on climate-related issues.
Using its Benchmark Module, Datamaran analyzed Annual Financial Reports and SEC filings of 4,737 of the world’s biggest companies across six regions (analysis made in December 2018). The research found that only 52 percent of them disclosed on Climate Change in their financial reports during 2018. The majority of mentions come from Africa, Europe, Oceania, and Asia. Americas and MENA lag behind their peers.
Climate Change reporting: a geographical analysis mentions
A Comparison between TCFD Signatories and Non-Signatories
While comparing the disclosure levels of the TCFD signatories and non-signatories the scenario changes and the levels of disclosure drop. Supported by Datamaran data*, two graphs below analyze member and non-member annual financial reports. They indicate how many times climate-related issues have been mentioned in their reports as well as emphasis given to these issues.
* Data collected on May 2018
Climate change as an issue in this analysis is comprised of topics, such as; Climate Change, Emission Trading, Air Emissions, Eco-efficient Transportation and Greenhouse Gases. Prioritizing of the issue has been analyzed by Datamaran’s proprietary Artificial Intelligence engine that interprets the narratives used in each document.
Graph 1 compares the level of Climate Change reporting in Financial reports between the TCFD members and non-members. The data indicates that signatories’ disclosure levels are double compared to their counterparts’ in 2017. A steady increase of disclosure is also seen among the supporters.
Data collected on May 2018
Interestingly, financial services firms refer to climate change issues in their disclosure less than an industry average among signatories (see graph 2) - in 2017 it was 41% compared to 29% by the industry average. In contrary to all members, financial service signatories decrease a number of mentions in 2017 compared to the previous year, while increasingly placing a higher and medium emphasis on climate change issues in their disclosure.
Data collected on May 2018
While more analysis has to be done – in particular looking into the correlation between climate change disclosure levels and financial performance – these graphs give a good sense of how business prioritizes climate related risks.
Double materiality explained: How to achieve double materiality in Datamaran
First introduced by the EU Commission as part of the Non-Binding Guidelines on Non-Financial Reporting Update, double materiality speaks to the fact that risks and opportunities can be material from both a financial and non-financial perspective. That doesn’t mean that double materiality is twice as challenging to achieve. You only need to ensure that the materiality process itself is data-driven, dynamic, and context-driven, taking into consideration a wider scope of external data.
Join our live workshop on 4 February to see how you can run double materiality analysis in real time using Datamaran, and how Fortune 500 companies use our data-driven approach to proactively meet rising investor and regulatory expectations, including those outlined in the EU Sustainability Standards, the NFRD revision, the IFRS consultation.
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