TCFD progress report on climate-related financial disclosures ‘encouraging’

The conclusions of a new study on the progress of international efforts to encourage businesses to disclose climate-related financial information are encouraging, according to two climate risk and sustainable finance experts.

The Task Force on Climate-related Financial Disclosures (TCFD) issued a number of recommendations in 2017, which were designed to help investors and others make informed decisions. In a progress report (161 pages / 18.3MB PDF), the TCFD said its recommendations have encouraged more consistency in how companies report climate-related information.

The TCFD found that several governments, regulators, and standard setters have adopted or incorporated these recommendations into their reporting requirements. This increased alignment in reporting has made it easier for investors to compare and evaluate companies, according to its report.

The report noted the growing international focus on companies including climate-related information in their financial disclosures, including their financial statements. It highlighted work by the US Securities and Exchange Commission (SEC) and authorities in the UK and EU to scrutinise how companies disclose climate risks. This aligns with the TCFD's 2017 recommendation that climate-related disclosures should be part of annual financial filings.

Dominique Gonsalves, sustainable finance expert at Pinsent Masons, said it was encouraging to see a growing number of organisations worldwide embracing TCFD-aligned disclosures and improving their adherence to the TCFD's recommendations. She added: “This trend is being propelled by increased regulatory disclosure mandates for large and publicly listed entities, particularly in the UK and EU.”

“Moreover, heightened stakeholder demands for transparency and the improved readiness of organisations to assess climate-related risks and opportunities further contribute to this positive trajectory,” Gonsalves said.

“Nonetheless, there is still substantial progress that needs to be achieved. As these findings underline, organisations frequently find it relatively easy to establish board-level supervision of climate-related risks and opportunities and to measure Scope I and II emissions. However, there is often a lack of adequate attention to, and quantification of, the materiality of climate impacts on the organisation,” Gonsalves said.

She added that this issue was hindering the development of a robust strategic response and the incorporation of consideration for material climate impacts into policies, processes, and procedures across all four pillars of the TCFD framework.

“It is not surprising to see that a significant number of large asset managers’ and asset owners’ disclosures are aligned with many of the TCFD’s recommendations. This alignment is consistent with other sustainable finance disclosure regulations like the EU’s Sustainable Finance Disclosure Regulation (SFDR) and standards such as ISO 32210,” Gonsalves said.

The report highlighted the increasing importance of including climate-related risks and strategies in financial filings because climate change is causing more frequent and severe weather events, resulting in substantial economic losses. It said these disclosures help investors, lenders and insurance companies assess and price climate-related risks and opportunities.

The report also assessed current climate-related disclosure practices, showing that, while more companies are aligning with TCFD recommendations, significant work still has to be done to improve transparency and encourage firms to consider climate-related impacts appropriately in their financial statements.

James Dunham, climate risk and sustainable finance expert at Pinsent Masons, said: “Large asset managers and asset owners have emphasised that their main challenges revolve around inadequate information and data from the companies they invest in and the absence of consistent methods.”

“The recent introduction of new standards by the International Sustainability Standards Board (ISSB) is set to fill the information gap and set a global standard for sustainability disclosures. When it comes to addressing transitional risks, the recently published Transition Plan Taskforce's (TPT) Disclosure Framework in October will improve the quality and consistency of transition plan disclosures,” Dunham said.

He added: “Additionally, there is an expectation that the TPT framework will eventually become the basis for legal and regulatory requirements in the UK. By adopting this framework, organisations can greatly enhance their strategic planning, making it easier to identify opportunities and strengthen their resilience.”

Dunham warned that there is a significant gap in how organisations recognise and address physical climate risks and opportunities. “Many organisations have not conducted thorough risk assessments or integrated the necessary measures into their policies, plans, processes, and procedures to deal with material physical climate impacts,” he said.

“Several factors contribute to this gap, including a lack of awareness, inadequate guidance and resources, and a prevailing belief that physical risks are less immediate and manageable compared to transition risks,” Dunham added.

He also warned that asset managers also face challenges themselves when it comes to evaluating the physical climate risks to their assets. “These challenges include difficulties in obtaining data for context-specific assessments, managing the associated uncertainties, the absence of standardised assessment methods, and the struggle to translate long-term risk assessments into short-term investment strategies. This however doesn’t negate the need to stress test financial models with consideration for a range of global warming scenarios,” Dunham said.