At 114 pages long, the TCFD’s third Status Report annual covering 2020 is quite the substantial read. However, condensing and highlighting some of the key areas showed several interesting themes that should prompt firms to further elevate and prioritise focus on climate risks, despite the myriad of complex demands already in play.
Interest and scope, including from regulators, continues to grow
Takeaway 1: As interest grows year-on-year, so does the likelihood of mandatory regulation and standard setting across all four areas of the TCFD’s recommendations.
- The TCFD’s framework and recommendations are currently ‘the’ global standard. 1,500 organisations have pledged support, with these organisations responsible for $150 trillion of assets and a combined market capitalisation of over $150 trillion.
- Investors representing $47 trillion of assets under management (AUM) are also engaging with greenhouse gas (GHG) emitters around linking information in disclosures to the TCFD’s recommendations.
- Lastly regulators are also aligning behind the recommendations, with 110 signed up and 3 – New Zealand, the EU and UK – starting to transpose this into national regulation.
Scenario analysis needs serious focus from firms
Takeaway 2: More detailed input parameters and guidance will be needed by regulators, industry bodies and working groups (e.g. Climate Financial Risk Forum) to encourage firms to bridge the gaps.
- Only one in 15 companies reviewed disclosed information on the resilience of its strategy under different climate-related scenarios. The percentage of companies disclosing strategy resilience was significantly lower than that of any other recommended disclosure – 10 percentage points lower than the next lowest recommended disclosure.
- Only 12% of banks and 8% of insurers disclosed their strategic resilience assessments.
- Feedback received from companies on the challenges of disclosing such information, corresponds with challenges FourthLine have heard around core data and availability of Integrated Assessment Models (IAMs) that allow enough bespoke analysis on the risks faced by specific businesses (e.g. postcode granularity for potential flood analysis).
Asset managers and asset owners are conspicuously called out
Takeaway 3: Naming and shaming the asset manager/owner sector may force the Financial Conduct Authority (FCA) to push standards uplift across firms to address Business Plan Key Priority 2.
- While reporting by asset managers and asset owners to the Principles of Responsible Investment (PRI) increased over the reporting periods, the TCFD believes reporting by asset managers and asset owners to their clients and beneficiaries, respectively, may not be sufficient and that more progress may be needed to ensure those stakeholders have the right information to make financial decisions.
- The FCA’s own Business Plan for 2020/2021 highlights their 2nd key priority is ‘enabling effective consumer investment decisions’. Climate change is called out in the business plan along with disclosure rules for some issuers. However, their own regulation may not have the coverage required and broader measures could be required to meet their requirements across the whole industry.
- Climate-Related Targets (11%) and GHG emissions (9%) are two areas where the sector lags significantly behind the average – 26% and 33% respectively.
Listen to expert users and ‘TCFD veterans’ when creating your disclosures
Takeaway 4: Getting started on those areas highlighted as ‘most important’ by expert users could deliver immediate ‘bang for buck’ impact in initial disclosures, in terms of client value.
- The single most valuable disclosure element was determined to be ‘How climate-related issues have affected business and strategy’. This was followed by ‘Key metrics on climate-related issues’ (2) and ‘Material climate-related issues identified for each sector and geography’ (3).
- The TCFD have used expert user feedback to develop an illustrative Implementation Plan – a three phase approach will allow firms to develop their disclosures in a structured and value adding way if a ‘big bang’ approach appears too intimidating.
- “Approach the process as a marathon, not a sprint” was sage advice provided by one discloser going through a more mature disclosure process.
Users need clear signposting to TCFD disclosure elements
Takeaway 5: Do not assume the user can find all the information they need at first sight. Indexing and referencing is critical to ensuring they can comfortably find information without becoming frustrated.
- Companies with enterprise-wide governance or risk management processes that include climate-related issues used a mapping of sections in their report where the reader can find information that addresses the TCFD’s recommended disclosures.
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