Disclosure based on Task Force on Climate-related Financial Disclosure (TCFD) recommendations has increased this year, but while more than half of companies disclosed climate risk and opportunities information, governance disclosure remains the least popular topic to report on.
This is according to the latest annual report from the TCFD, its 2021 Status Report. Since the release of the 2020 TCFD status report, more than 1,000 additional organisations have pledged support for the TCFD recommendations. As of 6 October 2021, the Task Force had more than 2,600 supporters globally, including 1,069 financial institutions, responsible for assets of $194trn. TCFD supporters now span 89 countries and nearly all sectors of the economy, with a combined market capitalisation of more than $25trn, a 99% increase since last year.
Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the UK have all announced requirements for domestic organisations to report in alignment with the TCFD recommendations. The International Financial Reporting Standards Foundation (IFRS) is also using TCFD recommendations.
This year’s report found disclosure had increased more between 2019 and 2020 than in any previous year, but it said “significant progress is still needed” as the average disclosure is one in three companies.
More than half of companies disclosing climate-related risks and opportunities, and although reporting on company reliance on different climate scenarios was seen the least, the TCFD report said it was nevertheless “encouraged” that this kind of reporting had increased from 5% of companies in 2018 to 13% in 2020. It said key challenges to reporting the impact climate scenarios can have include conducting financial impact analysis, coordinating organisational support and resources, obtaining and using relevant data, estimating potential financial impacts, determining actual financial impacts and articulating the uncertainty of assumptions and the quality and reliability of disclosures.
However, an area still lacking in disclosure is governance, with the report finding two governance-related reporting recommendations the second and third least disclosed area.
In terms of sectors, the report found materials and buildings companies now lead on disclosure, with an average of 38% disclosure across the 11 recommendations. This was followed by the insurance industry.
At a regional level, Europe leads on disclosures.
Example of disclosure: Legal & General GroupBoard oversight
The board is ultimately accountable for the long-term stewardship of the Group. Responding to climate change and the risks associated with it are of importance to the board. In early 2020 the Group added ‘addressing climate change’ as one of our six strategic growth drivers, emphasising the importance of climate risk and the opportunities arising from the necessary energy transition.
Throughout the year, the Group CEO report, divisional CEO reports and chief risk officer (CRO) report to the Group board detailed the challenge of climate change and the new opportunities presented by it, including continued focus on investing in clean energy technologies that support zero-carbon homes and climate-committed cities.
Nigel Wilson, Group CEO, has spearheaded the Group’s engagement on a range of climate change and environmental initiatives. Nigel is actively engaged and takes responsibility for the Group’s strategic direction and progress on this important topic.
The Group chief financial officer (CFO), who is also a board member, is responsible for how market risks connected to our investments (including risks arising from climate
change) are identified, considered and managed.
The CRO is responsible for ensuring that an appropriate strategy is in place to understand, identify, measure, monitor, control and report risks from climate change in line with the risk strategy and risk appetite parameters set by the Group board. The CRO also supports business managers in the development of appropriate processes to monitor and report exposures to the risks from climate change.
The Group board, through the Group risk committee (GRC) and executive risk committee (ERC), has delegated oversight of the management of the risks associated with climate change to the Group environment committee (GEC).
Asset managers and owners
When it comes to reporting from asset managers and owners, the TCFD took a slightly different approach, using the Principles for Responsible Investment (PRI) as a possible means for gaining insight. The Task Force reviewed aggregated reporting results of asset manager and asset owner signatories to the PRI for the 2021 reporting period, and found that while reporting on weighted average carbon intensity (Waci) had increased, reporting on climate-related targets remains low.
In the first quarter of 2021, there were 2,720 asset managers and asset owners with $134trn in assets under management reporting to PRI on climate-related indicators. This includes 2,182 asset managers and 538 asset owners. In terms of PRI signatories’ market coverage, asset manager signatories cover almost 75% of global assets under management by asset managers, and asset owner signatories cover around 24% of global assets under management by corporate and noncorporate pensions, insurance companies, and reserve/sovereign wealth funds. Geographically, these 2,720 asset managers and asset owners were headquartered in more than 60 countries.
The report found reporting on Waci was the most popular metric for asset owners this year (it was the least popular last year), but it was still the least used reporting metric by asset managers. Both asset managers and owners had a low response to reporting on climate targets – just 2-3% of PRI signatories reported on these. “Aligning entire group-wide portfolios with net-zero” was the lowest target for asset managers; while “reducing exposure to assets with significant climate transition risks” was the lowest for asset owners.
This year, PRI included some of the emerging alignment metrics (“implied temperature warming” and “proportion of assets aligned with the EU Taxonomy”) in its answer options providing an indication of the number of asset managers and asset owners that have started to report using these metrics to PRI.
These include Lombard Odier, which uses implied temperature rise (ITR) metrics. “We strongly support the findings of the TCFD’s Portfolio Alignment Team, that forward-looking ESG metrics are required if we are to properly assess whether companies are putting in place appropriate strategies to reduce their carbon footprints,” said Hubert Keller, senior managing partner at Lombard Odier.
“Whereas most other backward-looking approaches at best help us understand the scale of the problem, ITR metrics (which draw on existing climate science to assess alignment of investments and portfolios to the transition) can help us define the potential for real reductions in emissions across sectors and industries. The use of these metrics offers a common frame of reference, and will be vital in encouraging the deployment of capital to transitioning leaders in climate-relevant sectors, as opposed to merely allocating capital away from these vital industries.”
Alongside the report, the TCFD also published guidance on using Scope 1, Scope 2, and Scope 3 GHG emissions, metrics on climate-related transition and physical risks and opportunities, capital deployment, internal carbon price, and remuneration.
Over the next several months, the Task Force will continue to promote and monitor adoption of its recommendations, it said, along with any further work necessary to support preparers’ efforts to implement TCFD recommendations, and will prepare a status report for the Financial Stability Board in September 2022.