The Task Force on Climate-related Financial Disclosures (TCFD) recommendations provide a framework for assessing an organisation's readiness for a low carbon world. Here we look at:
Formation of the TCFD
Over the years, organisations have signed up to pledges and reported their environmental credentials through a range of reporting systems - see "About reporting schemes". However, lack of consistency and limited verification have made it difficult to compare the environmental performances of different organisations. This has created a big problem for lenders, insurers and investors trying to assess which organisations are best equipped for a low carbon future.
Climate reporting needed to become as accurate, detailed and standardised as financial reporting. There has been some progress towards this through the Global Reporting Initiative, the Climate Disclosure Standards Board and the Global Compact. However, the pace of climate change means that the standardisation of reporting had to be accelerated. A potential game-changer was when the G20's Financial Stability Board set up the Taskforce for Climate-related Disclosure (TCFD) led by Mark Carney and chaired by Michael Bloomberg.
TCFD recommendations
In 2017, the TCFD issued its recommendations on how organisations should disclose climate information. These recommendations specify what information should be reported, require a plan for transition and, crucially, make management take responsibility for both environmental strategy and reporting. The TCFD reporting requirements are as follows:
* Organisations must disclose direct and indirect GHG emissions. These are defined as:
And there is progress
Over the last few years, nearly 1,500 organisations have signed up to the TCFD recommendations. These include investors (with nearly $34 trillion in assets under management), businesses, national governments (EU, Hong Kong, New Zealand, UK, Singapore, South Africa, Belgium, Canada, Chile, France, Japan, Sweden), central banks, regulators, stock exchanges and credit rating agencies.
There has been a longstanding debate about whether going green is good for the share price. There is some evidence that at last organisations are benefitting from good environmental performance. For example, BP's share price bounced when it took its first major step into offshore wind energy. And there is a longer term upward drift to green shares, as investment funds and bond options provide many more environmental products, and banks and insurance companies give preferential rates to organisations taking climate action. Reporting in line with TCFD recommendations is allowing better assessment of environmental performance, making it possible for investors and others to discriminate in favour of climate-ready organisations.
There are some moves towards making CFD reporting mandatory. New Zealand, Canada and the UK have all indicated that they will do so. The UK's regulator, the Financial Conduct Authority, has made a start, saying that the biggest asset managers and pension schemes will have to comply with TCFD recommendations by 2022.
... but there is still a long way to go
An investigation by Greenpeace and the Huffington Post found that Shell and BP are still active members of at least eight trade organizations lobbying against climate measures in the United States and Australia. The relationship with these trade organisations was not revealed in their public reporting.
PRI analyses the progress of green investment. A recent report found that the number of investors taking account of TCFD recommendations had increased from 591 in 2019 to 2097 in 2020 (managing $97trn in assets). However, only 2% were fully implementing TCFD recommendations. Find an analysis of TCFD reporting in PRI's Climate Change Snapshot 2020.
Also a recent report from Reclaim Finance looked at asset managers (worth $23trn) with climate commitments and found that only one seventh of their investments excluded companies with coal expansion plans. So there is a long way to go before climate action aligns with words.
- how this task force was set up
- what the TCFD recommendations are
- progress
Formation of the TCFD
Over the years, organisations have signed up to pledges and reported their environmental credentials through a range of reporting systems - see "About reporting schemes". However, lack of consistency and limited verification have made it difficult to compare the environmental performances of different organisations. This has created a big problem for lenders, insurers and investors trying to assess which organisations are best equipped for a low carbon future.
Climate reporting needed to become as accurate, detailed and standardised as financial reporting. There has been some progress towards this through the Global Reporting Initiative, the Climate Disclosure Standards Board and the Global Compact. However, the pace of climate change means that the standardisation of reporting had to be accelerated. A potential game-changer was when the G20's Financial Stability Board set up the Taskforce for Climate-related Disclosure (TCFD) led by Mark Carney and chaired by Michael Bloomberg.
TCFD recommendations
In 2017, the TCFD issued its recommendations on how organisations should disclose climate information. These recommendations specify what information should be reported, require a plan for transition and, crucially, make management take responsibility for both environmental strategy and reporting. The TCFD reporting requirements are as follows:
- Governance
a) Describe the board’s oversight of climate-related risks and opportunities.
b) Describe management’s role in assessing and managing climate-related risks and opportunities. - Strategy
a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.
b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. - Risk Management
a) Describe the organisation’s processes for identifying and assessing climate-related risks.
b) Describe the organisation’s processes for managing climate-related risks.
c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. - Metrics and Targets
a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.
b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks*.
c) Describe the targets used by the organization to manage climate-related risks and opportunities, and performance against targets.
* Organisations must disclose direct and indirect GHG emissions. These are defined as:
- Scope 1 - all direct GHG emissions
- Scope 2 - indirect GHG emissions from consumption of purchased electricity, heat, or steam
- Scope 3 - other indirect emissions (not covered in Scope 2) in the value chain of the reporting company, including both upstream and downstream emissions
And there is progress
Over the last few years, nearly 1,500 organisations have signed up to the TCFD recommendations. These include investors (with nearly $34 trillion in assets under management), businesses, national governments (EU, Hong Kong, New Zealand, UK, Singapore, South Africa, Belgium, Canada, Chile, France, Japan, Sweden), central banks, regulators, stock exchanges and credit rating agencies.
There has been a longstanding debate about whether going green is good for the share price. There is some evidence that at last organisations are benefitting from good environmental performance. For example, BP's share price bounced when it took its first major step into offshore wind energy. And there is a longer term upward drift to green shares, as investment funds and bond options provide many more environmental products, and banks and insurance companies give preferential rates to organisations taking climate action. Reporting in line with TCFD recommendations is allowing better assessment of environmental performance, making it possible for investors and others to discriminate in favour of climate-ready organisations.
There are some moves towards making CFD reporting mandatory. New Zealand, Canada and the UK have all indicated that they will do so. The UK's regulator, the Financial Conduct Authority, has made a start, saying that the biggest asset managers and pension schemes will have to comply with TCFD recommendations by 2022.
... but there is still a long way to go
An investigation by Greenpeace and the Huffington Post found that Shell and BP are still active members of at least eight trade organizations lobbying against climate measures in the United States and Australia. The relationship with these trade organisations was not revealed in their public reporting.
PRI analyses the progress of green investment. A recent report found that the number of investors taking account of TCFD recommendations had increased from 591 in 2019 to 2097 in 2020 (managing $97trn in assets). However, only 2% were fully implementing TCFD recommendations. Find an analysis of TCFD reporting in PRI's Climate Change Snapshot 2020.
Also a recent report from Reclaim Finance looked at asset managers (worth $23trn) with climate commitments and found that only one seventh of their investments excluded companies with coal expansion plans. So there is a long way to go before climate action aligns with words.
FURTHER INFORMATION
TCFD website
https://www.fsb-tcfd.org/
TCFD Knowledge Hub
https://www.tcfdhub.org/
TCFD - recommendations
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
TCFD Status Report
https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf
BP share price bounce after wind energy announcement
https://www.theguardian.com/business/2020/sep/10/bp-takes-11bn-stake-in-offshore-wind-farms-as-it-agrees-equinor-deal
UK Asset Managers to comply with TCFD by 2022
https://www.energylivenews.com/2020/10/05/financial-conduct-authority-to-introduce-landmark-climate-risk-reporting-in-2022/
BP And Shell Back Anti-Climate Lobby Groups Despite Pledges
https://www.huffingtonpost.co.uk/entry/bp-shell-climate_n_5f6e3120c5b64deddeed6762?ri18n=true&guce_referrer=aHR0cHM6Ly93d3cuaHVmZnBvc3QuY29tL2F1dGhvci9hbGV4YW5kZXItYy1rYXVmbWFu&guce_referrer_sig=AQAAAD8NJBD_YLyKeR4shAtM-OK_gAY3pFN-WpcUvoH2N0vBCM8ug3GG6WwcGLyAHIX5IZwhrFmB0WcVVAGwbdPgB3R4XDgKKln8-C7nHjQUiEgPO75PFen_6_P_ANZxI6cIOISc9CB9N7zevRYGl8oujuI_45LEGpuE95E3QSR_z4nG&guccounter=2
Climate Change Snapshot 2020
https://www.unpri.org/climate-change/pri-climate-snapshot-2020/6080.article
Slow Burn: The Asset Managers Betting Against The Planet
Reclaim Finance
https://reclaimfinance.org/site/en/2021/04/21/willingly-passive-asset-managers-failing-to-phase-out-coal/
TCFD website
https://www.fsb-tcfd.org/
TCFD Knowledge Hub
https://www.tcfdhub.org/
TCFD - recommendations
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
TCFD Status Report
https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf
BP share price bounce after wind energy announcement
https://www.theguardian.com/business/2020/sep/10/bp-takes-11bn-stake-in-offshore-wind-farms-as-it-agrees-equinor-deal
UK Asset Managers to comply with TCFD by 2022
https://www.energylivenews.com/2020/10/05/financial-conduct-authority-to-introduce-landmark-climate-risk-reporting-in-2022/
BP And Shell Back Anti-Climate Lobby Groups Despite Pledges
https://www.huffingtonpost.co.uk/entry/bp-shell-climate_n_5f6e3120c5b64deddeed6762?ri18n=true&guce_referrer=aHR0cHM6Ly93d3cuaHVmZnBvc3QuY29tL2F1dGhvci9hbGV4YW5kZXItYy1rYXVmbWFu&guce_referrer_sig=AQAAAD8NJBD_YLyKeR4shAtM-OK_gAY3pFN-WpcUvoH2N0vBCM8ug3GG6WwcGLyAHIX5IZwhrFmB0WcVVAGwbdPgB3R4XDgKKln8-C7nHjQUiEgPO75PFen_6_P_ANZxI6cIOISc9CB9N7zevRYGl8oujuI_45LEGpuE95E3QSR_z4nG&guccounter=2
Climate Change Snapshot 2020
https://www.unpri.org/climate-change/pri-climate-snapshot-2020/6080.article
Slow Burn: The Asset Managers Betting Against The Planet
Reclaim Finance
https://reclaimfinance.org/site/en/2021/04/21/willingly-passive-asset-managers-failing-to-phase-out-coal/
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