The Task Force on Climate-related Financial Disclosures (TCFD) announced the publication of its 2021 Status Report – which says that a majority of companies are now disclosing climate-related risks & opportunities in some shape or form, and TCFD-aligned disclosures increased by 99% in just the past year. In another sign that momentum is gathering, more than 2600 organizations now say they support the TCFD recommendations – an increase of over a third since last year. Here are some other takeaways from the press release:
- Disclosure increased more between 2019 and 2020 than in any previous year assessed, consistent with global momentum around climate-related reporting. However, significant progress is still needed as an average of only one in three companies reviewed disclosed climate-related information aligned with the TCFD recommendations.
- Companies remain more likely to disclose information on their climate-related risks and opportunities (Strategy a in the TCFD recommendations) than on any other recommended disclosure, with over half of the companies reviewed including such information in their 2020 reports.
- Disclosure of the resilience of companies’ strategies under different climate-related scenarios (Strategy c in the TCFD recommendations), although still the least reported recommended disclosure, encouragingly increased from 5% of companies in 2018 to 13% in 2020.
- Although the TCFD recommends disclosure of governance regardless of materiality, the Governance recommendation remains the least disclosed recommendation with the two Governance recommended disclosures the second and third least disclosed.
In addition, the Status Report says that governments around the world are starting to incorporate aspects of TCFD recommendations into policies & regulations. Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom are going to require their domestic organizations to report in alignment with the TCFD recommendations.
The US isn’t on that list at this point, but Sidley’s Sonia Barros mentioned at our “Proxy Disclosure Conference” that Corp Fin may consider the TCFD framework in making recommendations to the SEC about how to measure greenhouse gas emissions, in anticipation of the climate disclosure proposal that is expected around the end of this year. Of course we’ll know more if and when we see that proposal, but that comment was consistent with SEC Chair Gary Gensler’s remarks at PRI that the staff would “learn from and be inspired by these external standard-setters.”
In addition to the Status Report, the TCFD also released:
- Guidance on Metrics, Targets, and Transition Plans to support preparers in disclosing decision-useful information and linking those disclosures with estimates of financial impacts; and
- Updates to the implementation guidance on its sector-specific Recommendations initially published in 2017.
The TCFD’s four pillars of “Governance,” “Strategy,” “Risk Management,” and “Metrics & Targets” – and the eleven associated recommended disclosures – remain intact. Major changes to the recommendations include:
- Revised to more explicitly address disclosure of actual and potential financial impacts on organizations.
- Revised to more explicitly address disclosure of metrics consistent with cross-industry, climate-related metric categories for current, historical, and future periods, where appropriate.
- Added disclosure of the extent to which lending, insurance underwriting, assets owned or managed are aligned with a “well-below” 2°C scenario.
- Revised disclosure of Scope 1 and Scope 2 Sectors GHG emissions to be independent of a materiality assessment.
- Revised to encourage disclosure of Scope 3 GHG emissions.
- Added disclosure of GHG emissions for lending, insurance underwriting, assets owned or managed, where data and methodologies allow.
- Added disclosure of interim targets, where available, for organizations disclosing medium-term or long-term targets.
The reports are pretty heavy reading and will take a bit of time to digest, but there are plenty of examples to help readers. It will be interesting to see whether and how any of the TCFD recommendations are incorporated into the SEC’s proposal, and that’s something we’ll be watching.