- 2022 Status Report highlights ongoing adoption and support of TCFD recommendations. TCFD’s report confirms that companies, in general, are increasingly reporting climate-related financial information
- In 2021, 80% of companies disclosed in line with at least 1 of the 11 recommendations
- Over 60% of the companies disclosed their climate-related risks or opportunities in 2021– up from 27% in 2017
The Task Force on Climate-related Financial Disclosures (TCFD) most recent annual status report shows that more companies are reporting climate-related information, but urgent progress is needed to increase implementation and transparency.
The momentum behind the Task Force’s recommendations remains strong. The total number of companies supporting the TCFD, now at 3,723, represents a broad range of sectors with a combined market capitalization of $26 trillion. This includes over 1,500 financial institutions, responsible for assets of $220 trillion.
80% of companies disclosed in line with at least one of the 11 recommended disclosures, and all regions have significantly increased their levels of disclosure over the past three years.
More than 60% of companies disclose climate-related risks and opportunities, up from 27% in 2017 when the recommendations were launched. While this is a significant increase, the Task Force remains concerned that not enough companies are disclosing decision-useful climate-related financial information.
Companies are improving their disclosure sophistication gradually as they build internal capacity and understand more the impact of climate-related issues on their business. Companies’ reports showed they applied an average of 4.2 of the Task Force’s 11 recommended disclosures.
As the report highlights the need for “more urgent progress,” we expect to see rapid acceleration of disclosure and integration as mandatory regulatory disclosures and standard setters accelerate progress on alignment and baseline disclosure requirements.
What you should know
- The average number of disclosures per company continues to grow yearly; for the fiscal year 2021 80% of companies disclose at least one of the recommended disclosures, and 43% of companies disclose in line with up to 5 of the recommended disclosures, compared to 52% and 9% in 2017 year, respectively.[1]
- Companies typically start by identifying their key climate-related risks and opportunities and understanding the impact on their business. This is reflected by the fact that the recommendations under the strategy pillar remain the most disclosed at 61% and 47%, respectively.
- Despite only 4% of companies currently disclosing in line with all 11 recommendations, 91% of companies intend to implement the 11 recommendations. The two primary drivers of this forthcoming uptake in reporting are (a) the company considers climate-related issues as material and (b) the need to respond to investor demands for climate-related information.[2]
- We expect to see more alignment and disclosure sophistication in the coming reporting cycles, especially as companies build more understanding of climate-related issues. That is evident in the reported significant increase in integrating climate into overall risk management and the rise in reported climate-related metrics and targets.
There is a need for greater disclosure and “transparency on the actual and potential impact of climate change
on companies.” Demands from stakeholders and mandatory disclosure frameworks will put pressure on businesses to identify risks, set targets, and disclose straightforward mitigation and adaptation approaches in alignment with TCFD recommendations, particularly around business strategy resilience. In response to regulations and investor pressures, companies tend to report quantitative emission data if they are required to do so by the regulators. North American companies disclose their targets at a greater rate than their metrics, in contrast to the rest of the world, which discloses metrics at a greater rate than targets. In the U.S., the number of companies reporting their metrics could drastically increase in the coming years based on the Securities & Exchange Commission’s (SEC) proposed rule amendments that would require public companies to provide certain climate-related financial data and disclose greenhouse gas emissions in public filings. We expect to hear updates from the SEC on the proposed new disclosure rules, that are aligned with TCFD recommendations, in the first quarter of 2023.
What’s next?
- With growing stakeholder pressure and regulatory disclosure requirements for climate action and transparency to fight greenwashing, we expect to continue to see growth in climate-related disclosures and improved alignment and sophistication of disclosures in line with TCFD recommendations
- As companies setting climate-related targets continue to increase, we expect to see more disclosures around transition plans, climate-related metrics, and targets and strategy resilience in the coming period. For example, the Glasgow Financial Alliance for Net Zero (GFANZ), the world’s largest coalition of financial institutions committed to transitioning the global economy to net-zero greenhouse gas (GHG) emissions, showed that the focus is moving from pledges to on-ground implementation with a clear emphasis on transition plans
- There is a push for regulations to have interoperability, especially as we start to align climate-related action with nature. The E.U. and the U.S. are creating their own set of mandatory disclosures. But, most importantly, we expect to see regulators support disclosure by broadening the nature of safe-harbor rules against private litigation to push companies towards disclosure which will eventually build the practice and lead to improved processes and data quality over time
- The next frontier in disclosures will be governance. Despite being marked as one of the easiest areas of recommendations disclosures, we have not seen growth in disclosure. However, we anticipate that with regulatory requirements, specifically safe harbor protections, and a growing corporate understanding of climate-related issues and their impact on businesses, boards and senior management will be taking a more active role in climate-related oversight.
Getting ahead of the challenge
The results of the Task Force’s survey reflect what we have been hearing from our clients and in the market. There are several challenges related to implementing the TCFD recommendations and areas where disclosures could be further improved. The results show that companies struggle with scenario analysis and strategy recommendations. Over 50% of preparers indicated that implementing Strategy c) — the resilience of their strategies under different climate-related scenarios — is very difficult, and another 36% indicated it was somewhat difficult. Another key area was Metrics and Targets, where 43% of respondents found reporting Scope 3 GHG emissions very difficult, with over 20% of respondents noting challenges related to data collection and methodology issues.
Despite the implementation challenge, the percentage of alignment and disclosure continues to be trending positively.
Aligning to the TCFD recommendations remains a journey as companies improve their understanding of climate-related impact on their businesses, industries, and broader economy. We still project growth in the number of companies reporting in line with the TCFD recommendation as well as improving their disclosure sophistication. Therefore, we recommend the following:
- First and foremost, have a conversation. Engage your leadership, build a multidisciplinary team that brings views from across your business, and keeps the conversation transparent; ask questions to understand the impact of climate change on your business.
- Start somewhere, regardless of where you are on the journey. Do not let perfect be the enemy of good. Instead, start by assessing your gaps and prioritizing the key areas for action.
- Identify your key climate-related risks and opportunities and start to think about how different future states would impact your business, by when and what are the associated financial impacts. For example, how would the increased frequency and intensity of weather-related events or new climate policies impact your business?
- Integrate climate-related issues into your governance structure and risk management framework. Identify mitigation approaches, roles and responsibilities and action plans to further align with the TCFD recommendations
- Keep working on measuring and disclosing your GHG emissions. Measuring is the crucial first step to managing your carbon footprint. Work on improving the quality and scope of your data
- Finally, review your reporting processes. Approach non-financial data with the same rigor as your financial reporting.
[1] Based on the AI review of disclosure practices; The Task Force reviewed financial filings, annual reports, integrated reports, sustainability reports, and other related reports of 1,434 public companies from five regions in eight industries (Banking, Insurance, Energy, Materials and Buildings, Transportation, and Agriculture, Food, and Forest Products)
[2] The Task Force’s analysis of the adoption and use of its recommendations is based on 399 responses to a survey conducted between late March and early May of 2022. Given the composition and number of survey respondents, the Task Force cautions readers on extrapolating these results to broader populations of companies disclosing climate-related financial information and users of such disclosures.