Expert Perspectives

Climate-Related Financial Disclosures 5 Years After the Release of the TCFD's Recommendations

December 21, 2023
October 14, 2022
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Kristina Wyatt and Anissa Vasquez on a collage background
Julian Mandler / Persefoni

Thanks to my colleague and rising star in the sustainability world, Anissa Vasquez, for writing this week's newsletter. She chose a topic near and dear to my heart - the TCFD. The TCFD issued its recommendations five years ago and recently issued its fifth annual status report. The takeaways show great progress, and more work to be done. Anissa provides a great summary of the TCFD's most recent status report. It's a quick read and very useful.This week, we received useful insight into the climate-related reporting practices of more than 1,400 companies. The Task Force on Climate-related Financial Disclosures (TCFD) announced on Thursday the release of its 2022 Status Report, the fifth annual status report since the TCFD launched in 2015. In order to get a better understanding of public companies’ climate-related financial information, the Task Force used AI technology to review the 2021 reports of the 1,400+ companies, which span across at least 8 industries.

From that AI review, we were able to see a considerable increase in the number of organizations reporting on climate-risks and opportunities (up 19% since 2019). Still, the report showed there is work to be done to increase adoption in other areas of the TCFD in which investors are demanding information. Here are the key findings from the AI review:

  • Of the 1,400+ companies reviewed, 80% of companies disclosed in line with at least one of the eleven TCFD recommended disclosures
  • Only 4% disclosed in line with all 11 recommended disclosures
  • 60% of companies reviewed included disclosure on their climate-related risks and opportunities, more than any other recommended disclosure
  • The lowest level of disclosure was that related to the resilience of companies’ strategies under various climate-related scenarios (16%)
  • Of the industries reviewed, energy companies, materials and building companies, banks, and insurance companies all have average disclosure levels over 40%
  • All regions have had a marked increase in their level of disclosure since 2019. European companies average level of disclosure was 60% in 2021 (growing 23% since 2019), North American companies are at 29% (growing 12% since 2019), and Asia Pacific companies are at 36% (growing 11% since 2019)

The AI review tells us that there is increased adoption across all 11 recommendations, in all industries, and in all regions. Still, there are certain disclosure recommendations, specifically on risk management processes and governance, that are still under-adopted. In addition to the AI review, TCFD surveyed over 4,500 organizations, and received 399 responses from 226 preparers of climate-related financial disclosures and 42 users of the climate-related financial information (investors, asset managers, and other financial services companies). The survey showed that 90% of respondents identifying as users have incorporated climate-related financial disclosures in their financial decision-making processes. Further, 95% of those users of climate-related financial disclosures saw an increase in the availability of climate-related information, with 88% citing improvements in the quality of disclosures.

At the same time, there is concern in the market that there is a lack of transparency on the financial impact of climate-related risks. Last week, EY announced the publication of its annual Global Climate Risk Barometer report, which analyzed corporate climate disclosures as well. While the EY findings were aligned with TCFD’s, in showing an  increase in TCFD-aligned reporting, they found a disconnect between those disclosures and reference to climate-related matters in financial statements. In fact, EY reports that only 29% of companies included climate info in their financial statements.

It is clear from the TCFD and EY reports that, while there is an increase in climate-related financial disclosures, there is still low inclusion in financial statements. At this point, we know that climate risk is financial risk. The financial significance of climate risk cannot be understated, making the increased adoption of climate-related information in financial reporting crucial to allowing investors to see an organization's full climate story. Luckily, the upward trends seen in the TCFD’s 5-year status report are a cause for optimism in the continued adoption of climate-related financial disclosures across industries and throughout the world.

Regulatory News


CSA seeks to resolve differences among climate disclosure standards proposals

The Canadian Securities Administration (CSA) is reevaluating the climate disclosure rules that it proposed nearly a year ago in an effort to reconcile key discrepancies between its own standards and those proposed by the Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB). The CSA will be looking back on feedback from its initial proposals and tracking the progress of the SEC and ISSB’s proposals, with the hopes of eventually establishing standardized regulations that will ensure consistent and comparable disclosures across the board.


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Hong Kong indicates a global baseline may not work for their exchange

Representatives from Hong Kong’s stock exchange have indicated in recent weeks that while they are monitoring the developments of the ISSB, they see a one-size-fits-all approach to climate reporting as ‘undesirable.’ The Hong Kong Exchanges and Clearing (HKEX) engaged with over 50 large and small companies listed on the HKEX and asked them directly where they were in terms of capacity to deliver on the ISSB requirements. Firms reported that they do not have the capacity to deliver on certain aspects of the ISSB’s proposal, such as Scope 3 emissions reporting and scenario analysis.

HKEX has said they will take this into account as they decide on how it will require listed companies to meet international disclosure requirements. Katherine Ng from HKEX has said, “As a regulator, it would be irresponsible for us to force companies to prepare disclosures that they don’t have the bandwidth or support to do. Not all companies are blue-chips. We need to cater for the range of companies, range of scenarios and different industries.” HKEX will work with the Securities & Futures Commission of Hong Kong to develop the regulatory framework “based on the ISSB standards.”


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New SFDR requirements proposed for nuclear and gas investments

After the controversial decision to include nuclear and gas energy in the EU Taxonomy, the EU’s classification system for determining whether financial products are aligned with environmental objectives, the EU’s financial regulators have revealed proposed disclosure requirements for nuclear and gas under the Sustainable Finance Disclosure Regulation (SFDR). Most recently, Austria has filed a legal challenge to the European Commission’s decision. Luxembourg has already announced that it would join the initiative.

The changes to SFDR include a yes/no question to indicate whether a product intends to invest in “gas and/or nuclear taxonomy-aligned activities.” If gas or nuclear will be a part of the investment, it will be required to provide a graphical representation of the proportion of the investment represented by such activities. While the controversy on the inclusion of nuclear and gas remains, the proposal released by the EU regulators does incorporate the feedback from various stakeholder groups. The implementation of the SFDR is still on track for January 2023.

EFRAG & TNFD plan to sign cooperation agreements

The European Financial Reporting Advisory Group (EFRAG), the group tasked with creating the EU’s climate-related reporting standards, and the Taskforce on Nature-Related Financial Disclosures (TNFD) are poised to sign a cooperation agreement and have begun “informal discussions” to align the European Sustainability Reporting Standards (ESRS) related to biodiversity and ecosystems with TNFD’s framework.


Green Technical Advisory Group reveals initial advice to UK government

In June 2021, The UK Government established the Green Technical Advisory Group (GTAG), a group of industry experts tasked to advise the UK on how they can reach their net zero economy goal and deliver a Green Taxonomy. GTAG released its first report this month, “GTAG: Advice on

the development of a UK Green Taxonomy.” The report provides a summary of the group's advice for a Green Taxonomy focused on four key areas. The report was released ahead of the UK’s anticipated consultation on two of the six environmental objectives included in the UK Green Taxonomy: climate mitigation and adaptation. GTAG will be releasing additional reports in the coming months to help shape the additional four parts of the UK’s Green Taxonomy policy.

London Stock Exchange sets listing rules for carbon cutters

The London Stock Exchange finalized listing rules for companies that finance greenhouse gas reduction projects, becoming the first major exchange to do so. The rules, intended to help scale the global voluntary carbon market, require companies and funds to issue a prospectus that details the projects they intend to finance. These prospectuses will have to be vetted by the Financial Conduct Authority. The global voluntary carbon market was worth nearly $2 billion in 2021 and could reach $50 billion.


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SEC Reopens Comment Periods for Several Rulemaking Releases Due to Technological Error in Receiving Certain Comments

The SEC announced on Sunday that it is reopening the comment period for 11 Commission rulemaking releases, including its corporate climate disclosure proposal and two releases that address funds focused on climate and ESG. A technological error that may have prevented some comment letters submitted online from being received was cited as the reason. Interested parties, including any who did not previously submit a comment, will now have until October 21 to weigh in. It is not known how many additional comments were affected, but it stands to reason that the Commission may require additional time to take account of any additional comments—potentially extending the timeline for the finalization of the rules.

FSOC initiates new climate risk committee

After releasing plans in 2021, the Financial Stability Oversight Council (FSOC) has launched a new committee to aid in managing climate-related financial risks. The Climate-related Financial Risk Advisory Committee (CFRAC) will consist of a diverse group of members with expertise in fields such as financial services, climate data, sustainability disclosure, and more. They will be tasked with collecting data on and analyzing climate risks threatening the financial system, and advising the council on how best to respond.

Louisiana and South Carolina divesting nearly $1 billion from BlackRock, joining Republican pushback against ESG investing

Last week, Louisiana’s Treasury announced that it will divest $794 billion from BlackRock funds, citing BlackRock’s embrace of ESG, which the state says would damage the state’s fossil fuel industry. South Carolina soon followed, announcing that it would liquidate its $200 million BlackRock portfolio by the end of the year, citing the asset manager’s “leftist worldview.” In response, BlackRock published a webpage “setting the record straight” on its investments in energy. Louisiana and South Carolina join a number of other Republican-led states that have been using their portfolios to push an anti-ESG agenda. In August, Florida passed a resolution barring its pension funds from considering ESG and Texas issued a statute that bars 10 firms and 348 funds from doing business with the state. Highlighting the political nature of these decisions is the fact that few of the affected investment firms and funds actually boycott oil & gas.

EPA Releases 20 Climate Adaptation Implementation Plans from National Offices, Regions to Increase Resilience to Impacts of Climate Change

As part of the commitments made in its 2021 Climate Adaptation Action Plan, the EPA has released 20 climate adaptation implementation plans. The plans include over 400 commitments for clean water, air, and land, which look to increase the resiliency of communities while also contributing to the mitigation of climate change where possible. The Implementation Plans also recognize the low-income and minority communities that are disproportionately impacted by climate change and are ensuring these underserved communities get the environmental justice they need.

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Rep. Lucas proposes bill to exclude agriculture from SEC climate disclosure rule

US Representative Frank Lucas, a Republican from Oklahoma, proposed a bill that would exclude agriculture from the SEC’s proposed climate disclosure rules. The bill has received support from 100 other Republicans and several agriculture industry groups, who argue that the cost of compliance would be too high for family farms. Though family farms would be indirectly affected by the SEC’s rules—to the extent that their customers require data for their own reporting—the bill as written would exempt the sector in entirety. The EPA estimates that agriculture contributes 11% of the US’ total greenhouse gas emissions.

California Commission approves funding for desalination plant

After previously failed attempts to introduce large-scale desalination plants, the Coastal Commission in California have settled on a more conservative model for producing drinking water for California residents during this extreme drought. Previous proposals were struck down on the premise that their negative environmental impacts would be too significant. The new proposed plant will produce an expected 5 million gallons per day with the $140 million that the commission approved, and will cause minimal environmental harm. The project still requires other licenses and approvals before continuing, but experts hope that upon the successful execution of this plant, they will be able to repeat it in other areas.

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