TCFD sharpens its approach?

TCFD published its status report last month, with further guidance across a number of topics: Metrics and Targets (with specific additional disclosures for the Financial Sector); insight on Transition Plans (a timely addition given the UK government announcement of mandatory disclosures for all UK banks and listed companies by 2023); and the relevance of GHG emissions.

With the exponential growth of supporters - including more than one thousand Financial Institutions that represent cumulative assets of $194 trillion - TCFD has yet again raised the bar through injecting transparency and driving best practices. However, could they have been bolder in pushing boundaries to accelerate the maturity of the reports?

New guidance on metrics and targets: a balancing act

As anticipated, the Task Force updated the guidance for financial institutions to disclose the extent to which their business activities are aligned with a temperature pathway well below a 2°C scenario. Surprisingly, they have dropped the need “to incorporate forward looking alignment metrics into the target-setting framework”. Their removal is perhaps a missed opportunity; scenario analysis (using forward looking metrics) is a well embedded concept into stress testing banking regulation, which could have been used to create best practices and drive excellence. Those with mature disclosures could have adopted forward looking metrics, demonstrating to the market how to incorporate these in a practical way.

Forward looking metrics are a very powerful tool to demonstrate credibility, enabling investors and financiers to demonstrate their support for the transition to a low carbon economy.

Transition Plans: must haves to support your net zero ambitions

Thankfully the Task Force has identified key characteristics for effective Transition Plans, including adoption of quantitative climate-related metrics and targets, while still acknowledging that they are implicitly included as part of the company’s strategy and net zero commitments.

Transition Plans allow stakeholders to assess the credibility of companies’ net zero commitments and progress towards them. For this reason, we recommend that all companies across sectors publicise their plans. This is not currently mandatory under TCFD, however we are hopeful for a change in this guidance.

GHG emissions: Increasing Scope 1 and 2 disclosures to facilitate Scope 3 reporting

The new publication emphasises the need to disclose Scope 1 and Scope 2 emissions, regardless of the materiality impact, while strongly recommending the publication of Scope 3 emissions for all sectors. It also includes additional guidance for the Financial Services industry to disclose Scope 3 emissions specific to their business activities. The non-materiality extension is a welcome one. We empathise with financial institutions, who are in a “catch-22” situation on Scope 3 GHG emissions.

With more companies reporting their Scope 1 emissions, financial institutions will be able to enhance the quality of their own reporting and more importantly, partner with their clients across all sectors to define common targets, supporting them in the transition to a low carbon economy.

Three ways to get ahead as you approach your next TCFD report:

1. Reporting vs strategic thinking:

   TCFD can fulfil different ambitions across the “grading spectrum” ranging from complying with regulation (a pass) to using it as a tool to drive strategy, assess risks and identify opportunities through a climate-related lenses (“A+”).

   With TCFD becoming the “go-to” framework for climate disclosure, inspiring further regulation and frameworks, we believe there is much to be gained by considering the merits of investing the time and resources at the early design stage of the report on shaping the business-wide climate strategy.

2. Get ahead of future regulation: 

   The reliance on forward looking metrics from financial regulators as well as the debate from the previous TCFD consultation would indicate that there is potential to incorporate them in the future, following further experimentation by current supporters.

   We would strongly recommend the adoption of forward-looking metrics into scenario analysis, at a minimum as an internal exercise, making use of “borrowed time”, before TCFD potentially make this mandatory.

3. Make credible commitments:

   The incorporation of Transition Plans in a company’s framework is a priority for investors, who want to see companies address it comprehensively within their TCFD.

   For companies with public net zero commitments the stakes are high. Proving credibility and delivery on those, will be a key differentiating factor when it comes to attracting and accurately pricing new capital and investments into their business.
   
   

Contact us for more information about how we can support your TCFD reporting or the credibility of your Transition Plans.