Posted: 24 Nov. 2021 5 min. read

Good progress but a way to go

Climate disclosure trends from the TCFD 2021 Status Report and CoP26

There is an ongoing need and pressure for companies in all sectors to develop quality and consistent disclosures of the financial and strategic implications of climate change on their business – now and into the future.
 

The 2021 TCFD Status Report

It’s been a positively explosive year for uptake of the most widely adopted climate disclosures framework, the Taskforce on Climate-related Financial Disclosures (TCFD). The  fourth TCFD Status report, released on 14 October 2021, shows supporter numbers have grown by a third since 2020 – bringing the total to 2,600 companies globally, and a combined market capitalisation of over $US25.1 trillion. In addition, eight countries are considering mandatory TCFD disclosure-aligned reporting requirements - Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom. Hopefully more nations will join this effort post, the 26th Conference of Parties (CoP26).

But companies are not singing from the same song sheet when it comes to quality and comprehensiveness of disclosures.

Reporting on and, more importantly, assessment and management of climate-related risks and opportunities takes years to integrate and each organisation is on a different stage of that journey.

Challenges and variations in disclosures

The 2021 TCFD Status Report showed that of 1,650 companies’ reports reviewed, from 69 countries and jurisdictions in eight industries, 50% disclosed in alignment with at least three of the four recommendations – Governance, Strategy, Risk Management, and Metrics and Targets. The Governance theme overall remains the least disclosed TCFD recommendation, though this should be the most straightforward.

Diving a little deeper, companies struggle the most with the ‘Resilience of Strategy’ disclosure, based on stress testing via climate-related scenarios. This comes as no surprise given the vast guidance (from regulators, the TCFD and elsewhere) on scenario analysis methodologies and metrics, and that a scenario analysis often requires specialised external expertise. Added to that is the capacity and willingness for a company to integrate the often disconcerting scenario analysis findings.

Naturally, not all sectors disclose in the same way and their strengths lie in certain TCFD themes. Whilst the Energy sector has traditionally led on TCFD disclosures due primarily to investor pressures, the Building & Materials sector now takes the lead, particularly in GHG emissions under Metrics and Targets. The Insurance sector is leading on Risk Management disclosures, given its strong interest in identifying direct climate-related impacts such as frequency of flooding, noting that almost 40% of the world’s population are exposed to coastal climate extremes.

Who is driving the disclosure of climate risks and opportunities?

Investors.

To date, the largest pressure to publicly disclose climate risks and opportunities, including company net zero commitments, has been by investors. The September 2021 updated Global Investor Statement to Governments on the Climate Crisis, signed by 587 investors representing $US46 trillion in assets, calls for firm policy and decarbonisation commitments, and mandatory climate risk disclosures. On Day 3 of CoP26, banks, insurers and investors pledged to align $130 trillion (40% of the world’s assets) towards meeting the 1.50C global warming limit from the Paris Agreement at CoP21.

Regulators and domestic efforts to introduce mandatory disclosures also fuels ongoing investor interest in climate disclosures. Financial regulators (e.g. APRA, Bank of England, Banque de France, HKMA) have released pilot studies and guidance around credit stress testing under a changing climate that align with the TCFD, with varying scenario analysis and balance sheet approaches recommended.

On a country-wide scale, New Zealand was the first nation to implement mandatory TCFD reporting on 15 September to approximately 90% of assets under management in the country. On 29 October the UK government announced mandatory reporting for large UK-registered companies from April 2022, which is an improvement from the ‘comply or explain’ proposed approach published in early 2020 by the UK Financial Conduct Authority(FCA) where companies could still choose not to disclose.

Mandatory disclosure is approaching

There are a few key emerging trends around climate reporting to come in 2022 that will accelerate climate change action, reporting and emission declines.

Mandatory disclosing is certainly on the horizon as countries and investors strive for consistent and comprehensive reporting, including financial impacts – answering the ultimate question of "how material are climate risks and opportunities for my organisation?". But what will these disclosures look like? How comprehensive and comparable will they be? Will there be support around pathways for implementation of climate-related risks and opportunities? And will the disclosures be audited?

Whilst climate scenario analysis remains a challenging endeavour on operations and personnel, those who have undertaken this step are likely to expand the assessment across the value chain, also aligning with quantifying scope 3 emissions. Quantifying region-specific physical climate risks remains a challenge and plays second fiddle to transition risks disclosures, despite the strong interplay between the two.

Finally, any action on climate and net zero targets requires a similar action towards nature positive activities. The introduction of the Taskforce on Nature-related Financial Disclosures (TNFD) and ongoing sustainability reports presents a new challenge to develop consolidated ESG strategy and business integrated reporting and resilience. A welcomed acceleration of this goal is the introduction of the International Sustainability Standards Board (ISSB) to develop global sustainability reporting standards, partially built upon the TCFD framework, and supported by 36 countries at CoP26.

Continued investment needed

What is clear is that the need for quality climate disclosures is growing alongside the demand by investors and stakeholders for consistent and insightful disclosure. Companies in all sectors need to continue investing in understanding the financial and strategic implications of climate change on their business now and into the future.

More about the authors

Stephanie Downes

Stephanie Downes

Senior Manager, Risk Advisory

Stephanie is a Senior Manager within the Sustainability & Climate Change team in Deloitte's Risk Advisory with over 17 years’ experience in climate change and scenario analyses on global and regional scales. She is an expert in quantifying and translating climate science trends to climate risk across sectors including agriculture, government, transport, infrastructure, health, energy and resources, retail, and finance. Stephanie joined Deloitte in early 2020 after her role as Principal Climate Scientist in the NSW Department of Planning, Industry and Environment, and over a decade in climate research across Australian and US universities. Stephanie has published over 20 scientific journal articles evaluating over 50 IPCC-class global and regional climate models, and holds a PhD in physical oceanography & climate science and Associate Researcher role at the University of Tasmania. She is a member of committees for the University of New South Wales, Australian Academy of Science, and the Deloitte ESG/sustainability efforts.

Paul Dobson

Paul Dobson

Partner, Risk Advisory

Paul has 20 years of experience and leads Climate Risk services in the Risk Advisory Sustainability practice. He has extensive experience working with complex sectors including energy, mining, manufacturing and property with a particular focuses on carbon, energy and sustainability services.