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On Monday 18 October 2021, the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) released its latest ‘2021 Status Report’ (the ‘Report’) along with two long-awaited annexes and guidance on developing metrics, targets and transition plans. Here, we aim to summarise what we consider to be the key messages and areas of focus for the upcoming reporting cycle.
The timing of release for the report and associated annex and guidance document will make it difficult to incorporate significant changes for December year-end reporters, but nonetheless it offers helpful guidance that can feed into plans for the next reporting cycle. The timing also presents an opportunity for companies with already advanced disclosures, to further improve in line with the new guidance and demonstrate climate leadership during the upcoming reporting season.
It’s clear the momentum behind TCFD is building fast. Since last year’s update the number of organisations endorsing TCFD has risen by 70% and the list of supportive governments, central banks, and regulators makes for impressive reading. TCFD recommendations are being incorporated into official disclosure requirements, including the UK, EU, Switzerland, New Zealand and Hong Kong, marking a real step change in commitment.
With so many countries, organisations and regulators in support of the TCFD, it’s likely that adoption will continue to accelerate in the foreseeable future, especially with the backdrop of the COP26 conference in Glasgow this month where it is anticipated that the International Financial Reporting Standards (IFRS) Foundation will launch the much anticipated International Sustainability Standards Board (ISSB). The TCFD is on the IFRSF’s technical readiness working group (TRWG) and the prototype climate standard they have been working on reflects the TCFD pillars. In the UK, we are on the path to mandatory reporting under ISSB standards as confirmed in the Greening Finance report issued by UK government last week. The increasing quality and uptake of TCFD disclosure is therefore helping to build capacity and readiness for these and other future global sustainability standards.
First and foremost, it’s important to note that the TCFD’s newly released guidance documents do not change the 11 recommended disclosures, however they do provide some fundamental updates and clarifications, along with additional guidance that all organisations should be aware of; not least because the TCFD does require disclosures to take account of supplementary guidance.
Good… but could be better
This seems to be the over-riding message in the report. This won’t come as any surprise for those involved either as preparers or readers of TCFD disclosures; the quality and quantity of disclosure has improved considerably over the last 12 months, but TCFD identify that there is room for improvement.
Having reviewed 1,651 public companies, the TCFD in its report, presents a comprehensive summary of trends and areas for focus going forwards, including:
Emphasis on financial impact disclosure
The report once again emphasises the need for quantified disclosures that provide insight into climate-related financial performance and position. Investors and other readers of TCFD disclosures are wanting to understand the cost of climate-related transition or exposure, including for example, expenditure or capital investment deployed towards climate-related issues, and that needed to meet targets for addressing climate issues (often disclosed in a transition plan), as well as the link between qualitative disclosures and their financial impact.
Early adopters have tended to begin with qualitative analysis based on strategy and related financial plans which can be translated into estimates of financial impact. Going forwards, there is a need for quantified assessment of financial impact associated with both transition and physical risks, supported by scenario analysis, and considering both risks and opportunities. Though in our experience there remain significant challenges to financial forecasting such as how to isolate climate effects from other effects. Both quantitative and improved qualitative information can allow for enhanced insight into resilience of a company’s strategies, and ultimately therefore the future actions required to mitigate risks and capitalise on opportunities.
One of the barriers often described by preparers, as highlighted in the report, is the lack of availability of robust and consistent data needed to fully assess these risks and opportunities. The TCFD have therefore made the following suggestions from a preparer’s point of view:
The rise of transition plans
The disclosure of a transition plan has always formed part of the strategy pillar of TCFD, however they have not, until now been a common feature of disclosures. The report and newly published guidance are more explicit in addressing the need for disclosure of plans to transition to a low-carbon economy. For example, how will regulation and policy constraints on emissions, increased carbon taxes, and changes in market demand affect a particular organisation between now and 2050 in terms of risks and opportunities? There is a growing trend for Net Zero transition targets and plans, partly in response to COP26 and the UK Government’s plan to transition the entire economy by 2050 as well as growing investor and stakeholder demand.
For all reporting companies and especially those for whom transition impacts are of greater relevance compared to physical impacts, this is an important clarification.
Introduction of cross-industry climate-related metric categories
The report and associated annexe and guidance documents have published seven metric categories which are considered to be generally applicable to all organisations. These should not be considered in addition to the Metrics and Targets pillar, rather, their value is that they allow for consistent and comparable disclosure on climate-related risks and opportunities, the holy grail for investors and other stakeholders. The cross-industry metric categories are:
With the exception of Scope 1, 2 and 3 GHG emissions as well as appropriate intensity metrics, the inclusion of metrics and targets in TCFD disclosures should always be as a result of a materiality review i.e. which metrics help a company to respond to and understand their key climate risks and opportunities. The TCFD has also provided some sector-specific metrics for financial services firms, which (for FS firms) should be considered alongside these cross-industry metrics, but all in the context of what is material to the company’s activities.
The TCFD have reported that the quality and quantity of disclosure has improved considerably over the last 12 months, helping to build capacity and readiness for future global sustainability standards, but that there is still room for improvement. The report and associated annex and guidance documents have raised the bar significantly for companies disclosing against the TCFD framework, enabling organisations to further progress their climate disclosure journey and also highlighting how quickly preparers need to evolve to keep up with peers and the wider market. Early movers, especially those with year ends falling in mid to late 2022 can view this as a great opportunity to use the newly raised bar, to really get ahead of the curve and improve disclosures in line with the latest guidance. Once this happens, it can be assumed that investor and stakeholder expectations will advance further still, with additional scrutiny to be expected for organisations that do not invest in continual improvement of their approach to climate risk and disclosures against TCFD.
Stephen is a Partner in our Banking & Capital Markets Audit and Assurance Group and has a leadership role in the Firm’s financial benchmark assurance and advisory engagements. He has extensive experience in financial services audit, internal audit, and regulatory projects. He has worked with a range of banking institutions, having developed a thorough technical understanding of banking products and treasury control practices. He sits on a committee of the FICC Markets Standards Board, the Bank of England SONIA Sub Working Group focusing on Communications & Outreach, and Co-Chairs the Deloitte Global LIBOR Transition Steering Committee.
James co-leads our Environmental, Social and Governance (ESG) Assurance practice in the UK. He spends much of his time talking to boards and non-execs about the fast-developing landscape of ESG reporting including the changing regulatory, stakeholder and investor requirements. He’s also responsible for developing Deloitte’s ESG assurance propositions in areas including PRI report assurance, ESG-linked finance assurance and ESG reporting assurance. James is a water resources engineer by background and has spent over 20 years in professional services working with companies in all sectors across FTSE 350, large private and PE.
Emily is a Senior Manager within the Deloitte UK Audit and Assurance practice and a qualified Chartered Accountant. Emily’s experience includes leading complex assurance projects and advising clients on external reporting comprising non-financial disclosures, sustainability reporting and compliance with reporting frameworks. She also manages audit engagements for large listed and private groups. Her clients cover a range of corporate industries including professional services, consumer business, investment groups, construction and energy and resources.
Christopher is a senior manager in our sustainability Audit and Assurance practice and a sustainability specialist with more than 10 years' experience in Environmental, Social and Governance (ESG) strategy development, ESG Due Diligence and Environmental and Social Impact Assessment (ESIA). He has experience of auditing, assessing and assuring against international sustainability standards including the IFC Performance Standards, Equator Principles, SASB, TCFD etc.) as well as national and international regulations. Chris has extensive experience of leading sustainability engagements across many industry sectors, including financial services, waste, oil and gas, mining, rail, pharmaceutical, aerospace and higher education.
Tia is a manager in our Audit and Assurance practice. Tia is a Certified Information System Auditor (CISA) who has twelve years of experience working in big 4 firms delivering carbon report verification, sustainability report, IT audit and risk management projects across industries (government, manufacturing, agriculture, oil & gas). She is knowledgeable in GHG Protocol, TCFD reporting recommendations, GRI Standards, and Green Bonds Principles.