TCFD Status Report 2022 – Five years of progress towards climate leadership | Deloitte UK has been saved
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In October 2022, five years on from their first report, the Task Force on Climate-related Financial Disclosures (TCFD) published its latest ‘2022 TCFD Status Report’. This blog summarises the key messages from it.
As expected, adoption of TCFD-aligned disclosures continues to grow with over 80% of companies reviewed disclosing at least one recommendation for fiscal year 2021. Much of the drive for this comes from the increased regulatory landscape. For example, the Financial Conduct Authority (FCA) requirement for mandatory TCFD disclosures for premium listed companies to disclose in line with TFD for periods beginning on or after 1st January 2021. The FCA has also extended this requirement to standard listed companies. In addition, support from governments and regulators across the world is growing. Disclosure requirements aligned with the Task Force’s recommendations come into effect between FY22 and FY24 for companies under the jurisdiction of the Brazilian Securities and Exchange Commission (SEC), Egyptian Financial Regulatory Authority, New Zealand Government, Singapore Exchange and Switzerland’s Financial Market Supervisory Authority.
Alongside this, the International Sustainability Standard Board (ISSB) under the oversight of the IFRS Foundation, is progressing a comprehensive global baseline for sustainability disclosures building upon TCFD. The new standards will be centred around the four TCFD pillars: governance, strategy, risk management and metrics and targets (see IFRS Sustainability Disclosure Draft). Therefore, in preparing disclosures under TCFD, companies are laying the foundations for future ISSB adoption.
Not only is the volume of companies disclosing increasing, so also is the quality and number of those disclosures. The Task Force reviewed publicly available reports and identified a few notable trends:
There is a potential gap emerging between what users would benefit from seeing, and what preparers are capable of disclosing effectively. Research conducted by the Task Force suggests scenario analysis that assesses resilience to climate change creates more decision useful information. However, the number of companies comparing different scenarios is low, only 9% of companies mentioned a 2°C scenario in 2021, dropping to around 4% for scenarios above 3°C. Focussing efforts into reporting strategy resilience under different scenarios is likely to improve the overall effectiveness of disclosures.
Inevitably, there are reporting variations across industries and geographies. Companies within banking and insurance provided more risk management-related disclosures whereas those operating in transportation, food, and materials and buildings industries provided more related to metrics and targets. At 43%, more energy companies disclosed across all four pillars than any other sector with the fewest disclosures seen within technology and media companies (15%).
Geographically, 60% of European companies disclose against the 11 recommended disclosures compared to North America at 29% and Asia Pacific at 36%. In all geographies, the number of reporters is growing with Europe seeing the biggest increase up 23 percentage points since 2019.
One key finding of the review is that some disclosures are not always “decision-useful”, particularly for investors, lenders, and insurance underwriters. Users were interviewed by the Task Force, and whilst the majority marked all 11 disclosures as either ‘very useful’ or ‘somewhat useful’, the disclosures most frequently viewed as either ‘not very useful’ or ‘not useful at all’ were Governance a) Board Oversight at 17%; Metrics & Targets b) Scope 3 GHG emissions at 19% and c) Climate-related targets at 19%.
To increase the usefulness of climate-related financial disclosures the TCFD highlighted four actions:
A year on from the Task Force publishing additional guidance on Metrics, Targets, and Transition Plans, the number of companies reporting their transition plans has increased, with over half of the companies reviewed as part of the status report including them within their FY21 disclosures. Additionally, some companies have published specific transition plan reports which are more comprehensive. Transition plan reporting occurs more in jurisdictions that have set GHG emission reduction targets, however investors are also increasing pressure on companies to describe their plans for transitioning to a low-carbon economy.
The importance of publishing transition plans can be seen in the UK through the development of the Transition Plan Taskforce (TPT) created by HM Treasury earlier this year (see UK Transition Plan Taskforce). The TPT guidance is under consultation until February 2023 and until the release, comprehensive TCFD disclosures are likely the best starting point for such reporting.
Whilst the overarching message of more disclosures by more companies mirrors that of previous status reports, it still serves to highlight the momentum building around TCFD and climate disclosures. And with ISSB also basing their new disclosures on the TCFD’s four pillars, there’s a clear message to companies regarding what to report and why.
As is to be expected with any emerging reporting area, there are still many opportunities for improvement, not least around the usefulness and comparability of disclosures, and the addition of more information in areas such as transition plans. The points highlighted in this latest status Report align with the observations from other reviews including the FRC’s climate thematic and provide a clear “direction” for companies; more detail, more transparency, more connectivity.
1 1,434 public companies were reviewed globally, composed of the following sectors. (Banking 248, Insurance 118, Energy 223, Materials and Buildings 353, Transportation 136, Ag., Food, and Forest Products 123, Technology and Media 96, & Consumer Goods 137)
Sarah Martin-Young is a chartered accountant and is an experienced statutory auditor having lead some of our largest and most demanding financial services audits. Sarah also leads our ESG frameworks and reporting assurance team across both corporate and financial services clients. She has significant experience of listed company reporting and corporate governance matters, including assuring non-financial information included in Annual Reports.
Annabel is an assistant manager within ESG Assurance at Deloitte London. She had three years experience in financial audits prior to joining the ESG Assurance team where she performs ISAE3000 enagagments across a variety of sectors. She is a qualified member of the Institute of Chartered Accountants of Scotland (ICAS). Annabel has also achieved the ICEAW sustainability certificate.
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.
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.