As legislation tightens, the financial sector can no longer ignore the rapidly changing environmental reporting landscape. In November 2020, the UK announced that reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) will become mandatory by 2025 across the economy as a whole, with premium listed companies expected to comply by the end of this year as declared by the Financial Conduct Authority (FCA). On an annual basis, all listed commercial companies(1), UK registered large private companies, banks and building societies, insurance companies, life insurers, FCA-regulated pension schemes and occupational pension schemes will need to publicly disclose how they are, and could be, impacted by climate change. Specifically, they will be required to disclose their governance, strategy, risk management, metrics and targets relating to climate-related risk. As part of the Green Finance Strategy, the UK is expecting all listed companies and large asset owners to be making TCFD disclosures by 2022.
|TCFD disclosure recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets. These thematic areas are intended to interlink and inform each other.
Source: Recommendations of the Task Force on Climate-related Financial Disclosures, 2017
In October 2020, the Science-Based Targets initiative (SBTi) launched its first-ever framework for the financial sector to set climate targets on their loans and investments, enabling firms to align their financial portfolios with the Paris Agreement(2). The Partnership for Carbon Accounting Financials (PCAF) has also developed and published the Global Carbon Accounting Standard for the Financial Industry to measure the financed emissions of loans.
Full TCFD alignment requires a review of all company processes and governance. A critical assessment of the potential financial impact on the firm of climate-related issues must be completed.
Full alignment is a multi-year effort. External expertise can help transfer and embed the appropriate knowledge required to make TCFD alignment a repeatable, normal business process. A firm dedicating insufficient resources to the ongoing management of its TCFD disclosures risks failing to meet the demands of new legislation between now and 2025.
Based on TCFD’s 2020 status report, reporting by asset owners and managers has to-date been insufficient. A key metric routinely failing to be disclosed by both asset managers and asset owners is the weighted average carbon intensity metric (WACI). TCFD sees WACI, a measure of a portfolio’s exposure to carbon-intensive companies, to be a helpful tool in comparing firms’ climate credentials.
The Task Force attempted to identify the level of reporting of asset manager and owners to their stakeholders by reviewing their 2020 responses to three Principles for Responsible Investment (PRI) indicators(3).
Banks had the lowest percentage of disclosure for climate-related targets of all industries in 2017, 2018 and 2019. Except for the top-performing companies, bank disclosures generally excluded physical risks, which continue to be a threat to the banking sector overall because of the risks of extreme weather and sea-level rise on their large mortgage portfolios.
Scenario analysis is one of the main challenges faced by financial service firms. A significant amount of confidential information can be included in the assumptions made by the companies, which firms are reluctant to disclose. Moreover, defining the right boundaries and deciding which climate scenarios are most applicable to your business can be challenging, as can linking any analysis to future business performance.
Linking climate-related issues to financial ones is a key purpose of TCFD. Companies need to identify and quantify the potential financial impact of climate-related issues. Climate scenarios must be translated into meaningful financial terms and firms need to identify ways to incorporate climate risk into financial planning going forward. Measuring physical risks will become the norm. Firms will have to be able to quantify how their financial performance will be affected by facility and location factors using climate science.
Dealing with the significant overall changes required by businesses has proven challenging. Companies need to include climate risks in their financial planning. This can only be achieved by adjusting their risk governance, reporting processes and data sourcing. They need to have the capacity to test the resiliency of their strategies under different climate scenarios.
With TCFD becoming mandatory in the UK by 2025, there is a significant acceleration in timelines. Many accompany require three or more years to fully implement the TCFD recommendations. Here are the three immediate actions any financial services firm should take:
A few financial services companies that have started working early into TCFD, have been praised. CPP investments, global pension plan investor, and Generation Investment Management, asset manager, have both been included as case studies in the TCFD 2020 report. Each company has provided their own insights into the approach they took to implement TCFD recommendations and how this has helped their business develop. “Our efforts to understand the implications of climate change on long-term investment values have accelerated. We continue to prioritize key advances to ensure we are a leader among asset owners in understanding the risks and opportunities presented by climate change”, said Mark Machin, President and CEO of CPP Investments.
At Avieco we use our extensive experience of working with the financial sector to help them develop a clear strategy on how they need to align with TCFD and use this as a competitive advantage. We can help you embrace TCFD recommendations by:
Want to know more about TCFD and the benefits it could bring to your organisation? Download our guide.
1. As defined by the Companies Act 2006, i.e. meeting at least two of the following criteria: turnover of more than £36m; balance sheet total of more than £18m; more than 250 employees.
2. The Paris Agreement aims at companies and countries committing to keep global temperature rise below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
3. The PRI Framework consists of modules, business areas and practices, that signatories need to provide information on. Indicators are specific questions captured in each module which can be categorised as mandatory, mandatory to report but voluntary to disclose and voluntary.
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