18 November 2019

The ESG data files, part six: TCFD and the challenge of looking forward

Requests for strategic information about the risks and opportunities posed by climate change have proved a step too far for many. Joe Walsh and Peter Cripps report

It has been two and a half years since the Financial Stability Board's (FSB) Task Force on Climate-related Financial Disclosures (TCFD) released its recommendations designed to stimulate company disclosures about the impacts of climate change on their businesses.

The release of the report was a landmark moment in the evolution of environmental, social and governance (ESG) data because it added a new and more challenging dimension to reporting.

Previous climate-related data has primarily been historical, such as disclosing the carbon footprint of a business's activities.

The TCFD asks for footprinting data, but it also asks companies to disclose forecasts of how climate change may impact their business in the future.

It recommends that companies use scenario analysis in order to inform their disclosures. And it also requests that companies disclose information about their strategies and targets for dealing with this challenge, and their governance of this.

In short, the TCFD seeks to move climate reporting forward from carbon footprinting, to a board-level risk management issue.

And it seeks to incorporate physical risks as well as transition risks – that a product or service may become obsolete as a result of changes in policies or technological change.

"The TCFD is less about integrated reporting and more about integrated thinking, and how management addresses this topic – so in that sense it's a fundamental change," says Christopher Greenwald, head of sustainable investment research at UBS Asset Management.

This has proved a headache for most companies – and even more difficult for investors, who struggle to disclose information when their holdings do not.

The TCFD has garnered public support from more than 800 organisations, representing $120 trillion in assets. Yet the number of disclosures in line with the TCFD recommendations is less impressive.

Ashley Ian Alder, who chairs the International Organisation of Securities Commissions (IOSCO) and is the CEO of Hong Kong's market regulator, told a conference earlier this year that the response to the TCFD has been disappointing.

The most recent progress report from the TCFD used artificial intelligence to review the reports of more than 1,100 companies. It found that in 2018, companies reported an average of 3.6 of the 11 disclosures it asks for. (See box for all 11 recommended disclosures.)

The report concluded that "disclosure of climate-related financial information is growing, but not fast enough".

Last December, the Climate Disclosure Standards Board (CDSB) reviewed the disclosures of 80 of the largest companies by market capitalisation across Europe, and found that only 38% mentioned the TCFD, and only 20% disclosed their climate policies.

Research by communications firm Black Sun found that 61% of FTSE 100 companies make no mention of the TCFD and only 16% mention climate change in the chair/CEO statements.

Despite the slow uptake, the TCFD is widely recognised as the framework to follow when it comes to climate reporting. A report by the UK's Financial Reporting Council (FRC) into corporate climate reporting said discussions with project participants soon "coalesced around the TCFD framework", as this was already widely adopted by the market.

Swedish pension fund AP4 is among those supportive of the TCFD. "We felt there is always value in having one standard, and we thought the TCFD had the calibre to develop into that – and I think it will, but it is taking a longer time, when it comes to the companies, than we initially thought," says Tobias Fransson, AP4's head of strategy and sustainability.

"Disclosure of TCFD-aligned climate data by companies is improving, but too slowly, and is nowhere near the levels required for investors to adequately assess climate risk," says Peter Uhlenbruch, research and engagement manager at ShareAction, an NGO focused on responsible investing.

Why so slow?

The TCFD recommendations identify four core areas where it seeks disclosure:

- Governance
- Strategy
- Risk management, and
- Metrics and targets.

It is the fourth that some say is most problematic. Only one metric is explicitly requested to be reported by the TCFD – greenhouse gas (GHG) emissions.

The scale of emissions covered include scope 1 and 2, covering direct emissions that a company emits and indirect emissions from energy purchased and used by the company. Scope 3 emissions, which are all other indirect emissions including those in the supply chain and in the use of products, in some sectors account for the greatest share of the carbon footprint.

These are only disclosed, according to the TCFD recommendations, "if deemed appropriate". (See part one of this series on reported ESG data for more details.)

It is left to companies to decide what other metrics to report.

This can lead to problems when it comes to comparing disclosure.

Another area of inconsistency can be found in how and where a company files its TCFD reporting.

The TCFD has recommended that this information should be part of financial reporting, when possible.

But oil and gas giant BP, for example, splits its reporting across three types of filing. Some aspects, such as the company's assessment and management of climate-related risks, can be found in its annual report, while the majority is in BP's Sustainability Report, with some additional scenario analysis in its Energy Outlook report.

There are also inconsistencies in how the numbers are reported.

For example, Italian utility Enel says its scope 3 emissions figures do not include figures for the sale of its products and it is still working on a methodology to do this. This makes it hard to compare with other utilities, such as Iberdrola, that do include this figure.

These discrepancies in how and where data is reported have led to frustration among investors.

"We own more than 2,000 stocks and we're not able to read every TCFD report or review every data point they provide," says AP4's Fransson. "But we have to aggregate data, and for that purpose, we had hoped that climate reporting would be part of the regular financial reporting."

Emilie Mazzacurati, CEO of US-based physical climate risk data firm Four Twenty Seven, says metrics are in need of standardisation.

"There's no set standard for what should be reported on physical climate risk. When companies disclose, it's fragmented and inconsistent and hard to compare," she argues.

She believes companies are working on such analysis, but often the progress is slow because of the involvement of legal and compliance teams.

The Japan Financial Service Agency (JFSA) has helped to convene a 'TCFD consortium' that aims to boost the uptake of TCFD disclosure in the country.

Satoshi Ikeda, chief sustainable finance officer at the JFSA, says the onus is on companies to choose the metrics most relevant to them.

"The metrics depend on a company's strategy and risk management – they should set the KPIs, and the disclosure should be closely linked to that," he says. "The dialogue between investor and corporate must be backed up by high-quality data."

However, he is open to the possibility that the consortium could discuss common metrics, KPIs and targets for specific sectors.

"From a supervisor's perspective, we need to have a sense of the size of the risks, so data is critical," he adds.

"We are aware that data is very much an issue and we are contemplating how to work on it."

ShareAction's Uhlenbruch stresses that it is important for companies to start disclosing, even if the metrics are imperfect and incomparable.

"Metrics are by far the trickiest part of the TCFD, but companies have to start today with what they're [already] using," he says. "There is value in developing more standardised metrics, and the EU Taxonomy [on sustainable finance] will certainly help, but the urgency of the climate crisis means we can't wait for the perfect tools and metrics," he adds.

What a scenario

Another challenge is that the TCFD has recommended that companies use scenario analysis to inform their disclosures, but it stopped short of stipulating which scenarios they should use. This has created further problems in terms of comparability.

Critics point out that this approach allows companies to manufacture scenarios that favour their businesses or products. For example, the fact that oil and gas companies have used scenarios in which carbon capture and storage (CCS) has a key role to play in the future energy mix, is described as "technological optimism" by Francis Condon, executive director of sustainable and impact investing at UBS Asset Management.
"There's a debate forming around which scenarios companies and investors use," he says. "That is one of the challenges the TCFD has opened up.

There's any number of scenarios, even within a 2°C envelope."

For example, Shell has a "technically possible, but challenging" climate scenario, called Sky, which assumes nearly 10 gigatonnes of CO₂ a year are stored underground by 2070 in order to meet the Paris climate agreement. This includes bioenergy with CCS.

Willemijn Verdegaal, co-head of climate and ESG solutions at technology and solutions provider Ortec Finance, told a recent conference that she doesn't think there is a single scenario that all companies should use.
But she added: "It's important for people to start educating themselves around scenarios – they vary widely, and some have a fairy dust sprinkling of imaginary CCS roll-out in there. We need to have an honest conversation about what a reasonable assumption is within an extremely tight carbon budget."

"It's important for people to start educating themselves around scenarios – they vary widely, and some have a fairy dust sprinkling of imaginary CCS roll-out in there" - Willemijn Verdegaal – Ortec Finance

She believes service providers have an important role to play in educating decision makers around these "sensitivities".

Research by MSCI found that fewer than 3% of the constituents of the MSCI ACWI Index, as of August 2018, had mentioned scenario considerations and/or analysis in their disclosures.

However, one bright spot was the oil and gas sector which is accustomed to reporting scenarios. Of the 20 largest integrated oil & gas and exploration & production companies in the MSCI ACWI by market capitalisation 55% had conducted some level of scenario analysis.

Matt Moscardi, an executive director at MSCI, says: "The oil and gas sector has this information, but it doesn't exist anywhere else in a usable form. It's not uniform, and companies don't know what to report."
He adds that TCFD data "is probably 10 years behind" the kind of ESG data more typically reported by firms such as MSCI.

Andreas Hoepner, professor of operational risk, banking and finance at University College, Dublin, cautions that care should be taken when using scenarios.

"There are no robust scenarios – there could be a million – they are all speculation!" he argues. "Assumptions are very dangerous. This should be seen as an exploratory tool only."

However, it is possible that regulators might start to dictate scenarios that companies have to use in their TCFD filings, alongside others of their own choice. It is understood that the Central Banks and Supervisors Network for Greening the Financial System (NGFS) is planning to roll out such a scenario.

The TCFD, meanwhile, says it is working on guidance for scenario analysis.

Japan FSA's Ikeda says: "Scenario analysis is the part that most companies are struggling with. Leading Japanese companies are already making progress in their disclosure, but most are struggling."
He says one of the problems is the lack of comparability between the scenarios used by companies and their industry peers.

He adds that in the future it may be necessary to compile industry-based sector scenarios. "One of the next steps for the TCFD consortium is to work on industry-specific scenarios.We are contemplating that..."

For investors, such as Mamadou-Abou Sarr, director of product development and sustainable investing at Northern Trust, more guidance around scenarios would be welcome.

"Forward-looking data will be very useful, but we are looking for more guidance to narrow the scope," he says.

"Scenario analysis is a great tool that will allow more time to alleviate exposure to certain risks, but there's a lack of clarity.

"If every company runs their own models, it will be hard to assess. All companies should report on the same basis, in the same way that banks are stress tested. The industry doesn't need more complexity!" - Mamadou-Abou Sarr, Northern Trust

"If every company runs their own models, it will be hard to assess. All companies should report on the same basis, in the same way that banks are stress tested. The industry doesn't need more complexity!"

Not a numbers game

Another of the problems that investors face when trying to compare TCFD reports is that much of the information is qualitative rather than quantitative, and therefore is not easily translated to a spreadsheet. For example, the TCFD asks for information such as a description of the impact of climate-related risks and opportunities.

"The TCFD recommendations are mainly focused on qualitative information, which could turn into quantitative financial information in the future," explains Japan FSA's Ikeda.

He says there around 10 or 20 very good disclosure cases in Japan. "Another 30 are following the TCFD recommendations, but not digging so much into the detail. Another 50 to 100 are currently considering how to disclose."

"Companies are increasingly reporting scope 3 emissions," says Meaghan Muldoon, head of sustainable investing for Europe, Middle East & Africa (EMEA) at BlackRock. "The availability for investors is therefore improving. However, there is a lot of work to be done on the quality of the data. Beyond the data points, stakeholders are increasingly asking for clear targets."

Companies say that reporting in line with the TCFD is challenging for three main reasons, according to the 2019 TCFD status report:

- Climate change is already embedded in processes and is challenging to discuss separately.
- Assumptions include confidential business information.
- There is a lack of standardised metrics.

There are also fears that disclosing forward-looking information could open the door to litigation, particularly in the US, say market participants.

However, activist law firm ClientEarth argues that there are also legal risks from failing to disclose in line with the TCFD. One of its lawyers, Daniel Wiseman, said: "Detailed and balanced climate-related disclosures are essential if investors are to meet their own fiduciary duties to prudently invest and steward our savings as climate risks materialise, so regulators must crack down on companies falling short.

"Reporting in line with the TCFD is now the basic expectation."

A glut of guidelines

In an attempt to help investors navigate this quagmire of patchy and inconsistent reporting, numerous organisations have issued guidance on how to report in-line with the TCFD recommendations. (See box for a run-down of some of the reports.)

For example, the CDSB has developed a framework for reporting in line with the TCFD and subsequently published an implementation guide with the Sustainability Accounting Standards Board (SASB), which has its own standards for reporting on TCFD that can work in conjunction with CDSB.

The TCFD has widespread support from governments and regulators, and pressure to report is growing.

The TCFD has suggested that reporting could be mandatory within five years of its launch.

The UK government said in its Green Finance Strategy that it expects all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022, and has threatened to bring in regulation if companies do not respond. An industry group has also been set up by the UK government and The Pensions Regulator (TPR) to develop guidance for pension schemes on the TCFD recommendations.

Pressure is also growing from other areas. For example, the Principles for Responsible Investment (PRI), which has 1,900 signatories, representing some $86 trillion in assets under management, has mandated that its signatories report on its climate risk strategy and governance indicators, which are aligned with the TCFD guidelines from 2020.

The CDP – formerly known as the Carbon Disclosure Project – is also taking steps to align its questionnaire with the recommendations of the TCFD.

Investors are also pushing portfolio companies for TCFD disclosure. Victoria Barron, responsible investment analyst at Newton Investment Management, describes Newton as "a huge supporter of the TCFD", and says it is asking companies to report in its engagements. It also released its first TCFD report last year.

And shareholder engagement initiative Climate Action 100+, which represents investors with $35 trillion of assets, has made the TCFD a key pillar of its dialogue with the world's biggest emitting companies.

Part two of this feature, which explores the role of third-party TCFD data providers and investors, can be found here.

This article is part of a series of features exploring ESG data:

  • To read 'The ESG data files – introduction, click here
  • To read 'The ESG data files – part one: reported data', click here
  • To read 'The ESG data files – part two: non-reported data', click here
  • To read 'The ESG data files – part three: ESG rating agencies', click here
  • To read 'The ESG data files – part four: fixed income data’, click here
  • To read 'The ESG data files – part five: the impact of the EU’s taxonomy’, please click here
 A guide to climate reporting guides

• The TCFD has produced extensive guidelines on how to report.
• A TCFD Knowledge Hub website is run by the Climate Disclosure Standards Board (CDSB).
• The Sustainability Accounting Standards Board (SASB) and CDSB have teamed up to publish a TCFD Implementation Guide. It claims to be the most commonly accepted and used guideline for TCFD. They followed that with a TCFD Good Practice Handbook.
• MSCI in August unveiled its TCFD Based Reporting: A practical guide for Institutional investors.
• PRI signatories are mandated to report in line with the TCFD from 2020. To assist with this, it introduced TCFD-aligned indicators into its own reporting framework and produced a guide to the TCFD for asset owners.
• The European Commission has published guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. They integrate the recommendations of the TCFD.
• The Institutional Investors Group on Climate Change has produced a guide to scenario analysis.
• UNEP FI issued guidance to implement TCFD recommendations in a report, called Changing Course. UNEP FI has also brought together 16 banks to help the industry implement the TCFD.
• The World Economic Forum in conjunction with PwC issued a report on How to Set Up Effective Climate Governance on Corporate Boards.
• The UK government has set up an industry group with The Pensions Regulator (TPR) to develop guidance for pension schemes on the TCFD recommendations.
• The Investors Leadership Network recently issued its TCFD implementation guidance.
• The UK's Financial Reporting Council released a new report on climate-related financial reporting by businesses, highlighting that current disclosures are failing to meet investor expectations.
• The Central Banks and Supervisors' Network for Greening the Financial System (NGFS) is to issue a report on scenario analysis, with its own scenario.

The 11 TCFD recommended disclosures:


A) Describe the board's oversight of climate-related risks and opportunities.
B) Describe management's role in assessing and managing risks and opportunities.


A) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.
B) Describe the impact of climate-related risks and opportunities on the organisation's businesses, strategy, and financial planning.
C) Describe the resilience of the organisation's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

Risk management

A) Describe the organisation's processes for identifying and assessing climate-related risks.
B) Describe the organisation's processes for managing climate-related risks.
C) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation's overall risk management.

Metrics and targets

A) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.
B) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas (GHG) emissions, and the related risks.
C) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

 The editor of Environmental Finance owns shares in BlackRock.