ESG reporting is now a hot topic for organizations everywhere. Every other day there’s news of a regulatory or supervisory authority mandating ESG disclosure from the entities it oversees. More often than not, the authority also mentions the ESG standards those entities may use to make their disclosures. Among the most widely-used standards are those developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).
The Task Force on Climate-related Financial Disclosures (TCFD) was set up by the Financial Stability Board (FSB) to build a set of recommendations helping companies disclose information to help investors, banks, and insurance underwriters put a price on climate-related risk. The TCFD released its recommendations in a 2017 report. Since then, the recommendations have been adopted globally by governments, regulators, ESG standards-setters, and stock exchanges for various purposes – which we will describe in more detail below.
This article is about the TCFD’s fifth annual status report since the release of its recommendations in 2017. In the latest report, the TCFD traces the various developments that have led to its framework being implemented widely. Based on an analysis of publicly available corporate reports of 1,400 large global companies from specific industries over a three- and five-year period, and a separate study of disclosures by asset managers and owners, the status report examines the growth of TCFD-aligned reporting. We bring you the five key takeaways from the 2022 TCFD Status Report.
1. More Companies Globally now use the TCFD ESG Framework
The status report says that for the fiscal year 2021, 4 out of 5 companies surveyed made disclosures in line with at least one of the TCFD’s 11 recommendations. This is in keeping with the general rise in ESG disclosures in recent years. However, only 4% of the companies surveyed used all 11 of the TCFD recommendations and only 40% of companies used 5 of the 11 recommendations. This shows the need for more granular ESG reporting where companies attend to all aspects of any given ESG standard they employ.
The TCFD report also shows that ESG reporting has grown steadily across regions. “The average level of disclosure across the 11 recommended disclosures for European companies was 60% for (the) fiscal year 2021, (and) 36% for Asia Pacific companies,” said the report. The percentage of companies using TCFD recommendations in financial filings and annual reports is also increasing each year. According to the TCFD report, more than 70% of companies that employed TCFD recommendations reported climate-related data in financial filings and annual reports in 2021. Compare this to just 45% in 2017.
2. Most Asset Managers & Owners Reveal ESG Information to Clients
More than 60% of asset managers and 75% of asset owners surveyed by the TCFD said they currently make climate-related disclosures to their clients and beneficiaries. “The majority of asset managers report through sustainability reports or directly to clients, while the majority of asset owners report through annual, sustainability, or climate-specific reports.”
The TCFD report says that almost 50% of asset managers and 75% of asset owners issued reports aligned with at least five of the 11 recommended disclosures. And 60% of asset managers and nearly 80% of asset owners said they report information aligned with at least one recommended disclosure. Asset managers and owners reporting on all 11 recommended disclosures are at 10% and 36%, respectively.
3. Quality & Accessibility of ESG Reports have Improved since 2017
The TCFD survey revealed that the availability and quality of climate-related financial disclosures have increased since June 2017. A survey of investors revealed that 95% saw an increase in the availability of climate-related financial disclosures since the TCFD recommendations were released, and 88% said the quality of disclosures had improved. This increase in quality and availability might have to do with a growing stakeholder interest in companies’ ESG performance. There is also an increase in regulatory attention towards sustainability issues, with most geographies working towards mandatory disclosure of ESG information over the near term.
The TCFD survey showed that “90% of investors and other users incorporate climate-related financial disclosures in their decision-making, and 66% of these indicated such disclosures factor into the way they price financial assets”. The proliferation of ESG rating and data providers means that there is a ready market for sustainability information based on standardized frameworks. Today’s business stakeholders are keen on knowing not only the financial performance of an organization but also the measure of its interactions with the external environment – and mainly its contribution towards climate change.
5. Steady Rise in Global Efforts to Implement the TCFD Framework
Countries or Regions that have recommended or mandated the use of the TCFD framework for climate-related disclosures include the United States, United Kingdom, European Union, Australia, New Zealand, Switzerland, Japan, India, Hong Kong, Malaysia, Thailand, Brazil, and Egypt.
Standards Setters: In March 2022, the International Sustainability Standards Board (ISSB) released two exposure drafts on sustainability and climate-related disclosure for public consultation. The latter of the two exposure drafts is based on the 11 recommendations of the TCFD. In the EU, the European Financial Reporting Advisory Group released its draft European Sustainability Reporting Standards (ESRS) for public consultation in April 2022. The disclosure requirements under the ESRS correspond to TCFD recommendations.
Stock Exchanges: The UN Sustainable Stock Exchanges Initiatives has launched a database to provide information on 78 stock exchanges across the globe that support more granular climate-related financial disclosures in line with the TCFD recommendations. The London Stock Exchange in October 2021 issued guidance on climate disclosure best practices and called for TCFD implementation for its listed companies. The Japan Exchange Group, Inc. in November 2021 published a ‘Survey of TCFD Disclosure in Japan’, summarizing the TCFD-aligned disclosure practices of about 260 listed companies. The Hong Kong Exchanges and Clearing in November 2021 published guidance to help listed companies implement TCFD recommendations and develop climate-related disclosures.
The Way Forward
As the TCFD status report shows, there has been a rapid increase in the amount of ESG information available to investors over the last five years. This is a positive development by all means, but there is cause for concern as the majority of organizations are stopping short of employing all 11 recommendations of the TCFD. This shows a reluctance on the part of the concerned companies to reach a level of transparency or granularity that is useful to investors and other stakeholders.
Things are poised for change, however, with major global regulators mandating digital ESG reporting by the entities they oversee. Digital reports are more transparent and granular as they do not allow companies to leave out critical information from their sustainability reports. This is because digital reporting is governed by digital taxonomies that are machine-readable versions of sustainability standards. The technology or format driving digital corporate reporting is XBRL or eXtensible Business Reporting Language.