climate-related financial disclosure

The annual report shows a considerable uptake in the adoption of climate-centred financial disclosures.

By Paul A. Davies and Michael D. Green

The Task Force on Climate-related Financial Disclosures (TCFD) published its Annual Report on TCFD-aligned disclosures by firms (Annual Report), on 29 October 2020. The TCFD was established by the Financial Stability Board (FSB) in 2015 as a mechanism to develop an approach for companies to disclose climate change matters. The TCFD offers companies guidelines and disclosure recommendations for providing information to investors, so that companies can provide more consistent, comparable data. The TCFD also promotes climate-related scenario analysis and the integration of climate-related risks into risk-management processes.

By Paul Davies and Michael Green

On 29 June 2017, the Task Force on Climate-related Financial Disclosure (TCFD) published its final recommendations. The TCFD set out information that companies should disclose to enable investors, lenders, and insurance underwriters to better understand how companies oversee and manage climate-related financial risk. Ultimately, the aim is to strike a balance between the need to raise standards for existing climate disclosure standards and the desire to achieve widespread adoption.

The TCFD released its draft report in December 2016, and updated the recommendations in the final report based on industry and public feedback from a public consultation.

The key updates to the final report:

  • Materiality: the recommended disclosures on strategy, metrics, and targets are subject to materiality tests. Disclosures related to governance and risk management recommendations should be provided (regardless of materiality) as many investors want an insight into the governance and risk management context in which an organisation’s financial and operating results are achieved. Furthermore, the TCFD also established a threshold for organisations that should consider conducting a more robust scenario analysis to assess the resilience of their strategies (this covers those in the four non-financial groups[i] with more than US$1 billion in annual revenue).
  • Simplification: simplifying the metrics and targets for non-financial sectors to provide:
    –  Clarity and consistency
    –  Encouragement for further development of metrics in the financial sector (typically, this covers banks, insurers, asset owners, and asset managers)
    –  Clarity regarding the link to financial impact
    –  Additional guidance and standard scenarios to ease implementation
  • Climate-related Financial Risk: providing additional information on the link between financial impact and climate-related risk and opportunities.