Ground-Breaking Standard Setter TCFD Given Warm Send-off

The king is dead; long live the king.

At the end of this year the Taskforce for Climate-related Financial Disclosures (TCFD) will cease to exist but its operations will be continued by the International Sustainability Standards Board (ISSB).

The standard setter’s dissolution eight years after its creation has prompted a wave of reflection within the ESG community on the achievements of the pace-setting organisation. Such has been its success in rallying the global financial system to the cause of climate change that a week from its cessation on December 31, 97 of the 100 largest companies in the world are reporting in line with its frameworks or publicly support it.

“Since its creation in 2015 the TCFD has had significant impact on the broader investment ecosystem,” Larry Lawrence, head of sustainable finance products at ICE, told ESG Insight. “It helps address one the biggest challenges the industry has faced for years and that is the lack reporting standardisation – it is essentially the disclosure norm around the world.”

Finance Unleashed

The TCFD was created as an arm of the Financial Stability Board (FSB) to help mobilise the capital needed to meet the climate limitation goals of the Paris agreement. It did this through a set of 11 reporting guides that focus on calculating the impact that a company’s activities have on the environment. With that process in place and data in hand, companies were encouraged to report the information to investors so that they could weigh the relative environmental advantages of one asset over another.

Soon, however, what had started out as a voluntary code had been incorporated into nascent jurisdictional reporting codes. The TCFD’s high profile, aided by the charisma of its chairman Michael Bloomberg, meant that its recommended disclosures became inculcated within the policies of organisations and regulators alike.

“TCFD has increased investor attention on climate change-related risk and as such set a foundation for various voluntary and mandatory disclosure frameworks around the world,” Mackenzie Hargrave, director of ESG product solutions at FactSet told ESG Insight. “It has also enabled collaborative engagement initiatives”, such as the Climate Action 100+, an investor-led organisation that presses the largest greenhouse emitters to reduce their carbon footprints.

Another One

At the time of its creation, critics saw the TCFD as just another attempt to bring some order to the ESG data landscape, one that already had multiple often competing reporting codes, such as SASB and GRI. Its recommendations, however, attracted attention for their focus on materiality. By treating companies as individual entities whose impacts on the environment are nuanced, TCFD provided an alternative to the one-hammer-cracks-all-nuts approach of other codes.

“TCFD acclimatised financial institutions towards climate-related disclosures,” said Shruti Bhargava at ESG Book’s climate research unit. ICE’s Lawrence said it had helped set the expectations for “resiliency, scenario analysis, compressive carbon footprint, including Scope 3 and governance controls” among other achievements.

Tanya Seajay of Canada-based ESG consultancy 7 Centre said she preferred the TCFD’s forward-looking approach to disclosures.

“You need a forward-looking lens to be able to anticipate risk and be prepared for those and to mitigate it and also to think about the opportunities associated with it,” Seajay told ESG Insight earlier this year.

Grand Achievements

In its sixth and final annual report published in October, the TCFD triumphantly trumpeted that 70 per cent of asset managers and 84 per cent of asset owners reported climate-related data to their stakeholders last year. More than four fifths of asset managers report in line with at least one of the TCFD’s 11 recommended disclosures, while half of asset owners followed the organisation’s guidelines, the report stated.

By last year, its recommendations had formed the basis of reporting in 19 jurisdictions that accounted for almost 60 per cent of global GDP, according to research firm Position Green. Implemented and under-development regulations in the EU, US, UK and Japan have been built with the recommendations in mind, as have the recommendations of other standards setters. Among those are the ISSB, which issued its first two sustainability disclosure standards earlier this year.

Nevertheless, TCFD cautioned that more work was needed to be done; only 4 per cent of companies followed all 11 of its recommendations.

“While the disclosure rates have increased and the same is also evident in the annual TCFD status reports over the years, one common challenge that still needs to be resolved is the qualitative nature of the disclosures,” ESG Book’s Bhargava told ESG Insight. “For data to be comparable and analysable, it needs to be disclosed in a quantitative manner. This could be one of the challenges ISSB could look forward to resolving, going forward.”

Optimistic Future

Data will continue to be the Achilles heel of the ISSB as it assumes the roles of the TCFD. For the recommendations to work optimally, they need good-quality data.

The ISSB is cognizant of this shortcoming, said FactSet’s Hargrave.

“The FSB notes that asset managers and asset owners indicated the top challenge to climate-related reporting is insufficient information from investee companies,” she said. “ISSB is primed to help bridge this information gap by applying TCFD’s widely adopted framework to establish global sustainability reporting standards that are closely aligned to financial disclosures.

“This taken together with ISSB’s focus on ensuring interoperability with SFDR and early signs of widespread adoption of ISSB set the stage for a wave of consistent and comprehensive sustainability disclosures to hit the market – addressing the biggest challenge facing the investor community.”