IIGCC welcomes TCFD’s draft report and suggests various ways to improve the final framework
Stephanie Pfeifer,CEO of the Institutional Investors Group on Climate Change
On 14 December 2016, the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) issued its draft recommendations on climate-related financial disclosures and launched a 60-day public consultation that closed on 12 February 2017.
In a formal response to this consultation, developed in discussion with members, IIGCC welcomes the critical work led by the TCFD, recognising it represents an important step forward in the harmonisation and wider adoption of greater climate-related disclosure by companies and financial actors.
IIGCC endorses the TCFD’s seven principles for effective disclosure of climate-related risks and opportunities as a means to improve the reporting of reliable climate information in financial filings, offering a more comprehensive view to investors and other stakeholders.
IIGCC believes the TCFD’s recommendations – structured around the four core elements of governance, strategy, risk management, and metrics/targets – represent a vital step forward in global efforts to drive harmonisation of climate-related disclosure by organisations already engaged in such activities and the adoption of such practices by many more companies with no such experience to date.
While climate-disclosures are already mandatory in some jurisdictions, we emphasise these requirements are not always well understood or routinely complied with. IIGCC therefore recommends that the TCFD ensures its final report makes explicit precisely where companies must already disclose climate-related financial risks.
IIGCC welcomes the TCFD’s ‘supplemental guidance’ for certain sectors (prioritised to reflect the carbon intensity of operations or products) and suggests these offer a solid starting point towards more coherent climate disclosure.
However, we warn that the TCFD’s current recommendations relating to the standardisation and comparability of data (including for scenarios) are not yet strong enough. As it stands, the proposed framework will leave it up to each organisation to select the metrics they want to use to assess climate-risks and opportunities. This can work against consistency in financial filings over time, hindering comparability, and may encourage companies to evade robust disclosure until specific reporting metrics are required by financial regulators.
IIGCC calls for several key reinforcements to the TCFD recommendations on corporate disclosure:
- Materiality: Companies should be tasked to disclose which risks/opportunities they have identified as financially material and those that they consider immaterial despite being identified as potentially material by investors, regulators or other key stakeholders.
- Three additional disclosures for the framework: board-level expertise on climate risk; whether (or not) remuneration at board and management level reflects climate-related performance; and the processes used by the board member responsible for climate policy to ensure consistency between public policy positions adopted by the company and any trade associations to which it also belongs.
- Green metrics: the narrative around disclosure about ‘risk’ (e.g. carbon emissions data) – should be balanced within the framework by addition of disclosure requirements related to ‘opportunity’. e.g. revenues from ‘green’ products that help mitigate climate change.
- Scope 3 emissions: Companies should have to disclose these especially in the energy, agricultural products, mining, and transportation sectors.
- Non-financial sector groupings (of companies): should be narrowed to more closely reflect levels of risk exposure. For example, companies as diverse as a mining company and a large real estate owner (with scope 1&2 emissions that may vary by an order of magnitude) should not fall into a single grouping for buildings and materials.
- Definitions must be developed in detail by sector-specific experts (under the umbrella of the TCFD or an equivalent body) for what constitutes a short, medium and long-term horizon for each sector
IIGCC considers scenario analysis an important form of risk assessment and calls for a standardised ‘best practice’ approach employing a two-degree scenario with commonly determined (and disclosed) assumptions / procedures to help normalise the use of such analyses and improve the comparability of the outcomes and costs they show.
IIGCC acknowledges the TCFDs recommendations will also focus investor attention on the need to be more transparent themselves about how they address climate risk across their portfolios. Since the quality of disclosure by investee companies determines the quality of disclosure by investors, we stress that the number one requirement for asset owners and managers to develop an effective disclosure strategy is for them to have more complete, meaningful, reliable and consistent data across companies and sectors. We also call for the TCFD’s guidance for investors – currently weighted toward equities – to cover more asset classes. In addition, information on an investor’s engagement work with investees on climate change issues can be an important part of climate disclosure.
Finally, we make plain that it is critical to international efforts to curb the risk of dangerous climate change that the TCFD’s final recommendations are fully implemented. IIGCC therefore urges the G20 to show leadership on this agenda during the German 2017 presidency on the implementation phase of the recommendations as well as the evolution of climate disclosures going forward. The G20 could, for example, task a designated body to oversee and monitor implementation of the TCFD’s recommendations and to develop them further as methodologies, metrics and practices evolve as part of global efforts to fully implement the Paris Agreement and meet the climate challenge.
This comment was first published in Business Green
Download the full IIGCC response to the TCFD consultation.
— CDP (@CDP) February 22, 2017
— IIGCC (@IIGCCnews) February 22, 2017