By Laura Canaveri and Robin Hamaker-Taylor
Whenever a new standard or guideline is released, the question as to whether it will have staying power emerges. The same was probably the case in July 2017, when the Task Force on Climate-Related Financial Disclosures (TCFD) published its recommendations. Yet, the outcomes of events held in May 2019, provide strong evidence to suggest that the TCFD recommendations have gained the right momentum among corporates and financial institutions and are here to stay. Acclimatise analyst Laura Canevari attended these events last week, and here she shares her digest on the momentum behind TCFD, how it has sparked a growing wave of regulatory action on climate risk disclosures, and progress made by organisations engaging with it.
On Monday 13th May, the Green Finance Initiative (together with the City of London, PRI and CDP) held its Second UK TCFD Preparers Forum. Important updates were provided by UK-based government bodies and regulators – including BEIS, BoE, FCA and the FRC – all of which are responding to the TCFD recommendations within the means of their mandates. The Financial Conduct Authority (FCA), for example, has defined its role on climate change and green finance, acknowledging the link climate change has to their objective of supporting a healthy financial system. The FCA have also released a Discussion Paper (DP18/8) providing guidance on how the current regime should incorporate climate change considerations. The Financial Reporting Council (FRC) has also committed to fostering climate action, developing a new UK Corporate Governance code, which requires companies to report on risks and opportunities to business sustainability (including climate change). The FRC are also providing updates to their guidance documents such as the ‘Guidance on the Strategic Report’, which encourages firms to consider climate-related risks as part of matters that can affect long term company performance. Central Banks are also starting to practice what they preach: Banque de France, for example, published its TCFD aligned disclosures in March this year (available here – in French). It is expected that others, such as Bank of England (BoE), will soon do the same.
The importance of regulator and government initiatives was further stressed at an event the following day – Tuesday, 14th May, hosted by the Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB). At the event, CDSB and SASB officially launched their new TCFD Implementation Guide. As noted by Morgan Deprés of the Banque de France and head of the NGFS Secretariat, “TCFD works only if all actors play the game and agree to report”. Unfortunately, not all actors currently report, or do so without consistent metrics. Hence the importance of establishing a clear government and regulatory environment, reflected in initiatives such as the development of an EU-level sustainability taxonomy, the UK Prudential Regulation Authority’s (PRA) release of a Supervisory Statement (SS3/19) managing the financial risks from climate change, and the establishment of a Climate Financial Risk Forum by the PRA and FCA.
Russel Picot, HSBC Bank UK Pension fund chair of the trustee board and Special Advisor to the TCFD, supported this sentiment. Picot pointed out during Tuesday’s event that the quickest way to build the enabling conditions for disclosure is to make them mandatory. Views from both events attendees diverged on this point: Sir Roger Gifford, Chairman of the Green Finance Initiative suggested it would be nicer if mandatory disclosures were not necessary. Paul Druckman of the FRC pointed out that practice needs to further evolve before climate risk disclosures can be mandated. Nevertheless, the overall sentiment at the event was that regulatory action on climate risk reporting may be on the horizon.
Another clear message emerged from the two events: companies have the means at their disposal to start disclosing, and investors should not wait until all companies have disclosed to start assessing them. Participants at these events suggested that the lack of perfect data or the multiplicity of other disclosure initiatives are no longer adequate excuses for companies not to respond to the TCFD recommendations. As noted by Meryam Omi, head of sustainability and responsible investment, LGIM, there is a clear path on how companies can start the journey. Omi suggested companies can address the TCFD recommendations in their governance systems and through the adequate allocation of roles and responsibilities. Similarly, Jason Eis, Executive Director of Vivid Economics, highlighted the fact that companies can start working with existing scenarios, in order to learn how the dynamics of both transition and physical risks work, and can move into more personalised and sophisticated scenarios later on.
Since the first TCFD Preparers Forum, held in late 2018, it seems the conversation has shifted from being a conversation on general support of TCFD, to a practical discussion on how to implement its recommendations. Though hard and fast climate risk reporting regulations lack, progress is still being made toward improved climate risk disclosures. During Monday’s event, for example, several banks and investment firms (including Standard Charter, LGIM, UBS and EMEA Invesco) reflected on their journey so far. Similarly, progress was also shared during Tuesday’s event by BNP Paribas and HSBC. Though approaches to TCFD have varied, all organisations emphasised the fact that TCFD aligned disclosures are not an end per se, but rather one component of a much broader strategy to engage both internally and externally on climate change issues; TCFD disclosures are a means to get different people within and between organisations to discuss climate challenges and ways forward.
The conversation around risk has also clearly evolved and, as noted by Helena Viñes Fiestas, Deputy Global Head of Sustainability, BNP Paribas Asset Management), it has shifted from being centred on companies or investments, to a broader recognition of the environmental and societal risks that climate change is posing. In the words of Russell Picot “what we are talking about is profound in terms of societal change. […It entails…] a deep change for decarbonising the world, which puts into question the resilience of business models in terms of scarce resources.”
The TCFD framework, however, seems to have enabled much more action toward engagement with this profound societal change than other similar initiatives. Potentially, as noted by Maria Lombardo (Head of Responsible investment EMEA Invesco), this is because TCFD provides a framework not only to see gaps but also to create a journey within a company. Also, because it is a framework originating within the sector itself.
In practical terms, and in order to move forward, Sarah Breeden, Executive Director for International Banks Supervision, PRA, indicated that disclosures now need to be made more coherent, comparable and comprehensive across the financial system. It will also be important to understand what level of disclosure should be requested from different companies (in proportionality terms). Corporate reporting will have to evolve to what is needed by financial institutions and regulators. But progress is more important than perfection.