TCFD 2023 Final Status Report and Next Steps
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In mid-October, the Task Force on Climate-related Financial Disclosures (TCFD) published its sixth and final TCFD Status Report detailing TCFD adoption and disclosure trends across over 3,100 companies in 8 economic sectors. In 2024, the International Sustainability Standards Board (ISSB) will take over monitoring responsibilities for the TCFD recommendations as the newly adopted ISSB Standards incorporate the TCFD recommendations in their entirety.
The Status Report highlighted the steady momentum of TCFD adoption since the TCFD recommendations were first released in 2017. Notably, 58% of publicly listed companies disclose in line with at least 5 of the 11 TCFD recommendations, significantly higher than the 18% disclosure rate in 2020. However, only 4% of companies disclose in line with all 11 TCFD recommendations.
We anticipate the number and percentage of companies disclosing in line with all 11 TCFD recommendations to increase as sustainability reporting increasingly moves from a voluntary to a mandatory status and as sustainability frameworks and standards converge.
Key Report Findings
Disclosure Completeness
The most disclosed recommendation was metrics used to assess climate-related risks and opportunities, with 71% of the companies observed disclosing this information. The least commonly disclosed recommendation was on the resiliency of strategies under different climate scenarios with many companies citing difficulty implementing this recommendation as the reason for omission. The IFRS recognizes this gap and while the ISSB S2 Standard does require a Climate Scenario Analysis in disclosing a company’s resiliency, the IFRS suggests a more feasible option for some companies is to complete a qualitative Analysis.
Location of Disclosure
TCFD and other emerging sustainability reporting frameworks emphasize the importance of intrinsically linking financial information to sustainability information. TCFD recommends while CSRD requires, sustainability information to be reported in annual management or financial reporting. Currently, companies are 4 times more likely to report TCFD disclosures in a sustainability report than in an annual management or financial report. As the CSRD comes into effect for more companies each year, we expect more sustainability information will be represented in annual financial and management reports.
Sector Trends
Energy companies disclosed more information across all TCFD categories than companies in the other 7 observed sectors: Banking, Insurance, Materials & Building, Transportation, Agriculture, Food & Forestry, Technology & Media, Consumer Goods. Energy companies, on average, had the highest disclosure levels across all TCFD recommendations out of the seven observed industries. Insurance companies and banks included in the review had the highest disclosure levels for Risk Management recommendations, reflecting the high emphasis banks and insurance companies place on risk management processes and mitigation procedures. Companies in the Consumer Goods and Technology & Media sectors reported on fewer TCFD recommendations overall than companies from the other observed sectors.
Geographic Trends
Companies based in Europe disclosed the most TCFD recommendations out of any global region, averaging 7.2 disclosures out of the 11 recommendations. 92% of European companies disclosed their climate-related targets compared to a 57% reporting rate in Asia Pacific and a 60% reporting rate in North America. Although European companies disclosed the most TCFD disclosures of any global region, less than 25% of European companies disclosed on the resilience of their strategies under different climate scenarios, the least reported on TCFD recommendation. In North America, an average of 4.6 recommendations were disclosed. Companies' resilience under different climate-related scenarios had the lowest disclosure level across all regions and industries. All regions except Europe had at least one industry where no companies reported this information.
Internal Capacity
To make sound judgments about the impact of climate-related risks on a company's financial statements, those responsible for preparing, reviewing, and auditing those statements should have sufficient experience and knowledge of these risks. According to a 2022 TCFD survey of senior executives, 82% are not "completely confident" that their companies are properly staffed to meet the demands of increased environmental, social, and governance (ESG) disclosures, including climate change disclosures. Nearly 25% of these respondents indicated that one key barrier preventing their finance teams from supporting the organization in addressing climate-related issues was their lack of professional skills in climate analysis and reporting. Companies that lack sufficient knowledge are at higher risk of underestimating the impact of climate-related issues on their business.
Financial Impact and Associated Drivers
In 2022, over 4,000 companies identified climate-related issues with a potential or actual substantial impact. 68% of these companies provided estimates of the potential financial impact in single amounts or as a range. The most disclosed potential financial risk impact was increased indirect operating costs. 65% of companies that provided estimates of their potential financial impacts associated with climate risks and 56% of companies that provided estimates of their potential financial impacts associated with climate opportunities estimated that these financial impacts would represent less than 5% of their revenue. The most disclosed financial opportunity impact was increased revenues from increased demand of sustainable products and services.
Looking Ahead
The reach of TCFD extends globally. The map below shows the jurisdictions where the government or another authority has issued climate-related disclosure requirements that incorporate or draw from the TCFD recommendations.
TCFD-Aligned Disclosure Requirements (by jurisdiction)
(click to enlarge)
Source: Adapted from www.fsb-tcfd.org
As more reporting frameworks are developed and enforced legally, we can expect more alignment between emerging and existing frameworks and regulations.
Comparing TCFD Recommendations & Proposed SEC Requirements
Companies in the United States are paying close attention to the pending SEC Greenhouse Gas reporting ruling and the recently passed regulation in California – CA SB261. Whereas the US SEC rule is broadly aligned with the TCFD recommendations with some key differences (see the table below), CA SB261 requires companies disclose climate-related financial risks in accordance with TCFD. Likewise, global companies headquartered in the United States are also preparing to comply with the EU’s Corporate Sustainability Directive (CSRD).
TCFD vs. SECGreen = SEC Proposed Requirements that would go above and beyond TCFD Recommendations | |
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Governance | |
TCFD Recommendations |
SEC Proposed Requirements |
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a.) Describe the board’s oversight of climate-related risks and opportunities |
- The oversight and governance of climate-related risks by the board and senior management - Board oversight of climate-related risks - The nature of board expertise related to oversight of climate-related risks including whether any board member has expertise in climate-related risks and, if members of management or board committees are responsible for assessing and managing climate-related risks, the climate-related expertise of the relevant individuals. - Senior management’s processes for identifying, assessing, and managing climate-related risks |
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b.) Describe management’s role in assessing and managing climate-related risks |
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Strategy | |
TCFD Recommendations |
SEC Proposed Requirements |
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a.) Describe the climate-related risks and opportunities on the organization’s business, strategy, and financial planning |
- How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term. Specifically for physical and transition risks - How the risks considered as part of the business strategy, financial planning, and/or capital allocation - Proposal includes a requirement of zip code level disclosures of location of assets subject to climate-related risks with additional disclosures for assets in flood zones or regions of high water stress |
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b.) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning |
- The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant's consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements. - A description of the impact of physical and transitional risks (as identified in financial disclosures) on financial statements. - Contextual information about how each specified metric (financial statement metric) was derived, including a description of significant inputs and assumptions - A description of how estimates and assumptions are impacted by climate-related events and transition activities. *Please note, the SEC proposal ruling is set to utilize a reporting materiality threshold of 1% - far less than what is generally used as a materiality threshold for other types of reporting |
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c.) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2⁰C or lower scenario |
- Information about if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks - A description of the scenarios used (if applicable), as well as the parameters, assumptions, analytical choices, and projected principal financial impacts |
Risk Management | |
TCFD Recommendations |
SEC Proposed Requirements |
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a.) Describe the organization’s processes for identifying and assessing climate-related risks |
- The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes |
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b.) Describe the organization’s processes for managing climate-related risks |
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c.) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management |
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Metrics and Targets | |
TCFD Recommendations |
SEC Proposed Requirements |
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a.) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process |
- If a registrant uses an internal carbon price, information about the price and how it is set - If the company does not have an internal estimate of the cost of carbon emissions, no additional disclosure is required |
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b.) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks |
- The registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production) - Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions - GHG intensity for Scope 1, Scope 2, and (if appropriate) Scope 3 emissions - Accelerated and large accelerated SEC registrant filers (those with a public stock float of $75 million or more) must obtain an independent attestation of, at minimum, Scope 1 and Scope 2 emissions - When disclosing Scope 1, 2, and 3 emissions, the impacts of any offsets must be excluded from the SEC disclosure |
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c.) Describe the targets used by the organization to management climate-related risks and opportunities and performance against targets |
- If the registrant has publicly set climate-related targets or goals, information about the scope of activities and emissions included in the target, the defined time horizon by which the target is intended to be achieved, and any interim targets - If the registrant has publicly set climate-related targets or goals, information about how the registrant intends to meet its climate-related targets or goals - If the registrant has publicly set climate-related targets or goals, information about relevant data to indicate whether the registrant is making progress toward meeting the target or goal and how much progress has been achieved, with updates each fiscal year and if carbon offsets or RECs have been used as part of the registrants |
ISSB’s Role and the Future of TCFD
As the newly finalized ISSB standards fully incorporate all 11 of the TCFD recommendations, the ISSB will be taking over the monitoring and reporting duties associated with the TCFD recommendations. The ISSB will be responsible for ensuring interoperability of the ISSB standards and therefore the TCFD recommendations with other reporting frameworks and jurisdictional reporting directives. The ISSB will oversee the development of implementation guidance on specific climate-related topics like Scope 3 GHG emissions, climate-related scenario analyses, and climate-related physical risk assessment and adaptation planning. The ISSB will also oversee the development of a consistent climate-related financial disclosure framework to be used by sovereign entities. This framework will support organizations preparing TCFD-aligned disclosures and transition plans.
The final status report from the TCFD Taskforce shows that significant progress has been made in the corporate adoption of TCFD recommendations, but more progress on disclosing climate-related financial information is needed from both organizations and sovereign entities. TCFD Guidance has been incorporated into emerging reporting frameworks and directives such as ISSB, CSRD, The SEC Climate Ruling, and SB261. As sustainability reporting becomes increasingly mandated across jurisdictions, convergence between frameworks and directives is expected to streamline requirements and make accurate comparisons between frameworks.
For more information or help preparing for your TCFD-aligned disclosure, please contact us or call (800) 508-8034 to speak with one of our Sustainability professionals today.
Author
Lauren Besser, MBA
Sustainability Analyst
KERAMIDA Inc.
Contact Lauren at lbesser@keramida.com
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