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)

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).

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