TCFD Analysis: The focus now turns to re-thinking ‘materiality’

Materiality emerges as a pivotal issue as high level report released

The Task Force on Climate-related Financial Disclosures (TCFD) has now issued its final report and it will set the scene for much of the climate disclosure debate going forward.
It seems to me that it could be deemed a success if it helps to focus people’s minds on the whole concept of materiality. The TCFD acknowledges the topic needs “special attention”.
It was a topic raised on a conference call by Responsible Investor with senior figures from the TCFD. Former SEC Chair Mary Schapiro, Special Advisor to TCFD Chair Michael Bloomberg, said companies already have obligations to disclose material risks to investors, saying: “They have the skill in making those materiality distinctions.” But climate change has impacts over a longer period than the next quarter or next year, so “some adjustment” was needed.
And Diane Larsen, an Audit Partner at EY and an expert contributor to the task force, added: “If a company has a material risk you are going to have to disclose that. With climate, you’ve got a long tail. Boards and audit committees will have to adjust their lens a bit – extend that lens to a longer horizon.”
The wording of the final report recognizes that most information included in filings is subject to a materiality assessment. “However, because climate-related risk is a non-diversifiable risk that affects nearly all industries, many investors believe it requires special attention.”
Asset managers and asset owners, it says, should consider materiality “in the context of their respective mandates and investment performance for clients and beneficiaries”.
It believes that organisations should determine materiality for climate-related issues “consistent with how they determine the materiality of other information included in their financial filings”.
Some organisations had expressed concern about disclosing information in filings that is not clearly tied to an assessment of materiality.

In most G20 countries, listed firms have a legal obligation to disclose material information in their financial filings— including material climate-related information.
The recommendations are intended to help organizations meet existing disclosure obligations more effectively and in accordance with their national disclosure requirements.The TCFD report comes in the same week as new guidance on the EU’s Non-Financial Reporting directive, which has this to say: “Materiality is a concept already commonly used by preparers, auditors and users of financial information.” The Accounting Directive defines material information as the “status of information where its omission or misstatement could reasonably be expected to influence decisions that users make.” But the new Directive introduces a new element to be taken into account when assessing the materiality of non-financial information by referring to information “to the extent necessary for an understanding of the … impact of the company’s activity”.
The backers of the TCFD are at pains to stress that it is a voluntary market solution, with Schapiro saying there’s no expectation of a regulatory response; it’s a “good business, common sense” initiative. This is in contrast to, say, what California Insurance Commissioner Dave Jones is doing in terms of getting insurers to disclose climate risks or France’s Article 173 investor climate reporting law. How all this works together in practice will be a key test.
And, while it’s worth noting that no-one ever went to jail for breaking a soft law, as TCFD Vice Chair Yeo Lian Sim said: “We won’t really need a rule if everybody is using voluntary climate change disclosure.” Speaking on the call, the advisor to the Singapore exchange noted how the SGX is bringing in sustainability reporting from 2018.
There had been concerns too, revealed in research by analytics and data provider IHS Markit last month, that the TCFD could mislead investors and distort markets.
Schapiro addressed this, saying: “Markets work best when they are transparent. It’s impossible for me to understand the perspective that opacity is somehow better, as a capital markets person.”
Mark Carney weighed in on this as well in an FT article today, observing: “The more incomplete or opaque the data and analysis, the more inefficient are markets.”
Another element flagged up by the TCFD is scenario planning, and there’s a 42-page technical supplement to help those grappling with this.
Fiona Wild, Vice President, Climate Change and Sustainability at mining company BHP and a panel member, acknowledged it is a nascent area for climate change. But, she said, BHP has found it a useful tool for “bringing the future back to today to make more informed decisions and improve shareholder value”.