The US is currently a global laggard on climate reporting regulations, according to the Taskforce on Climate-related Disclosures (TCFD) secretariat chief Mary Schapiro – the only person to have chaired both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission, two of the most powerful financial regulators in the US.
The comments were made at the launch of revised guidance for TCFD-aligned reporting and an annual status report on the growth of TCFD disclosures by firms. Schapiro said: “The US is behind the rest of the world at this stage but I think the SEC is working very hard to catch up.
“It is my fervent hope that the SEC will follow the lead of the rest of the world in utilising the TCFD as the foundation for its climate risk disclosure rules … as this will allow for a lot of comparability from jurisdiction to jurisdiction, which is what investors want.”
The TCFD framework – specifically its four pillars of Governance, Strategy, Risk Management, and Metrics and Targets – is the basis for a global standard for sustainability disclosures which is currently being developed by accounting body the IFRS Foundation, and climate disclosure rules which are to be introduced under the EU’s incoming Corporate Sustainability Reporting Directive.
It has also influenced disclosure rules and regulations in the UK, Hong Kong, Singapore, Japan and multiple other jurisdictions.
The SEC launched a consultation on climate disclosures in March and is expected to propose a series of mandatory requirements for companies by the end of 2021.
Under the TCFD’s updated guidance, published today, companies in all sectors are asked to disclose their Scope 1 and 2 emissions independent of a materiality assessment – while Scope 3 disclosure is encouraged. Previously, the TCFD had recommended that all disclosures relating to its Strategy, and Metrics and Targets pillars – carbon footprinting falling under the latter – would be subject to an assessment of materiality, or whether such information was relevant to a company’s operations.
Commenting on the change, Schapiro said that the TCFD viewed Scope 1 and 2 emissions as the key foundational information “needed to understand the global state of greenhouse gas emissions” and that the data was easily obtained. Around 70% of respondents to a recent TCFD consultation backed the approach, she said.
“Scope 3 data is harder to acquire and its methodology is not quite as developed, although the TCFD continues to strongly encourage its disclosure. We always try to balance the costs of disclosure with its usefulness, and in some cases there are companies where Scope 3 does not directly relate to their climate risks and opportunities, so we left it subject to materiality,” she added.
The guidance also included new provisions for banks, insurers, asset owners and managers to disclose the proportions of their assets and activities which are “aligned with a well below 2°C scenario…using whichever approach or metrics best suit their organisational context or capabilities”.
The TCFD did not specify a specific approach to disclosure but an independent group headed by former Bank of England governor Mark Carney – also involving TCFD’s Schapiro, in addition to HSBC, BlackRock, AXA and others – was commissioned by the TCFD to produce guidance on portfolio alignment metrics which would allow financial institutions apply the new guidance.
The guidance, also released today, is not an explicit guide on portfolio alignment but provides an overview of 26 best practice recommendations, including Implied Temperature Rise (ITR), which attempts to estimate a global temperature rise associated with the emissions of a company or investment portfolio if the global economy was to exhibit the same level of alignment or misalignment as the company or portfolio in question.
The group will now transition its work to the Glasgow Financial Alliance for Net Zero (GFANZ), the umbrella climate finance also set up by Mark Carney in anticipation of COP26, which has set up a workstream to develop portfolio alignment guidance and support adoption.
Where relevant, the TCFD also asked reporting companies to disclose their internal carbon price – a mechanism which allows companies to factor in the cost of carbon when making business or investment decisions. Carbon pricing is increasingly rising up the agenda of governments and investors, particularly in relation to compliance and voluntary carbon markets, and other measures such as carbon taxes.
Finally, the TCFD has added the disclosure of interim climate targets to its guidance for organisations disclosing medium-term or long-term targets – typically involving Net Zero pledges, and the disclosure of cross-industry, climate-related metrics such as water, energy, land use and waste management.
A separate report published by the TCFD showed that climate reporting aligned to its framework had reached an all-time high in 2020, growing by nine percentage points – a larger increase than in any previous year assessed. Last year, the TCFD had warned that the rate of adoption was “slower than necessary” and “in need of drastic acceleration” after it grew by only four percentage points in 2019.
Despite the increased rate of uptake, it said “significant progress is still needed as an average of only one in three companies reviewed disclosed climate-related information aligned with the TCFD recommendations”.
The TCFD noted that Europe has remained the leading region for disclosures, having grown by 15 percentage points compared to the previous year. More broadly, energy companies provided the highest disclosure of climate-related risks and opportunities, while companies which are less carbon intensive disclosed the least – for example, 15% of tech and media companies provided such disclosures.
The least reported information was on the resilience of company strategies under different climate-related scenarios, said the TCFD, mirroring the findings of the European Financial Reporting Advisory Group which recently published a stocktake of current sustainability disclosure practices by companies. However, the proportion of reporting companies has increased to 13% in 2020 compared to 5% in the previous year, which the TCFD described as “encouraging”.