Summary of TCFD progress report

The recommendations focus on four key areas:

• Governance: the organisation’s governance around the management of climate-related risks and opportunities.
• Strategy: the current and future impacts of climate-related risks and opportunities on the organisation’s strategy and financial planning.
• Risk management: the processes used by the firm to identify, assess, and manage climate-related risks.
• Metrics and targets: used to assess and manage relevant climate-related risks and opportunities.

UK will be the first G20 country to align disclosing climate-related risks and opportunities with the TCFD recommendations (for largest firms, with gradual implementation until 2025), followed by some other non-European jurisdictions, e.g. New Zealand. 

­Currently, there are no plans to make TCFD mandatory in the EU. However, some EU directives are embedding these and other standards in a slightly modified form in the EU regulatory framework.

Every year, the TCFD Status Report announces the number of companies supporting the framework and discloses the required information. As of this year, 3,800 organisations are complying with the TCFD Recommendations, with a stable increase since its inception. Over 1,500 of these organisations are financial institutions responsible for $217 trillion of assets  (TCFD, 2022). Europe remains the leading region reporting 60% on average across the 11 recommended disclosures.

The biggest achievement of TCFD is the progress related to the board's oversight of climate-related topics. The TCFD recommendations on governance helped many companies to establish climate risk internal accountability structures and to allocate responsibility to specific senior executives. For climate-related issues, having the support of people on the board makes a difference between Corporate Social Responsibility (CSR) being an integral part of a bank's strategy rather than merely a Public Relations activity. Progress in this area is worth noting. Unfortunately, despite clear improvements, there are also some problematic areas.

TCFD has a very limited area where it overlaps with other major voluntary (Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI)) or obligatory (Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Due Diligence Directive (CSDDD)) standards.

Similarly to ESG ratings with embarrassingly low correlations to each other (Stackpole, 2021), climate disclosures are another element of the broadly understood ESG universe that suffers from multiple competing methodologies and a lack of strong market consensus. All that makes navigating through different systems a fiendish exercise.

Further increase in interoperability would align with the Financial Stability Board’s (FSB) expectations, whose chair recently emphasised the need for standard setters to work faster to avoid hardwiring differences between their disclosure standards. (Jones, 2022).

According to TCFD (2022), "For the fiscal year 2021 reporting, 80% of companies disclosed are in line with at least one of the 11 recommended disclosures; however, only 4% disclosed are in line with all 11 recommended disclosures". It is fair to assume that this fact is not caused by banks' bad will. The lack of data and harmonisation of TCFD with other regulations makes collecting the information from stakeholders all but trivial.

The consequences are predictable; if the firm discloses only partial data, a non-informed observer may assume (correctly or not) that the key aspects could be missing. According to research done at ETH Zurich (Bingler et al., 2022), the adoption of TCFD recommendations had no significant impact on the disclosures of supporting companies. 

Unfortunately, reports of companies are sometimes inconsistent with each other on a year-on-year basis. There are known cases of firms being praised by non-governmental organisations (NGOs) for the traceability of their targets only to change the metrics reported in the next financial year. Changes like this additionally impede comparability.

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It is fair to say that TCFD suffers from a set of defects common for "self-regulating" systems where policies are not enforced: lack of incentives to cooperate, conflicts of interest, insufficient accountability, moral hazard, or even free-riding participants.

Disclosure C in the strategy part (also referred to as 3.3) asks companies to describe the resilience of the organisation’s strategy, considering climate scenarios, including a 2°C or lower scenario. Additionally, scenarios consistent with increased physical climate-related risks should also be considered where relevant to the organisation.The standard defines additional guidance for insurance companies, especially those with substantial exposure to weather-related events, to consider greater than 2°C scenarios.

Across the 11 recommended disclosures, the scenario analysis remains the least disclosed at 19% for banks and 25% for insurance companies (TCFD, 2022).

These difficulties are in line with the exercise that banks often mention in this section of their TCFD report, that is ECB stress tests (ING, 2022; BNP Paribas, 2022). This exercise highlighted deficiencies in the data acquisition process for climate-related data and methodological shortcomings (Vanweddingen, 2022). Since climate-related scenario analysis is work-in-progress, the relatively lower coverage of this particular element for banks should not be surprising.

The latest status report recorded the highest increase of banks reporting this disclosure. It should not be surprising; many regulators, including ECB (2020), in their guidance on climate-related risks, pay attention to the aspect of transmission channels and impacts on the risk profile of financial institutions. 

Due to the atypical features of climate risks, their integration into risk management is not a painless task. However, it still has practical consequences, e.g. for the prudential frameworks applied to banks. Basel Committee on Banking Supervision (BCBS) investigates the extent to which climate-related financial risks should be explicitly incorporated into the existing Basel framework (Tajti, 2022).

European regulators consistently emphasize that banks need to speed up the development of climate-related risk models data collection to fill all the existing gaps and to fully integrate climate risks in their risk management framework (Mazza, 2022). Banks that were meticulous in their TCFD exercises should have an easier task ahead as they have already made some progress.

Unfortunately, the vast majority of the banks’ disclosures concerning the integration of climate factors into existing processes are still mostly qualitative, which contradicts TCFD's recommendations of having an appropriate balance between qualitative and quantitative information (TCFD, 2017). However, even with qualitative disclosures, it is possible to distinguish some good practices.

The heart of the TCFD is the Metrics and Targets section, that should allow the reader to assess the changes in capital allocation to carbon-intensive sectors and assess whether climate-related risks and opportunities are in line with company strategy and risk management processes disclosed earlier. 

The analysis of metrics published by the biggest banks exhibits the problems mentioned above, with some key dimensions not being reported. The selection of metrics is often based on what is available rather than what is the most relevant; It is commendable that a bank has reduced its paper consumption but that is a relatively insignificant information compared to how the bank allocates billions of euros it manages. Moreover, even the part that is almost by definition quantitative often lacks traceable data. Again, lack of data and harmonisation with other regulations is not making delivering crucial metrics easier, so too big criticism towards banks would not be fair.