‘Urgent progress needed’ as companies fall short of TCFD

Evidence climate-related risks are beginning to affect valuations

The majority of asset managers and asset owners are reporting climate-related information to their clients, largely in-line with the Taskforce for Climate-related Financial Disclosure (TCFD) recommendations, but are many are still falling short of covering all 11 factors.

This comes at a time when investors say they are increasingly using these disclosures in their financial decision-making.

According to the 2022 TCFD Status Report, the percentage of overall companies disclosing TCFD-aligned information continues to grow, with 80% of companies disclosing in line with at least one of the 11 recommended disclosures. However, only 4% disclosed in line with all 11.

Taking a closer look at asset managers and asset owners, 50% and 75% respectively said they are reporting climate-related information aligned with at least five of the 11 recommended disclosures. Furthermore, only 10% of asset managers and 36% of asset owners indicated they report on all 11 recommended disclosures.

However, the report findings show “more urgent progress is needed” across all companies.

“Even with the significant progress made over the past five years, this report makes clear that more urgent progress is needed,” said Michael Bloomberg, chair of the TCFD. “Supporting market efficiency and stability is paramount as we look to build a more sustainable and resilient future.”

See also:- Asset managers need to take TCFD seriously

TCFD reporting is in demand from investors with 90% of those surveyed saying they incorporate climate-related financial disclosures in financial decision-making and 66% of these factor into the way they price financial assets.

In terms of progress, the number of companies disclosing against TCFD in financial filings and annual reports has increased this year with over 70% disclosing for the fiscal year 2021, compared to 45% for the fiscal year 2017.

Furthermore, the availability and quality of climate-related financial disclosures has increased since June 2017, the report found. Some 95% of survey respondents saw an increase in climate-related financial disclosures since the release of TCFD recommendations, while 88% said they had seen improvements in quality.

Interestingly, those surveyed for the annual TCFD report also reported evidence that climate-related risks are beginning to affect prices and valuations for certain types of assets. The report said 76 of companies implementing the TCFD recommendations indicated they see climate-related issues affecting market prices, with 57% seeing an effect in the prices or values of financial assets and 45% seeing an effect in lending or insurance rates.

The report concluded three themes are emerging around climate-related risk and asset prices:

First, climate-related risks that are expected to materialise in the near term are more likely to be incorporated into prices than those expected to materialise in the medium to longer term. As a result, transition risk seems to be more likely to be priced into financial markets than physical risk.

Second, the effect of transition risk on prices has generally increased since the Paris Agreement in 2015 but varies over time with news and election cycles as new information emerges.

And third, prices are a function of not only the specific climate-related risks of a company (as measured by some proxy such as GHG emissions), but also the uncertainties surrounding a company’s future cash flows — uncertainty tends to raise risk premia.

The Taskforce will prepare another status report for the Financial Stability Board in October 2023.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...