Looking to have your reporting aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework? Not sure what to include in your climate disclosure? Recently, we held a webinar addressing these pressing topics and want to share with you our answers to the most popular climate disclosure questions that came up.
Q: TCFD Disclosure Drivers: There are many different ‘motivators’ coming to the table to push disclosure, some of which are surprising to many. What do you think will be the top motivations for the next few months?
A: There are certainly several factors driving adoption for companies of TCFD reporting and climate related financial disclosure. In our opinion, some of the main factors are:
- Increasing demand from institutional investors for companies to provide TCFD reporting. A great example is the announcement from BlackRock CEO Larry Fink this past January that all BlackRock portfolio companies are to produce a TCFD-aligned report. The sheer scale of BlackRock will increase the corporate adoption of TCFD significantly. In the institutional space, asset owners are consistently asking more questions of their asset managers who will turn to portfolio companies for this information.
- Government commitment to reduce GHG emissions to net-zero by 2050. The growing list of countries setting net-zero targets, including Canada, is putting pressure on companies to explain how they fit within that future. There is no one single path for doing so, but the TCFD framework is the best to illustrate how a company intends to operate in a low-carbon future.
- Growing concerns about the financial risk of climate change. There is a growing body of research from central banks that both physical and transition impacts of climate change put the global financial system at risk. Institutions like the Bank of England and the Bank of Canada are calling for greater adoption of corporate climate disclosures as a way to reduce financial risk. Investors, in turn, will use the warnings of financial risk to put pressure on companies to disclose how they intend to avoid this risk.
Q: First steps: For an organization at the start of their TCFD journey, what would you recommend we focus on first in terms of financial disclosure obligations?
A: Developing a climate risk disclosure requires time and resources. We recommend two steps that support building a consensus across a company. First, Executive leadership support is key to starting the TCFD journey. Strong climate governance sets the direction for how seriously an organization takes climate change risk. Second, assess what your company is already doing (and may not be calling climate change). We are often brought into a company and ask “Who is responsible over climate change management?”, “How are climate related risks identified and assessed in the supply chain, for capital expenditure decisions, and in day-to-day operations?” With this information, you will be in a strong position to plan the next steps in disclosure.
Q: Disclosure Documents: TCFD recommends that climate disclosure is part of a company’s financial filings. This would involve issues of auditing or assurance and regulatory disclosure requirements from the CSA or SEC. How do you see this developing in the industry?
A: Currently, companies are not consistently consolidating climate change disclosure in any single document. In our work with the CPA disclosure project, we found that several corporate documents are in use, including the annual report, the MD&A, sustainability reports, and other standalone documents. It is not unusual to find climate disclosures, especially forward-looking statements, in the MD&A. The CSA released two bulletins on climate disclosure already to give guidance on this matter. At the time of writing, the US government proposed new guidance on ESG (which would include climate) reporting through the Department of Labor so it is unclear what the SEC will do next. If the annual information form includes climate disclosure, it may be subject to certain levels of assurance. The ability of the industry to provide this assurance may play a role in what we see today; for example, GHG footprinting is far more likely to be disclosed in voluntary documents than in regulatory filings due to several issues, including assurance.
Q: Next Steps: What should we anticipate in the future? How soon should we disclose?
A: To date, government panels and agencies are ‘suggesting’ and ‘encouraging’ companies to disclose climate risk. We expect these suggestions will become more structured as we see in the EU and UK. In Canada, provincial securities regulators could make it mandatory for any publicly listed company to publish a TCFD-aligned report, for example. The Office of the Superintendent of Financial Industry could require the banks and insurers it oversees to publish one as well.
Our strong advice is companies should not be waiting for regulatory requirements to publish a TCFD-aligned report. There is no benefit to waiting and delaying climate disclosure—as a business or financial institution, you are only going to fall further behind your peers, raising questions for investors and stakeholders about how prepared you are for climate change. The earlier you disclose, the more control you will have over your climate change story and the messaging.
Q: Non-corporate Disclosure: Have you come across an interest in TCFD from provincial, regional, or local governments?
A: Yes. National governments in the UK, France, Sweden, Canada, and Chile are committed to TCFD-aligned reporting. In Canada, the cities of Vancouver, Toronto, and Montreal have included TCFD-aligned reporting in their annual financial reports. The Canadian Urban Sustainability Practitioners (CUSP) is working with these cities to strengthen their disclosures and has information on their work. There is ongoing work to understand how the recommendations can be used on a city level and CPA Canada has published a guide on this topic.
Q: Scenarios: TCFD seems to be working towards keeping warming below 2°C. Most of the reading I have done has shown this target is highly unlikely at this point. How do you and the TCFD account for this discrepancy? What is the recommendation for >2°C scenarios?
A: TCFD’s recommendation is for companies to look forward and disclose how they will operate in a 2° or below world. The work to implement the 2° transition is already underway around the world and the concern of the TCFD is whether companies are properly accounting the financial impact of economic and sectoral transitional change – regardless of whether we reach the 2° or below target. The goal of disclosure is to inform investors on how companies approach and manage this change to support better investment decisions and market stability.
Q: Canada’s Low-Carbon Transition: Canada’s oil & gas sector and the ecosystem of service firms and contractors which supply it creates a large climate change impact. Is Mantle314 playing a role in helping companies transition to meeting the Paris Agreement goals?
A: Yes, we do! We work with companies in a range of sectors, including oil and gas, helping them develop strategies to transition, decarbonize, and disclose. A big part of this work is helping businesses understand not just the risks from climate change, but the opportunities that come from the shift to a low-carbon economy: green jobs, new markets for products, access to sustainable finance, etc.
Q: Specific Metrics and Targets: Can you highlight some metrics and where they impact the financial statements? Are Science-Based Target (SBT) methodologies sufficient to comply with TCFD?
A: It’s important to recognize that metrics and targets are just one of the four categories of TCFD recommendations. In our view, other than GHG footprinting (which TCFD highlights separately) metrics and targets need to be specific to the climate change issues that are relevant to your company. Your company can determine these issues through risk management and strategic thinking. If an SBT is relevant for your company, it is appropriate to include in the metrics & target recommendation, and you can supply additional content to explain how you consider governance, risk management, and strategy.
Q: LEEFF: Can you speak to LEEFF’s TCFD requirement? Can you clarify when companies who receive LEEFF need to issue a TCFD report? How strict do you think the government will be on the completeness of these TCFD reports?
A: Climate disclosure is a part of LEEFF, but details are pending. The original announcement specifically mentions TCFD, and while we have been assured that this remains true, specific requirements were not laid out. Based on the work we did for the CPA climate disclosure project, the current state of disclosure in Canada is still in its infancy and TCFD expects companies to take years to fully disclose. Therefore, the sooner a company starts to disclose, the better their position will be should specific requirements be published.