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Climate Risk and the TCFD: things to look out for in 2021

22 January 2021

The Task Force on Climate-related Financial Disclosure (TCFD), is, as the name suggests, an industry group established to address the question of how global financial instruments and the investment community homogenise reporting standards on the future impact of climate change on business activity. Spearheaded by the Financial Stability Board, the TCFD is very much embedded in the financial services industry, and prioritises the formalisation of climate risk as a factor in investment decision making and transparency.

Risk is a central and well-established concept in the finance and wealth management industry, with the common understanding of the term relating to shareholder returns and investment performance. With the expansion of responsible investment, risk has now taken on a variety of more nuanced meanings, with reputational and ethical risks now widely understood to also impact how the eligibility, success or failure, of an investment is assessed and particularly how clients value their interactions in financial markets. The TCFD's approach to climate risk seeks to deepen consumer understanding of the impact of environmental fragility in the investment market, and so radically change how investors integrate climate factors into investment planning.

The TCFD released its initial guidelines on reporting in 2017, with a number of companies in high-polluting sectors, such as oil and gas exploration, and the financial sector, notably banks, voluntarily reporting to the recommended standard. However, Chancellor Rishi Sunak announced in late 2020 that the UK would be adopting the TCFD framework formerly for all UK-listed assets, and so became one of the first markets to make it mandatory for registered companies to report to TCFD standards. Following the announcement, the UK government published a timeframe for all UK-listed companies, with all listed companies and financial instruments, such as pension funds, expected to report to the standard by 2025.

With all UK-registered companies expected to report by the end of the 2021/22 financial year, TCFD standards should become commonplace within CSR and Sustainability reports over the next 12 months, impacting how many asset managers and data providers process climate risk data. Importantly, the TCFD requires companies to report on forward-looking risks, and to explain company responses to climate change scenarios, such as explaining and responding to the impacts of a 2 degree increase in global temperatures over the medium and long term. This has the potential to fundamentally change the interaction between capital markets and climate change, with the emphasis now on future-proofing commercial activity, rather than the normal process of reporting retrospectively on actions taken and impacts recorded.

For Ethical Screening and other responsible investment insight providers, this also requires a review of how data is processed and represented to financial advisors and managers. Following the norms of reporting, data has often had to rely on the same retrospective approaches which provide a snap-shot of asset performance using data ascribed to the short- or medium-term period just gone. Now, we have to take the same step to reflect on how ongoing data streams better reflect future risks, and how traditional environmental metrics can be used to give better insights into how an asset is preparing itself for climate change.

The next 12 months or so will be very compelling, as a better picture emerges of just how well reporting is able to make this shift to forward-looking, scenario driven statements, but the prevailing message from the TCFD is clear. Climate change will have an impact on how societies, communities and businesses work in the very near future, and we need to be talking about adaptation now. 

Resources:

  • For more information on the TCFD, click here.
  • For the TCFD's reporting guidelines, click here.
  • For the UK's timeframe for reporting, click here.

Jim Blackstock - Senior Researcher

22/01/2021


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