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Friday August 23 General

TCFD Disclosures - Momentum is Building but Challenges Remain

By Sara DeSmith, PwC US Sustainability Services Leader

Nearly four years after the ratification of the Paris Climate Agreement, pressure continues to build on both the public and private sectors to accelerate the transition to a low carbon economy.

For companies that means they need to be prepared to respond to emerging risks and opportunities generated by physical climate change and market and regulatory developments. In our view, the call for disclosure on how businesses are likely to be impacted and how they plan to respond strategically and tactically will only increase in the coming months.

Over the past 3 years it has become increasingly accepted that climate change is a financial issue, as well as an environmental and societal one. The World Economic Forum reports climate-related issues as one of the top five global risks. Regulators, investors, companies and individuals are now more focused on the consequences of climate change on the performance of companies that they regulate, invest in, work for or buy from. Only through better disclosure by companies across the G20 will we have a greater understanding of the impacts of climate change and our ability to transition to a low carbon, low risk and high growth economy.

The FSB Task Force on Climate-related Financial Disclosures (TCFD) is at the center of efforts to encourage greater disclosure. Two years on from the release of the TCFD’s recommendations, corporate reporting on climate change is still evolving. The release of the second TCFD Status Report earlier this year shows a further increase in companies supporting and disclosing against the recommendations, with nearly 800 organizations supporting the TCFD, an increase of 50% since September 2018. 70% of the companies reviewed are disclosing against at least one recommendation and a similar number planning to fully disclose within three years.

Progress can be seen across the four TCFD pillars of Governance, Strategy, Risk Management and Targets and Metrics. For example, the Task Force believes involvement of multiple functions is critical to mainstreaming climate-related issues, and while sustainability and corporate responsibility functions are the primary drivers of implementation efforts, risk management, finance, and executive management are increasingly involved as well. And certain sectors, such as energy, utilities and chemicals which are adept at using scenario analysis to plan for the future are providing leading disclosure practices to demonstrate their ability to survive and thrive in new ways during the low-carbon transition.

But overall, the pace of implementation remains slow, investors want even more clarity and there is scope for further improvement in disclosure practices. Aspects that are particularly challenging for companies are identifying and quantifying the potential financial impact of climate-related issues and stress testing the resiliency of their strategies under different climate scenarios. One of the top issues identified by TCFD preparers is that disclosing scenario analysis assumptions is difficult due to their inclusion of confidential business information. Of the companies responding to the TCFD’s most recent survey that view climate-related risk as material and use scenario analysis to assess the resilience of their strategies, 60% do not disclose information on the resilience of their strategies.

Risk management remains challenging as companies attempt to balance a wide range of influences, demands and changing regulatory scenarios. Measuring physical risks is particularly challenging as those risks are expected to develop over longer timeframes, are facility and location specific and dependent on scientific evidence and imperfect climate forecasting. And while more targets and metrics are being reported by companies than ever before, it is imperative for companies to keep the TCFD’s principles of effective disclosure squarely in sight:

1. Disclosures should represent relevant information

2. Disclosures should be specific and complete

3. Disclosures should be clear, balanced, and understandable

4. Disclosures should be consistent over time

5. Disclosures should be comparable among companies within a sector, industry, or portfolio

6. Disclosures should be reliable, verifiable and objective

7. Disclosures should be provided on a timely basis

Commenting on the TCFD 2019 Status Report, Jon Williams, Sustainability & Climate Change Partner at PwC UK and a TCFD member said:

“It’s really positive to see the increase in companies supporting the TCFD and beginning to disclose against its recommendations. We expect the momentum to continue, driven by the financial institutions responsible for assets of nearly $118 trillion who have signed up as TCFD supporters and regulators that supervise them. We know companies are finding it a challenge, particularly in respect of scenarios analysis, a lack of data availability and the need for standardized metrics and targets. We also know that users of disclosures want to see more on the financial implications of climate-related impacts on companies. It’s vital that financial institutions better manage the risks and opportunities that addressing climate change will bring. The more companies know about the risks they face, and the better they disclose the financial impacts, the faster and more effectively they can address them.”

PwC played an active role in the development of the TCFD’s recommendations, and PwC UK has developed a market-leading Artificial Intelligence tool used to score more than 2000 companies' TCFD disclosures. In addition to providing analytics and insights to take to clients, the results have been included in reports to the TCFD, Financial Stability Board, and G20 Finance Ministers. PwC is a member of The Climate Group’s RE100 global initiative, bringing together the world’s most influential businesses committed to 100% renewable power.

We are looking forward to Climate Week NYC and engaging with companies on practical approaches and solutions to accelerate their TCFD implementation.

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