TCFD: coming, ready or not

TCFD – the climate disclosure destination of choice

As outlined in another article in this report - ‘The rising tide of climate-related risks – time for a strategic response’ - recent years have seen a fundamental shift in the mainstreaming of climate-related factors across finance.

A key element of this is the momentum behind enhanced climate disclosure, particularly the widespread adoption of the TCFD recommendations (see box). Since publication around three years ago, TCFD has been endorsed by over 1,000 organisations, including institutions representing nearly $140 trillion dollars of assets.

What’s involved in TCFD

UK companies have been producing corporate social responsibility or specific sustainability reports for many years. But TCFD goes way beyond this sort of reporting and makes climate risks and resilience integral to financial reporting and projections.

The reporting framework covers four core areas for firms to disclose their approach to managing the financial implications of climate change.

1. 01

   Governance

   Governance around climate risks and opportunities.

2. 02

   Strategy

   The actual and potential impacts of climate-related risks and opportunities on strategy and financial planning.

3. 03

   Risk management

   How the organisation identifies, assesses and manages climate-related risks.

4. 04

   Metrics and targets

   The metrics and targets used to assess and manage climate-related risks and opportunities.

The direction of travel towards mandatory climate disclosure is becoming ever more apparent. For example, the UK’s joint Government-Regulator TCFD Taskforce, established as part of the UK’s 2019 Green Finance Strategy, has now published a roadmap for economy-wide mandatory climate disclosure¹. The roadmap builds upon requirements already in place, or forthcoming, as part of a co-ordinated approach by UK authorities to integrate climate considerations across the UK’s financial system and wider economy, including:

1. the Financial Conduct Authority’s (FCA) recent commitment to introduce climate disclosure, on a ‘comply or explain’ basis, beginning next year, for UK premium listed firms;
2. the Department of Work and Pensions (DWP) consultation on a mandatory climate disclosure requirement for larger occupational pension schemes, with smaller schemes to follow.
3. the Bank of England strengthening requirements for PRA-regulated banks and insurers to disclose their climate risks, and for firms to ‘fully embed’ their approach to managing the financial risks from climate change by the end of next year.

And the UK is not alone. Over 110 regulators and government entities support the TCFD, including those in Europe, North America, Asia, and Australasia. The European Union and New Zealand in particular have been at the forefront of its inclusion for corporates and financial institutions. Additionally, the major sustainability reporting standards and frameworks (CDP, CDSB, GRI, IIRC, PRI and SASB) are aligning their frameworks with the TCFD. Most recently, IFRS Foundation has launched a consultation on the need for a global sustainability standard and, if so, proposes to focus on climate change first by building off these frameworks and standards².

¹https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933782/FINAL_TCFD_REPORT.pdf

² https://www.ifrs.org/projects/work-plan/sustainability-reporting/

While UK plc is generally not well prepared, our findings suggest that financial firms, including insurers, are slightly more advanced, but that plenty more remains to be done. As shown below, nearly half of financial firms that responded have either undertaken TCFD or are in the process of preparing a report, with the balance actively discussing their approach internally. Non-financial firms much less so.

And the general movement towards climate as a financial and risk management issue is amplified in the financial sector – not surprisingly given the increasing regulatory attention outlined earlier. The new regulatory requirements on banks and insurers to assign individual accountability to senior management is particularly notable – 100% of financial firms who responded had a named individual responsible for leading on climate-related issues, compared to less than a third of non-financials.

However, while the level of maturity in responding to TCFD requirements may vary, it is also clear that common challenges exist, regardless of sector. For example, very few firms have yet to make any significant progress including climate-related metrics and targets in remuneration policy, and support for scenario modelling and analysis remains a key area of common need.

TCFD benchmarking within the European insurance sector

In addition to this survey, Willis Towers Watson has also carried out a benchmarking exercise to examine the TCFD practices of leading UK and EU insurers and insurance-focused asset management firms. To conduct this analysis, we consulted publicly available reports (up to year-end 2019) in this area for each firm. The majority of companies examined publish a dedicated climate / TCFD report and, in all but one case, reports were presented by a member of the C-suite.

The key takeaway is that TCFD disclosures are largely improving and whilst most companies are now disclosing a reasonable amount of climate-related information, we believe more progress is needed. Indeed, most firms (including those with leading scores) acknowledge that further work is required. Scoring across each of the four major TCFD themes was varied, and only four firms achieved the highest score in at least three of the four overarching areas.

Conclusion – plenty more to do

Assessing, managing and disclosing climate-related risks is no easy task. The insurance industry is clearly making progress, and, along with other financial firms, our survey suggests insurers are slightly ahead of the pack compared to UK plc more generally.

At the same time, clearly there is more to be done. Continuing to develop, and standardise, approaches to scenario analysis, metrics and targets remains a key challenge for achieving consistent, comparable and decision-useful climate disclosure. And doing more to integrate climate-related strategies and performance into executive compensation is a key area for many firms to develop.

To return to one of the founding arguments for establishing the TCFD – what gets measured is much more likely to get managed.