The-SEC-Climate-Disclosure-Rule-Should-Align-with-the-TCFD-say-US-Companies

The SEC Climate Disclosure Rule Should Align with the TCFD, Say US Companies

July 6, 2022

Over the last three months, hundreds of organizations and individuals have submitted comments to the US Securities and Exchange Commission (SEC) on its proposed climate risk disclosure rule. Many have made clear that they want it to align closely with the reporting framework established by the Task Force on Climate-related Financial Disclosures (TCFD).

The SEC proposal would require all US exchange-listed companies to include information on their climate risks and opportunities in their periodic filings. Released on March 21, the public comment period on the proposal closed on June 17. Now, the SEC is poring over the comment letters it received in preparation for the release of a finalized disclosure rule, which could take effect as soon as the fiscal year 2023.

The proposal was modeled in part on the TCFD, the SEC having recognized that it is “widely accepted” by companies, investors, and other stakeholders. However, some institutions believe it should cleave more closely to the framework.

Financial institutions back TCFD alignment

BlackRock, the world’s largest asset manager with over USD$10trn in assets under management (AUM), said in its comment letter to the SEC that the TCFD framework results in “clear disclosures” on how companies are adapting to climate risks and the low-carbon transition. It added that an SEC rule that is consistent with the TCFD’s recommendations will be “less confusing” for companies to implement and produce “more targeted disclosure.” BlackRock also said closer alignment with the recommendations would make US companies’ climate disclosures comparable with those of firms in other jurisdictions, where TCFD-aligned reporting rules have been, or are in the process of being, implemented.

A BlackRock peer, State Street — which has over USD$4trn in AUM — also backed close alignment with the TCFD in its comment letter. Specifically, the firm said that the TCFD “has flexibility that allows for an evolution in climate-related disclosures”, and that sticking to this framework would be preferable to a “prescriptive” rule that does not take into account “the nascent state of climate data, methodologies and reporting capabilities.”

Bank industry groups want the SEC rule to closely reflect the TCFD, too. The Financial Services Forum, which represents the largest banks in the US, said in its comment letter that it favors a “principles-based approach” to climate disclosure and that the TCFD recommendations balance investors’ need for detailed information with companies’ need for flexibility on how and what they report.

What’s significant about these letters is that banks and asset managers are not only producers of climate risk reports, they’re big consumers of them, too. Why? Because they need climate-related information on potential investees to make informed capital allocation decisions. Their calls for a TCFD-aligned SEC rule, therefore, reflect their experiences combing through climate risk reports for this kind of decision-useful information.

What professional services firms say about the SEC rule

It’s not only financial institutions that want the SEC proposal to stick close to the TCFD recommendations. Professional services firm EY wrote in support of the SEC’s decision to use the TCFD as one of the foundations of its rule, explaining that “investors are familiar” with the framework. PWC, another professional service company, said likewise, writing that using the TCFD as the basis for the rule “is a pivotal step toward reducing complexity.” 

Deloitte, a peer of PWC and EY, also made the case that by leveraging the TCFD framework in its rule the SEC was contributing to the “goal of greater consistency and comparability in reporting across companies, as well as across jurisdictions.”

These companies assist thousands of organizations each year to define corporate reporting strategies, and audit their periodic filings, too. Given their depth of expertise, their vote of confidence in the TCFD is significant.

If clear, consistent, and comparable climate reporting is the goal of the SEC disclosure rule, then building on the TCFD recommendations is the agency’s best bet. Given the large number of US companies that already support the TCFD — over 400 as of June this year — this decision could also save organizations time and money in complying with the rule.

How Manifest Climate can help

Our climate risk planning software helps businesses understand and track over time how their climate actions and climate disclosures align to TCFD recommendations, and how they stack up against industry & disclosure leaders. We can then provide actionable recommendations to improve your climate initiatives and disclosures, with ongoing support from our in-house climate experts.

Get in touch with us now to learn more.