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Unpacking the Proposed Updates to the TCFD Framework

Public reporting of climate risks and opportunities has come a long way since the publication of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations in 2017. As of this June, over 2,200 organizations have pledged their support to the TCFD framework, and a number of jurisdictions — including the G7 countries — have agreed to introduce climate-related reporting requirements.

However, many supporters say putting certain aspects of the framework into practice is tricky. This is especially true of the Metrics and Targets pillar, which asks organizations to publish data on how they measure and monitor their climate-related risks and opportunities. In fact, a survey the TCFD ran in 2019 found that 75% of supporters found implementing these recommendations somewhat or very difficult.

Furthermore, the big strides taken by certain firms and governments in putting together plans to hit ambitious greenhouse gas (GHG) emissions reduction targets has left the TCFD recommendations behind, in places. Absent guidance on drafting so-called ‘transition plans’, there’s a danger that organizations publish information that is neither credible nor decision-useful to investors and other stakeholders.

It’s against this background that the TCFD published new Proposed Guidance on climate-related metrics, targets and transition plans on June 7, 2021. This package would significantly expand the Metrics and Targets recommendations, while providing more detailed instructions on what exactly to include in these disclosures, and how to integrate them with the other three TCFD pillars covering Governance, Strategy, and Risk Management.

The Proposed Guidance would also beef up the Strategy pillar to incorporate explicit recommendations on drafting transition plans: the part of an organization’s business strategy that explains how they intend to become climate resilient.

The TCFD hopes that the Proposed Guidance “will encourage a more systematic approach” to the selection and disclosure of climate-related metrics and targets, and instill some discipline into the process of transition planning.

Upgrading climate metrics

So, what’s new? Under the Metrics and Targets pillar, the Task Force proposes updating the wording of the recommendations to include an explicit call for climate-related metrics to be “decision-useful, understandable, verifiable, objective, trackable over time and consistent, and aligned to the other TCFD pillars”. This is an important change that should deter organizations from producing wishy-washy metrics that do little to inform stakeholders of their climate-related risks and opportunities.

In addition, the TCFD lays out a list of seven climate-related metrics that organizations should disclose, at a minimum. These are:

  1. GHG emissions (absolute Scope 1, Scope 2, and relevant, material categories of Scope 3 emissions, as well as carbon intensity)

  2. Carbon price(s) (external and shadow/internal)

  3. Proportion of assets and/or operating, investing, or financing activities materially exposed to physical risks, based on key categories of commonly accepted risks

  4. Proportion of assets and/or operating, investing, or financing activities materially exposed to transition risks, based on key categories of commonly accepted risks

  5. Proportion of assets and/or operating, investing, or financing activities aligned toward climate-related opportunities, based on key categories of commonly accepted opportunities

  6. Amount of senior management remuneration impacted by climate considerations

  7. Amount of expenditure or capital investment deployed toward climate risks and opportunities

By establishing a baseline level of metrics disclosure, the TCFD is raising the bar for what it means to be aligned with its recommendations. TCFD supporters that don’t produce these seven metrics may well face pressure from stakeholders to do so going forward. 

This should also foster comparability and consistency of disclosures across companies. One of the Task Force’s initial goals was to build a picture of climate-related risks and opportunities economy-wide, and identify concentrations of carbon-related assets across the financial system. This objective becomes easier to achieve if each supporter produces the same metrics.

One other notable aspect of the Proposed Guidance on metrics is how it tightens up the recommendations on the disclosure of Scope 3 emissions. The TCFD now says that “data and methodologies have matured sufficiently such that Scope 3 disclosure is appropriate for all sectors”. This is a step-change from the 2017 recommendations, which simply said that Scope 3 emissions should be disclosed if a firm deems it appropriate. This update could significantly increase the amount and quality of GHG data produced by TCFD supporters.

Making climate targets fit for primetime

When it comes to recommendations for climate-related targets, the Proposed Guidance suggests a number of important updates. 

As with the metrics section, the TCFD has made these recommendations more prescriptive. Targets should be “quantified and granular enough to enable tracking and be informed by qualitative or quantitative scenario analysis and company forecasting”, the Task Force says. These targets should also be accompanied with descriptions that at a minimum explain the units, time horizons, baseline, and interim goals used to produce them.

The insistence on interim targets, and that targets should be informed by scenario analysis, are particularly important innovations. Not only should these conditions make the targets organizations set more credible, they should also bring a measure of accountability to the target-setting process itself. After all, it’s hard for stakeholders to argue a company isn’t in line with its climate target in 2021 if the target date is 2050. It’s easier to do so when there’s an interim target set just five years in the future.

Transition planning: a new frontier

The Task Force’s Proposed Guidance on transition plans transforms the Strategy pillar, establishing new recommendations that could significantly expand the scope and complexity of climate-related disclosures going forward. 

Transition plans are meant to bridge the gap between where a disclosing company stands today and where it wants to be in the future, as expressed through its climate-related targets. They should also serve to complement firms’ adaptation plans, which explain how they intend to minimize the risks and maximize the opportunities linked with physical climate risks.

The Task Force proposes fives principles to which transition plans should adhere:

  1. Disclosed as part of the broader organizational strategy

  2. Anchored in quantitative elements, including climate-related metrics and targets

  3. Approved and overseen by the Board

  4. Actionable and linked to specific initiatives

  5. Detailed and verifiable

Again, these recommendations are prescriptive, but with good reason. A big challenge faced by users of climate-related disclosures is determining the credibility of firms’ climate strategies. By providing a point-by-point checklist on compiling transition plans, the TCFD is giving both producers and users of disclosure a way to measure the plans’ credibility. This should also ensure that users get the fullest possible picture of a firm’s climate resilience to both transition and physical risks.

Look ahead

“Forward-looking” is a phrase that comes up repeatedly in the Proposed Guidance. It chimes with a running theme embraced by the TCFD: to get companies to assess and report their climate-related risks and opportunities in the future, instead of just in the here and now.

In fact, this Proposed Guidance comes off the back of one conducted last year specifically on forward-looking metrics. This publication is also paired with a guide to ‘Measuring Portfolio Alignment’, aimed at financial institutions looking to produce metrics showing the implied temperature rise associated with their investments. Clearly, the Task Force wants supporters of its framework to produce disclosures that credibly and coherently describe where their climate strategies are taking them and how they are planning on achieving them.

This ambition raises the game for disclosing organizations. The question is whether they’re ready for the challenge. Some understanding of their preparedness may be gleaned from the responses to the consultation on the Proposed Guidance, which closes on July 7, 2021.

How Manifest Climate can help

The TCFD framework is evolving as it matures and as the demands of climate-conscious investors change.

Whether you work for a company that’s looking to accelerate its pathway to decarbonization, or an investor looking to make your investment decisions a little easier, get in touch today. We can help.