The 2022 annual status report of the Task Force on Climate-related Financial Disclosures (TCFD) was published at the end of last year. The report, which analyses the current state of disclosure practices worldwide in line with the TCFD recommendations, indicates that companies are making progress in disclosing climate-related information. At present, over 3,800 organisations across 99 countries support the TCFD Recommendations, which include over 1,500 financial institutions responsible for assets worth $217 trillion. However, the report also finds that greater transparency and more urgent efforts are needed to address the ongoing climate change crisis.
Listed below are some of the key findings of the report:
“The percentage of companies disclosing TCFD-aligned information continues to grow, but more urgent progress is needed. For the fiscal year 2021 reporting, 80% of companies disclosed in line with at least one of the 11 recommended disclosures; however, only 4% disclosed in line with all 11 recommended disclosures and only around 40% disclosed in line with at least five.”
“A majority of asset managers and asset owners report to their clients and beneficiaries. Over 60% of asset managers and over 75% of asset owners surveyed indicated they currently report climate-related information to their clients and beneficiaries, respectively. The majority of asset managers report through sustainability reports or directly to clients, while the majority of asset owners report through annual, sustainability, or climate-specific reports.”
“Investors and others use disclosures in decision-making and pricing. Based on the TCFD survey, 90% of investors and other users incorporate climate-related financial disclosures in financial decision-making, and 66% of these indicated such disclosures factor into the way they price financial assets. In addition, based on a literature review, there is a growing body of evidence that climate-related risks are beginning to affect prices for certain types of assets.”
What is the TCFD, and why is it Gaining Prominence?
In 2015 The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB). It was developed with the objective of providing investors, lenders, and other stakeholders with consistent and comparable information about a company's risks and opportunities related to climate change, so that they can make more informed investment and lending decisions. Based on four thematic areas: governance, strategy, risk management, and metrics and targets, these recommendations help voluntary climate-related financial disclosures that companies can make in their financial filings.
Learn more about TCFD in our blog here.
Why should more businesses adopt TCFD recommendations?
There are several benefits of climate-related risk reporting. For instance, if an entity wants to:
continue to thrive in a changing environment
Take more informed decisions
Have a consistent framework for comparison
Have better investor and stakeholder relations
Identify climate-related opportunities
Then using and understanding a TCFD framework can be of immense help.
Further, it helps in bringing down physical risks resulting from climate change. An important and growing risk to companies, physical climate risks are often under-managed and underreported, potentially threatening to cause significant financial impacts on companies and the financial system as a whole.
Physical risks include direct impacts from extreme weather events and gradual impacts from long-term changes in temperature, sea level, and precipitation patterns. For instance, droughts cause significantly impact businesses that are dependent on water and wildfires can damage infrastructures and cause supply chain disruptions. By following TCFD recommendations, companies can better understand and manage their exposure to physical risks, reducing the financial impact of climate change.
The recommendations developed aim to serve a dual purpose. They seek to:
Improve corporations’ understanding of their own exposure and risk profile, as well as opportunities arising from climate change.
Provide clear signals for financial institutions to understand risks and opportunities implicit in individual holdings as well as portfolio-wide exposures.
The Need for Data to Drive Better Disclosures
While the increasing support for TCFD is a welcome move, several challenges persist in disclosure reporting. These problems are primarily data related.
Ádám Banai, executive director of Magyar Nemzeti Bank, stated in this regard: “Part of the reason why markets are not yet ready to integrate environmental, social and governance factors into their investment decisions is ‘data, data, data,’ said Banai. This was the biggest challenge the MNB faced when compiling the report, especially considering the scope of the bank’s portfolio. The more varied and complex the portfolio, the harder it is to find appropriate, comparable data from other organisations.”
Likewise, discussing the risks inherent in climate related data, a report by Citi states: “Climate data continues to be limited in availability, and even when available, is generally is variable in terms of quality. Our understanding of the interconnected nature of climate-related risks and the global economy, as well as our modelling capabilities to analyze these interconnections is improving but remains incomplete…”
Some of the key data characteristics in this regard that can help in driving better disclosures are:
High-frequency data: Risk analysis without high-frequency data has very limited utility as data gathered a few times a year cannot paint a clear picture of climate risks. High-frequency data is important to gain better insights and enables higher statistical precision in assessments.
High resolution: High-resolution data is important for better mapping and monitoring of climate systems. It also helps in a better quantification of vital factors such as the change in land cover. Currently, most climate models are of a global scale and have to be scaled down significantly to get regional insights, which compromises the resolution. For instance, the IPCC CMIP6 offers a resolution of 250km x 250km. Even the highest available resolution of the CMIP6 projections is 11.1km x 11.1km.
Near real-time data: Near real-time data allows continuous monitoring, which helps identify trends, establish parameters, trigger levels and real quantification of risks and probabilities. Currently, climate models draw vast insights from historical data that no longer suffice. As climate change drives new weather patterns, relying only on historical data does not suffice. In addition, historical data have limitations such as poor documentation as government agencies in most countries began collecting data only towards the end of the last century.
Wide-scope: Risk assessment tools must have a broad scope that looks at the earth as one system. Monitoring a single variable does not provide an overall understanding of the climate crisis, as most climate phenomena are interlinked. All the essential variables need to be assessed for a holistic understanding of our planetary systems.
At Blue Sky Analytics, we have built a comprehensive global catalogue of high-frequency and high-resolution environmental datasets by leveraging satellite data, AI and the cloud. Leveraging open-source tools like PostgreSQL, QGIS, GDAL, k8s, PostGIS, GeoPandas etc., we started with air quality monitoring (in 2019) and have expanded to monitoring carbon emissions, wildfires, water quality, flood & drought risk, and extreme heat risk; covering all long time series historical, real-time, 7-10 days prediction, recurring annual predictions, and 5-10 years scenario analysis under various pathways.
We have built a wide range of datasets that include spatial air quality, glacial melting, wildfire prediction, asset level carbon emissions, land surface temperature and landfill site monitoring, among others. These high-quality datasets provide insights that help organisations more effectively disclose climate-related risks and opportunities.
It has become clear to the current generation of financial leaders that climate-related risk has a material impact on financial markets. Ignoring this data is no longer an option, and companies that heed the TCFD recommendations sooner rather than later will benefit from stability, resiliency and profitability. The widespread adoption of the TCFD will, however, continue to be hindered until data on climate-related financial impacts is more readily available and accessible. Accessing better data can thus enable more governments and companies to implement TCFD recommendations, an important step in the larger objective of managing the climate change crisis.