After three years, why hasn’t TCFD conquered the world?
Despite receiving strong support after the Paris COP25 in 2019, implementation of TCFD remains low among asset owners and managers.
After launching following the much-lauded Paris COP25 meeting, the implementation of the Financial Stability Board's Taskforce for Climate-Related Financial Disclosures (TCFD) is starting to gather pace. But it remains a challenge for both asset owners and managers.
The latest TCFD status report confirmed that 1,069 financial institutions with $194trn in assets under management had signed statements of support for the TCFD recommendations in 2021, up from 700 institutions and assets of $150trn in 2020.
Nevertheless, implementation of TCFD remains low.
"TCFD, somewhat surprisingly, is only seeing adoption by 32% of Western Europe's largest asset owners by assets under management, and less than that in the US, where only 28% are using it as an environmental reporting framework,” says Gordon Tveito-Duncan, director and head of ESG technology at ESG data analytics group GaiaLens.
Tveito-Duncan says of the various ESG reporting frameworks, the Global Reporting Initiative’s standards have proved most popular with asset owners in the US and UK, with 57% of asset allocators using them.
TCFD is only seeing adoption by 32% of Western Europe’s largest asset owners, and less than that in the US, where only 28% are using it as an environmental reporting framework.
Data challenges
One of the biggest challenges surrounding the implementation of TCFD principles surrounds the lack and comparability of high-quality data to meet the disclosure standards.
The taskforce itself has noted the challenges, providing further guidance for companies, and working with external organisations – such as the International Financial Reporting Standards (IFRS) Foundation – to develop new sustainability reporting standards.
Nazmeera Moola, chief sustainability officer at Ninety One – a South Africa and UK-listed asset manager – says data is a considerable challenge for asset managers to implement TCFD.
"The main issue is around data," says Moola. "The bulk of data will be around Scope 3 emissions and financed emissions, but many companies – particularly in emerging markets – don't necessarily report that data, so often you're using estimates."
Ninety One's Moola says that while TCFD has improved the qualitative understanding of data, emissions measurement is still a “work in progress”.
"For example, for one of our holdings, emissions rose this year, not because we invested more money into it but because the company had paid back some debts," she adds. "Therefore, its economic value shrank, and the same amount of emissions were divided across a smaller economic value."
Alignment rather than implementation
Nevertheless, TCFD-aligned disclosures – while often not binding – are helping asset managers and owners to measure their environmental impact and achieve their net-zero goals.
Also revealed in the most recent TCFD report was that some 2,720 asset managers and asset owners, with $134trn in assets under management, were reporting on Principles for Responsible Investment (PRI) climate-related indicators.
"TCFD-aligned disclosures are vital in helping investment managers and their investee companies achieve their net-zero targets," said a spokesperson for the Investment Association, a trade body for the UK asset management industry. "A clear understanding of the impact of climate change on a business and how that impact is being managed provides the foundation for responsible investment, engagement and voting decisions.
"Clear, high-quality and comparable data on the climate-related risks companies are facing is therefore imperative, as firms undertake the journey to net zero."
And broader efforts to adopt reporting frameworks are having other effects.
“TCFD and other reporting frameworks have reinforced our focus on financially material non-financial investment decision-making,” adds Lydia Guett, sustainability and impact investment specialist at global investment firm Cambridge Associates.
“When selecting fund managers, we have found it material to discuss scenario analysis and climate-related risks to avoid greenwashing or ‘climate-washing’ as many call it now.
“For example, increasingly high carbon emitters publish targets to become Paris-aligned without any feasible action plan backing them up. This is a material climate risk.”
Monique Mathys-Graaff, senior sustainable investing strategist at consultancy Willis Towers Watson, expects the number of asset owners making a net-zero commitment to increase as more regulators promote TCFD and other reporting frameworks.
"We do expect the number of those making a net-zero commitment to increase and observe many more considering it and working through the implications on their portfolios before making the commitment," she says. "There are actually many more who are proactively and effectively driving portfolio assets to zero emissions already, even though they haven't formally signed up to net zero."
