The number of FTSE 100 companies mentioning the Task Force on Climate-related Financial Disclosures (TCFD) in their reporting has surged over the last year, although important gaps remain in disclosure, according to new research.
Two thirds of companies in the UK blue chip index reference TCFD in their 2019 annual report, up from 39 percent in the previous year, finds a study by Black Sun, a communications consultancy.
Launched three years ago, the TCFD recommendations have quickly grown in prominence as a way for companies to disclose their approach to risks and opportunities stemming from climate change.
The initiative received a key boost in January when Larry Fink, CEO of BlackRock, called it a ‘valuable framework’ for reporting on climate risk in his influential annual letter. The following month, TCFD said it had passed 1,000 declared supporters globally from the public and private sectors.
Despite the growth in use of TCFD recommendations, most companies are still not providing scenario analysis about the potential financial impact of climate change, says Sallie Pilot, chief insight and engagement officer at Black Sun.
Scenario analysis is viewed as a key tool by the TCFD framework for understanding and explaining how businesses may be affected by global temperature rises. Companies are advised to use a range of scenarios but, at a minimum, to consider the impact of a 2°C change.
‘Scenario planning remains the most challenging of the recommendations to implement,’ says Miguel Santisteve, founder of Leaders Arena, an ESG consultancy.
Black Sun’s research also finds that just 7 percent of companies in the FTSE 100 discuss the resilience of their strategy to climate change, and only one in five mention both climate-related risks and opportunities.
Starting out
RSA Group, the FTSE 100-listed insurance firm, is one of the companies that began reporting against TCFD recommendations in its 2019 annual report.
In the document, RSA lists its current progress and future goals against each of the TCFD’s four thematic areas. The report includes information about how the insurer can support the move to a low-carbon economy, such as through a new policy on underwriting for carbon-intensive sectors. It also notes that RSA plans to improve its use of scenario planning in 2020.
‘One of the challenges for investors is understanding the potential financial impacts [of climate change] on companies, how this is managed and how it influences company strategy,’ says William McDonnell, RSA’s group chief risk officer. ‘Improving company disclosure and making it more comparable and useful via TCFD is important, and is one element of RSA’s climate-change action plan set by our board.’
Global interest
Looking beyond the UK, Santisteve says there has been a ‘rapid uptick’ globally in companies reporting against at least some of the TCFD recommendations.
He says one of the key drivers of TCFD uptake is pressure from major asset managers. Some companies in carbon-heavy industries were early adopters, but it took ‘more forceful encouragement’ from firms like BlackRock and State Street Global Advisors to catch the attention of management and boards.
‘Investors can reasonably expect companies to have answers to the potential business impacts from what is widely viewed as a global mega-risk,’ Santisteve says.
Another driver of adoption is the high level of alignment between TCFD and CDP disclosures, he adds. CDP, the environmental disclosure project launched more than 20 years ago, already has thousands of companies reporting under its framework. Forthcoming UK and European Union legislation on climate disclosure is also prompting companies to act, Santisteve says.
