Webinar: What does climate-related financial disclosure really look like
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This webinar helps you understand how to overcome common TCFD implementation challenges and discover practical guidance and examples of good practice for disclosing climate-related financial information. Speakers: Youri Lie, Senior Manager, EY Fiona Quinlan, Technical Manager, CDSB
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Webinar: What does climate-related financial disclosure really look like
- 1. April 2020 | Tweet @CDSBGlobal What does effective climate-related financial disclosure really look like? Fiona Quinlan Technical Manager Climate Disclosure Standards Board Youri Lie Senior Manager EY
- 2. April 2020 | Tweet @CDSBGlobal Q. What is driving your interest in implementing the TCFD recommendations? Investor demand Changing regulation Becoming part of your strategic planning and risk management processes Desire to align with peers in your sector who are disclosing
- 3. April 2020 | Tweet @CDSBGlobal Youri Lie Senior Manager EY
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- 10. April 2020 | Tweet @CDSBGlobal Fiona Quinlan Technical Manager CDSB
- 11. April 2020 | Tweet @CDSBGlobal To provide decision-useful environmental information to markets via the mainstream corporate report
- 12. April 2020 | Tweet @CDSBGlobal 12 Reporting Requirements REQ-01 Governance REQ-07 Organisational boundary REQ-02 Management’s environmental policies, strategy and targets REQ-08 Reporting policies REQ-03 Risks and opportunities REQ-09 Reporting period REQ-04 Sources of environmental impact REQ-10 Restatements REQ-05 Performance and comparative analysis REQ-11 Conformance REQ-06 Outlook REQ-12 Assurance cdsb.net/Framework The CDSB Framework
- 13. April 2020 | Tweet @CDSBGlobal 13
- 14. April 2020 | Tweet @CDSBGlobal Presented– in the mainstream report Effective climate-related financial disclosures must be:
- 15. April 2020 | Tweet @CDSBGlobal 15 Good practice example: Shell Concise mainstream disclosure with additional detail in supplementary report
- 16. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Prepared– according to the same rigour as financial information
- 17. April 2020 | Tweet @CDSBGlobal How to achieve rigour… https://www.wbcsd.org/Programs/Redefining- Value/External-Disclosure/Assurance-Internal- Controls/Resources/Guidance-on-improving-the- quality-of-ESG-information-for-decision-making
- 18. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Specific– to the reporting entity
- 19. April 2020 | Tweet @CDSBGlobal 19 Good practice example: EDF Information on the specific impacts of climate change for their different business areas
- 20. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Coherent– across strategy, finance and impact
- 21. April 2020 | Tweet @CDSBGlobal 21 Good practice example: Schneider Electric Indicators which demonstrate the linkage between climate issues and financial performance
- 22. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Supported by leadership – with oversight and involvement from all relevant functions
- 23. April 2020 | Tweet @CDSBGlobal 23 Good practice example: Enel Clearly states what each Committees’ role is and provides clarity on arrangements within its wider functions
- 24. April 2020 | Tweet @CDSBGlobal 24 Good practice example: Royal Bank of Canada Explanation of the Board’s and its Committees oversight of climate change
- 25. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Qualified – statement of conformance so the reader understands the limitations
- 26. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Future-oriented – the plan is clear and stands up as being resilient
- 27. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Financed – current financing options and investment support the plan
- 28. April 2020 | Tweet @CDSBGlobal 28 Good practice example: QBE Clear year-by-year roadmap on the actions it will be taking over future reporting periods to enhance its TCFD disclosure
- 29. April 2020 | Tweet @CDSBGlobal Effective climate-related financial disclosures must be: Decision-useful – to providers of financial capital and responsive to investors
- 30. April 2020 | Tweet @CDSBGlobal SASB Standards https://www.sasb.org/
- 31. April 20 | Tweet @CDSBGlobal Resources 31 www.cdsb.net/tcfdguide ww.cdsb.net/tcfdhandbook www.tcfdhub.org ww.cdsb.net/tcfd-to-do-list
- 32. April 20 | Tweet @CDSBGlobal 32
- 33. April 20 | Tweet @CDSBGlobal 33
- 34. April 2020 | Tweet @CDSBGlobal Questions? With the contribution of the LIFE Programme of the European Union. Hosted by CDP Europe. Contact: info@cdsb.net Fiona Quinlan CDSB Youri Lie EY
Editor's Notes
- The 2019 EY Global Climate Risk Disclosure Barometer examines disclosures from approximately 1,000 companies across a range of sectors in 34 countries during the 2018-19 reporting period. The report provides a snapshot of the uptake of the recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), and offers insight into reporting across regions and sectors, plus suggested areas of improvement for climate disclosures. Over the last 12 months, companies have made limited progress in addressing the quality and coverage of climate-related financial disclosures. This lack of progress is at a time when companies are facing increased scrutiny and pressure on their actions to mitigate climate change. Pressure has included direct shareholder action and public demonstrations – Global Climate Strike. New financial incentives have also been introduced, including the EU Green Taxonomy.
- Most companies now commonly acknowledge climate change as a material issue This is reflected either in a companies’ annual or sustainability reports. However, a majority of highly exposed companies still lack high quality climate disclosures. Sectors exposed to transition risk continue to lead the way Leading sectors include: banking, energy, manufacturing and transport. Although other sectors with high emissions, direct exposure to fossil fuel supply chains, or with investments in the energy sector or with readily accessible low carbon substitutes are scoring higher in their disclosures. Disclosure information varies across markets The quality of information disclosed varies significantly across markets, with better performing markets generally linked to some level of national regulation or Environmental, Social and Governance (ESG) guidance.
- Most companies now commonly acknowledge climate change as a material issue This is reflected either in a companies’ annual or sustainability reports. However, a majority of highly exposed companies still lack high quality climate disclosures. Sectors exposed to transition risk continue to lead the way Leading sectors include: banking, energy, manufacturing and transport. Although other sectors with high emissions, direct exposure to fossil fuel supply chains, or with investments in the energy sector or with readily accessible low carbon substitutes are scoring higher in their disclosures. Disclosure information varies across markets The quality of information disclosed varies significantly across markets, with better performing markets generally linked to some level of national regulation or Environmental, Social and Governance (ESG) guidance.
- Most companies now commonly acknowledge climate change as a material issue This is reflected either in a companies’ annual or sustainability reports. However, a majority of highly exposed companies still lack high quality climate disclosures. Sectors exposed to transition risk continue to lead the way Leading sectors include: banking, energy, manufacturing and transport. Although other sectors with high emissions, direct exposure to fossil fuel supply chains, or with investments in the energy sector or with readily accessible low carbon substitutes are scoring higher in their disclosures. Disclosure information varies across markets The quality of information disclosed varies significantly across markets, with better performing markets generally linked to some level of national regulation or Environmental, Social and Governance (ESG) guidance. Investors’ influence on companies in their portfolio There is a clear connection between an investor’s commitment on climate change issues and the TCFD disclosures score of its portfolio.
- Thank you Lesley and for that really insightful presentation Youri. Now here at CDSB companies often ask us the question "how do I know when I’ve met the TCFD recommendations?" and "What constitutes an effective TCFD disclosure?" So I’m now going to take you through some of the most common challenges and misconceptions that we are seeing and hearing in the market. Once you have tackled these, you will have a complete “TCFD to-do” list, which ensures that you are producing effective and reliable climate-related financial disclosure in line with the TCFD recommendations.
- Now before we dive into this, I just wanted to provide a brief reminder for those who aren't familiar with CDSB of who we are and what we do. CDSB is a consortium of environmental and business NGOs. We were set up in 2007 at the World Economic Forum in Davos. The CDSB secretariat is hosted by CDP on behalf of our board. Our mission is to provide decision-useful environmental information to markets via the mainstream corporate report and we achieve this by offering a framework for reporting environmental and climate information in the mainstream report.
- The CDSB framework provides a set of 7 principles and 12 requirements, covering both the 'how' and 'what' of environmental disclosure for companies. The CDSB framework is fully aligned with the TCFD recommendations and its 7 underlying principles. It's therefore also complementary to existing reporting provisions such as CDP, GRI, SASB, as well as existing regulations. Now, with introductions out of the way I will take you through our effective TCFD disclosure to do list.
- One of the most common misconceptions that we hear is that information can be disclosed in a separate TCFD or sustainability report. In fact the TCFD recommendations said from their inception that material information should be provided in the mainstream report. When I say "mainstream report", I’m referring to the annual reporting package in which the company delivers its audited financial results. This is often referred to as the annual reports and accounts, or in the US the Form 10K So why should climate-related information be disclosed in the mainstream report? Well, the TCFD said that due to the non-diversifiable nature of climate risk ,affecting nearly all industries, investors want to see governance and risk management disclosures by all companies and that these should therefore be provided in the mainstream report. It then said that further disclosure, addressing the company’s strategy and metrics and targets should be provided if this information is deemed material by the company. So why is mainstream disclosure important? Well, the mainstream report is the company’s core communication to investors, so material climate information should be both disclosed in the narrative and reflected in the numbers to support well-informed investor decision-making. If it’s placed in other documents, it will be harder for investors to locate and may not be considered in the context of the company’s wider strategy and performance. Additional disclosure, for example providing further detail and supporting information, may be located in other supplementary reports to support a concise mainstream disclosure, but your material climate-related information should be found in the mainstream report. An example of an organisation doing this effectively is Shell, who provide a concise summary of their climate-related financial disclosure in their annual report and form 20-F, and then link to their separate energy transition report for further detail on their scenario analysis work.
- An example of an organisation doing this effectively is Shell, who provide a concise summary of their climate-related financial disclosure in their annual report and form 20-F, and then link to their separate energy transition report for further detail on their scenario analysis work. https://reports.shell.com/annual-report/2018/servicepages/downloads/files/shell_annual_report_2018.pdf https://www.shell.com/energy-and-innovation/the-energy-future/shell-energy-transition-report/_jcr_content/par/toptasks.stream/1524757699226/3f2ad7f01e2181c302cdc453c5642c77acb48ca3/web-shell-energy-transition-report.pdf
- Another challenge we often hear is that investors do not consider company reporting on climate change to be of the same quality as financial information, limiting its usefulness for decision-making. It is therefore important to ensure that the same rigour and management responsibility is applied to climate-related financial information, as is applied to financial statements in the mainstream report. While independent external assurance is not necessarily a requirement, information should be prepared as though it would be assured, undergoing the same or comparable internal controls and governance procedures as financial disclosure to ensure its reliability. The application of similar internal controls as for financial information also helps to address other disclosure challenges such as materiality, which is a critical aspect when considering disclosure of financial information. For further information on how to achieve this rigour, we recommend that you consider the guidance released in 2019 by WBCSD and the Danish auditor FSR on “improving the quality of ESG information for decision-making through internal controls.
- Now, turning to our next challenge another common criticism we hear is that company disclosures on climate change are of a “boiler plate” nature, that is not sufficiently specific to the company or its particular circumstances, addressing the issue of climate change only in quite generic and high-level terms. However, in order for disclosures to be decision-useful for investors in line with the aims of the TCFD, they need to be specific to the business. Generic and boilerplate disclosures are not helpful to users of reporting, for example if the risks and opportunities of climate change at a societal level are reported, without being linked back to the industry or business in question, disclosures may not be meaningful for decision-making. So in order to be specific to the reporting entity, disclosures should be complete, but free from immaterial clutter and unnecessary or duplicative detail that obscures major trends and events that are specifically relevant to the organisation. An example of good practice reporting in this regard is EDF, who provide disclosure on the specific impacts of climate change for their different business areas, for example operations, products and services, value chain and suppliers and investments and acquisitions. This helps to provide a contextualised view of how EDF integrates climate risk into its business strategy.
- EDF provide disclosure on the specific impacts of climate change for their different business areas, for example operations, products and services, value chain and suppliers and investments and acquisitions. This helps to provide a contextualised view of how EDF integrates climate risk into its business strategy. https://www.edf.fr/sites/default/files/contrib/groupe-edf/espaces-dedies/espace-finance-en/financial-information/regulated-information/reference-document/edf-ddr-2018-en.pdf
- Ensuring that climate-related information is well linked to other aspects of business performance reported in the mainstream report, such as strategic and financial disclosures, is another commonly cited challenge in adopting the TCFD. In order to be effective, climate-related disclosures should be connected to other information in the mainstream report. For example, consider how your business’ strategy is impacted by climate-related risks and opportunities, and what this will this mean for the various numbers reported in your financial statements. Climate-related disclosure should not be stand-alone and should be provided in the context of the wider information provided in the mainstream report. A simple means by which you might seek to start doing this is to provide page references which link between the relevant report sections, moving to greater integration of the narrative and quantitative content over time. A good practice example here is Schneider Electric. In their integrated report they provide a clear table summarising the linkages and coherence between the different aspects of their climate-related disclosure. Additionally, alongside more conventional environmental metrics such as carbon emissions, they also disclose indicators that linked clearer to their wider business performance, such as the increase in turnover from the Energy & Sustainability services they provide. This shows a clear link between climate-related and financial performance.
- In their integrated report they provide a clear table summarising the linkages and coherence between the different aspects of their climate-related disclosure. Additionally, alongside more conventional environmental metrics such as carbon emissions, they also disclose indicators that linked clearer to their wider business performance, such as the increase in turnover from the Energy & Sustainability services they provide. This shows a clear link between climate-related and financial performance. https://www.se.com/ww/en/assets/564/document/69032/2018-annual-report.pdf
- Another potential misconception that we encounter is that the sustainability or CSR department should have responsibility for implementing the TCFD recommendations. However, it’s vital that buy-in is gained from across the business, with leadership input and accountability from all relevant functions, to ensure integrated disclosure. A key way in which this can be demonstrated is through disclosures under the governance pillar of the recommendations, illustrating which individuals and committees at board and management level have responsibilities regarding climate-related information. Governance disclosures should be clear on the specific matters that are considered by board and management respectively, outlining the relationship between governance arrangements at different levels and disclosing the specific actions being taken. These should provide clarity on business line or geographically specific arrangements where appropriate. Some good practice examples we would bring to your attention here include Italian Utility Enel and Royal Bank of Canada. Enel’s disclosure illustrates the responsibilities of each relevant committee, for example the Control and Risk Committee and Corporate Governance and Sustainability Committee, in its climate strategy. It states specifically what the committee’s role is, for example examining climate-related targets, or reviewing and approving the company’s non-financial reporting, and also provides clarity on arrangements within its wider functions, regions and business lines. Royal Bank of Canada explain clearly the Board’s and its committees oversight of climate change. They also explain which functions are involved in various processes relating to climate issues and tie these responsibilities back to its management level performance goals.
- Enel’s disclosure illustrates the responsibilities of each relevant committee, for example the Control and Risk Committee and Corporate Governance and Sustainability Committee, in its climate strategy. It states specifically what the committee’s role is, for example examining climate-related targets, or reviewing and approving the company’s non-financial reporting, and also provides clarity on arrangements within its wider functions, regions and business lines. https://www.enel.com/content/dam/enel-com/documenti/investitori/informazioni-finanziarie/2018/annuali/en/annual-report_2018.pdf
- Royal Bank of Canada explain clearly the Board’s and its committees oversight of climate change. They also explain which functions are involved in various processes relating to climate issues and tie these responsibilities back to its management level performance goals. https://annualreports.rbc.com/ar2018/downloads/
- Although more organisations are now providing disclosure that addresses some of the TCFD recommendations, a common challenge is the completeness of this disclosure and the level of transparency companies provide on this subject. For example, the 2019 TCFD status report found that on average companies were making only 3.6 of the 11 recommended disclosures. Providing a clear statement of conformance with the recommendations, which provides transparency over the limitations of current information, is therefore key. Alongside this, companies should state how they plan to address any existing disclosure gaps in future reporting. Ultimately, investors are going to quickly be able to determine what information is missing, so failing to acknowledge this in your disclosures doesn’t do you any favours! This is in line with the five year implementation pathway incorporated into the TCFD, which recognised that fully aligned disclosure was likely to be an iterative process over a number of disclosure cycles. The key thing is to ensure that your disclosure demonstrates continued progress in improving transparency over time. A good example to take a look at here is Australian insurer QBE, which provides a clear year-by-year roadmap on the actions it will be taking over future reporting periods as to enhance its TCFD disclosure.
- A key aspect of the TCFD was the emphasis on providing forward-looking disclosures, particularly through the use of the scenario analysis, however this is often an area that companies struggle with. In the 2019 TCFD status report, disclosures on the resilience of company strategy to different climate scenarios was found to the weakest area of uptake, with only 12% of reviewed companies providing this. However, to provide effective climate-related financial disclosures it is key that information is forward-looking! A starting point to achieve this could be complementing historically focused climate information with narrative on its influence on future performance. As well as looking at the past and present, disclosures should look to the future and communicate trends and factors relating to climate-related matters that are likely to affect the organisation’s future performance, position and development. Ultimately users of the mainstream report want to understand if the business will be resilient to future climate-related risks and if you are positioned to take advantage of climate-related opportunities. Another key part of this providing clarity on the time-frames over which your risk management and strategy is considered i.e. defining what you mean by short-, medium- and long-term in this context.
- Whilst we have seen a growth in narrative TCFD disclosures, a key remaining issue for companies to tackle is providing disclosure on how its climate change strategy will be financed. Companies in high impact sectors such as oil and gas are generally starting to provide clearer disclosures on the integration of climate change into their business strategies, but are often still falling short when it comes to linking this to their financial planning. For example, disclosure on the strategic integration of low carbon opportunities into a company’s business model, is not always followed through with clarity over the level of capital or R&D investment apportioned to these issues. Support your narrative reporting on climate-related matters by illustrating to your investors how you are executing this in your strategic and financial plans is a key aspect of effective disclosure. Simply put you need to ensure you are “putting your money where your mouth is”
- QBE provides a clear year-by-year roadmap on the actions it will be taking over future reporting periods as to enhance its TCFD disclosure. https://www.qbe.com/-/media/group/qbe-annual-report-2019.pdf
- Ultimately reporting needs to be decision-useful for the users of your mainstream report. Key users of climate-related information include investors, lenders and insurance underwriters, who increasingly need to integrate a company-specific understanding of these issues into their decision-making. A useful thing to keep in mind is how users will be reading the reports, simple things like keeping information clearly formatted, succinct and in a consistent and comparable structure over time will all support its decision-usefulness for investors and other users. Also consider the metrics you disclose and whether these are consistent with those widely used for your sector, for example the reporting boundaries you apply and intensity metrics you select, such as emissions by revenue or by product output. The Sustainability Accounting Standards Board’s standards may be a helpful reference point here. They have developed 77 industry specific standards, which set out financially material sustainability topics and their associated metrics for a typical company in an industry. So that concludes the overview of our TCFD “To do list”. I hope that this provides you with some helpful suggestions as to how your organisation can overcome some of the key challenges and misconceptions regarding the TCFD, enabling you to provide effective and decision useful climate-related financial disclosure. I’ll now hand you back to Lesley for the next part of our webinar.
- The SASB standards may also be a useful tool to support this. SASB have developed 77 industry specific standards, which set out financially material sustainability topics and their associated metrics for a typical company in an industry. So that concludes the overview of our TCFD “To do list”. I hope that this provides you with some helpful suggestions as to how your organisation can overcome some of the key challenges and misconceptions regarding the TCFD, enabling you to provide effective and decision useful climate-related financial disclosure. I’ll now hand you back to Lesley for the next part of our webinar.