Weighing up the pros and cons of climate-related financial disclosure

As evidence of a still-escalating climate crisis mounts, companies and their investors face growing pressure to address the likely catastrophic consequences of climate risk. Climate reporting will be central to these efforts.

Disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures is increasingly acknowledged as valuable.

The TCFD was set up in 2015 by the Financial Stability Board and the G20.

In 2020 the UK government and the Financial Conduct Authority set out a roadmap for mandatory TCFD disclosure from listed companies, large private companies and financial services providers by 2025.

All UK investment firms with more than £50bn in assets under management were required to publish annual TCFD reports in June on both an entity level and for each underlying product.

We must accept the urgency of the climate crisis denies us the luxury of waiting for a genuinely flawless framework.

Going forward, such reports should explain the likely risks and impacts that climate change presents to the holdings of an asset manager or owner.

The aim is to encourage and enable investors to assess the financial risks and opportunities associated with climate change and the transition to a low-carbon economy when making investment decisions.

This is clearly to be welcomed, but it also gives rise to new and complex considerations for investors and their advisers.

It is therefore vital to understand not just the benefits but also the challenges that ever-greater requirements around TCFD disclosure are likely to bring.

With this kind of reporting still in its early stages, a responsible and realistic approach is warranted.

Scope one, two and three emissions

“If you can’t measure it,” management consultant Peter Drucker famously remarked, ”you can’t improve it”. In order to evaluate climate risks, any form of ESG integration must reflect this dictum – especially in the age of big data.

Disclosure aligned with the recommendations of the TCFD is no exception.

Climate impacts are encapsulated in an array of metrics and key performance indicators, the most important of which are arguably those relating to scope one, two and three greenhouse gas emissions.

Scope one emissions arise directly from a company’s normal operations; scope two emissions are produced indirectly, for example, when a company purchases energy to heat its buildings; and scope three emissions are those generated up and down a company’s value chain.