Will TCFD disclosures become mandatory?

Climate change is becoming an inescapable topic of conversation for companies and their providers of capital as pressures increase for countries and companies to help achieve the ambitions of the Paris Agreement, and as forest fires and floods continue to impact areas around the world.

The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (which coordinates the work of national financial authorities and international standard-setting bodies) to develop a reporting framework that would help companies report useful climate-related information to investors, and ultimately safeguard the financial system from climate change-related shocks. TCFD is driven by the belief that better climate-related disclosures support better financial decision making by investors, creditors, and insurance underwriters (i.e., directing capital to the most resilient companies), which will support a smoother transition to a low-carbon/net-zero economy.

The TCFD released its first recommendations for climate-related financial disclosures in 2017 and they are being rapidly adopted around the globe. Although I cannot predict the future, all signs point to TCFD (or climate-reporting aligned with TCFD) becoming mandatory in the next few years.

The momentum TCFD has experienced over the last few years is reflected in the following developments, which are taking two forms: mandatory TCFD disclosure (for specific types of companies), and TCFD-aligned guidance for disclosure (which is not mandatory).

Targeted mandatory TCFD-aligned disclosure

TCFD reporting is already mandatory, for select organizations, in the following countries:

·       Canada: The Federal government announced that Canadian crown corporations with assets of $1 billion or more are required to adopt TCFD disclosures by 2022. Crown corporations with fewer than $1 billion in assets must report by 2024 at the latest.

·       Hong Kong: In 2020, a multi-agency group including the government and other key regulators announced that financial institutions and listed companies will have to report climate-related information in line with TCFD by 2025.

·       New Zealand: The government introduced a mandatory climate-related financial disclosure regime based on the TCFD framework, beginning in 2023 (for 2022 disclosures).

·       Switzerland: Starting July 2021, the Swiss financial regulator is requiring large banks and insurance companies to provide climate-related disclosures in alignment with TCFD.

·       United Kingdom: In November 2020, the UK government announced mandatory TCFD-aligned disclosure beginning with large pension funds (>£5 billion), premium listed companies, banks, and insurance companies starting October 2021, and ending with the entire financial and non-financial sectors reporting by 2025.

Plans to implement mandatory TCFD-aligned disclosure

The following countries have indicated their intent to make TCFD (or similar) climate reporting mandatory:

•       China: The People’s Bank of China has said they will implement mandatory disclosures of climate-related information.

•       European Commission: In 2021, the Commission proposed a new Corporate Sustainability Reporting Directive which would require asset managers to report on, among other things, climate change mitigation and adaptation in alignment with TCFD. If/when approved, the standards will apply to 2023 reports (published in 2024).

•       G7 (Canada, France, Germany, Italy, Japan, the UK, and the USA): In June 2021,  G7 finance ministers and central bankers agreed to move towards mandatory climate-related financial disclosures. Target dates have not been released except where noted above.

•       United States: President Biden signed an executive order in early 2021 that includes a call on financial regulators to assess climate-related financial risks, consider plans to improve climate-related disclosures, and to incorporate climate-related financial risks into regulatory and supervisory practices.

TCFD-aligned guidance (not mandatory)

Although not mandatory, the following regulators have updated their disclosure guidance to reflect TCFD requirements:

·       Australia: In April 2021, the Australian Prudential Regulation Authority updated guidance (aligned with TCFD) for banks, insurers, and pension funds on managing and disclosing climate-related risks.

·       Canada: In 2019, the Canadian Securities Administrators provided climate disclosure guidance based on TCFD.

What does this mean for you?

We are seeing significant variation in the extent and quality of companies’ climate-related disclosures as internal understanding and support for climate-related disclosures evolve. Adding to the complexity is the TCFD framework itself. In this first iteration, several elements are open to interpretation, while others are overlapping, making their implementation challenging.

If you want to learn more about the framework, understand what is being asked of you as a reporter, and discover best practices in applying TCFD, we are offering a short online course, TCFD Primer for oil and gas available through JWN Energy on September 16th. We hope to “see” you there!