Picking Up Speed – Adoption of the FSB’s TCFD Recommendations…

January 21 2021

by Hank BoernerChair & Chief StrategistG&A Institute

Countries around the world are tuning in to the TCFD and exploring ways to guide the business sector to report on ever more important climate related disclosures.  Embracing of the Task Force recommendations is a key policy move by governments around the world.

After the 2008 global financial crisis, the major economies that are member-nations of the “G20” formed the Financial Stability Board (FSB) to serve a collective think tank and forum for the world’s leading developed countries to develop strong regulatory, supervisory, and other financial sector policies (guidance, legislation, regulations, rules).

Member-nations can adopt the policies or concepts for same developed collectively in the FSB setting back in their home nations to help to address financial sector issues with new legislative and/or adopted/adjusted rules, and issue guidance to key market players. The FSB collaborates with other bodies such as the International Monetary Fund (the IMF).

FSB operates “by moral suasion and peer pressure” to set internationally-agreed to policies and minimum standards that member nations then can implement at home. In the USA, members include the SEC, Treasury Department and Federal Reserve System.

In December 2015, as climate change issues moved to center stage and the Paris Agreement (at COP 21) was reached by 196 nations, the FSB created the Task Force on Climate-related Financial Disclosures, with Michael Bloomberg as chair.  The “TCFD” then set out to develop guidelines for corporate disclosure on climate change-related issues and topics.

These recommendations were released in 2017, and since then some 1,700 organizations endorsed the recommendations (as signatories); these included companies, governments, investors, NGOs, and others.

Individual countries are taking measures within their borders to encourage corporations to adopt disclosure and reporting recommendations. There are four pillars -– governance, strategy, risk management, and metrics & targets.

A growing number of publicly-traded companies have been adopting these recommendations in various ways and publishing standalone reports or including TCFD information and data in their Proxy Statements, 10-ks, and in sustainability reports.

The key challenge many companies face is the recommendations for rigorous scenario testing to gauge the resiliency of the enterprise (and ability to succeed!) in the 2C degree environment (and beyond, to 4C and even 6C),,,over the rest of the decades of this 21st Century.

Many eyes are on Europe where corporate sustainability reporting first became a “must do” for business enterprises, in the process setting the pace for other regions.  So – what is going on now in the region with the most experienced of corporate reporters are based?  Some recent news:

The Federal Council of Switzerland called on the country’s corporations to implement the TCFD recommendations on a voluntary basis to report on climate change issues.

Consider the leading corporations of that nation — Nestle, ABB, Novartis, Roche, LarfargeHolcim, Glencore — their sustainability reporting often sets the pace for peers and industry or sector categories worldwide.

Switzerland — noted the council — could strengthen the reputation of the nation as global leader in sustainable financial services. A bill is pending now to make the recommendations binding.

The Amsterdam-based Global Reporting Initiative (GRI) is backing an EU Commission proposal for the European Financial Reporting Advisory Group (EFRAG) to consider what would be needed to create non-financial reporting standards (the group now advises on financial standards only). The dual track efforts to help to standardize the disparate methods of non-financial reporting that exist today.

The move could help to create a Europe-wide standard. The GRI suggests that its Global Sustainability Standards Board (GSSB) could make important contributions to the European standard-setting initiative.

And, notes GRI, the GSSB could help to address the critical need for one global set of sustainability reporting standards.  To keep in mind:  the GRI standards today are the most widely-used worldwide for corporate sustainability reporting (the effort began with the first corporate reports being published following the “G1” guidelines back in 1999-2000).

The United Kingdom is the first country to make disclosures about the business impacts of climate change using TCFD mandatory by 2025.

The U.K. is now a “former member” of the European Union (upon the recent completion of “Brexit” process), but in many ways is considered to be a part of the European region. The UK move should be viewed in the context of more investors and sovereign nations demanding that corporations curb their GhG emissions and help society move toward the low-carbon economy.

In the U.K., the influential royal, Prince Charles — formally titled as the Prince of Wales — has also launched a new charter to promote sustainable practices within the private sector.  He has been a champion of addressing climate challenges for decades.

The “Terra Carta” charter sets out a 10-point action plan designed to reduce the carbon footprint of the business sector by year 2030.  This is part of the Sustainable Markets Initiative launched by the prince at the January 2020 meeting in Davos, Switzerland at the World Economic Forum gathering.

Prince Charles called on world leaders to support the charter “to bring prosperity into harmony with nature, people and planet”. This could be the basis of global value creation, he explains, with the power of nature combined with the transformative innovation and resources of the private sector.

We closely monitor developments in Europe and the U.K. to examine the trends in the region that shape corporate sustainability reporting — and that could gain momentum to become global standards.  Or, at least help to shape the disclosure and reporting activities of North American, Latin American, Asia-Pacific, and African companies.

It is expected that the policies that will come from the Biden-Harris Administration in the United States of America will more strenuously align North American public sector (and by influence, the corporate sector and financial markets) with what is going on in Europe and the United Kingdom.  Stay Tuned!

TOP STORIES FOR YOU FROM THE UK AND EUROPE

Items of interest — non-financial reporting development in Europe:

Reporting and Disclosing Corporate ESG & Sustainability Results– Key Resources Roundup

By Kelly Mumford – Sustainability Reporting Analyst Intern – G&A Institute

Sustainability, Corporate Responsibility, and Environmental Social Governance (ESG) – these are some of the key buzz words circulating in capital markets’ circles that have become increasingly more important to both investors and corporate leaders as the risks of climate change to business organizations steadily increase.

We are now at the critical tipping point where it is necessary for all businesses to publicly report on and in various ways amply disclose how climate related risks — and related opportunities – and other issues such as Human Rights and Human Capital Management (HCM) might affect their business. And, to disclose what they are doing to address and mitigate such risks.

A recent institutional investor survey report by the Harvard Law School Forum on Corporate Governance that focused on ESG risk and opportunities found that investors recognize the growing risks of non-financial factors such as climate change, which is at the top of the agenda.

Climate change issues and human capital management were cited in the 2020 survey as the top sustainability topics that investors are focusing on when engaging with their boards.

Regardless of sector, all companies understand the importance of engaging with these topics. With that said, ESG and sustainability topics are playing a more concrete role in the private sector.

The good news is that there are significant resources available to help companies measure and report on sustainability and ESG, promote greater transparency, demonstrate better risk management, talk about improved performance, and in turn better promote the corporate brand value and reputation.

Such corporate disclosure and reporting have been shown to help to create higher shareholder returns and improve corporate economic performance.

With this in mind, standardized frameworks and indices are being used by corporations to provide more accurate and transparent information to their investors as well as all of their stakeholders.

However, as more diverse resources become available (examples are sustainability and responsibility frameworks, indices, and standards) there is also a need for distinctions to be made among them. To group all of these resources together would be inaccurate and misleading as each has unique advantages and distinction for both investors and corporate reporters.

Some of the key resources available in this space include: SASB, MSCI, Sustainalytics, Institutional Shareholder Services (ISS), Dow Jones Sustainability Index (the DJSI), TCFD, CDP, SDGs, and GRI.

To more easily understand their similarities and differences these can be grouped into broader categories. Such categories include: reporting standards, ESG ratings, indices, disclosure frameworks, investor surveys, and international goals. We’ll explain these in this commentary.

ABOUT CORPORATE REPORTING STANDARDS
The leading reporting standards present an effective way for companies to structure and publicly disclose “non- financial” information — such as strategies, actions, performance and outcomes for governance, environmental, and social impacts of the company. (That is, impacts affecting stakeholders, including investors.)

These important disclosures can be identified in the form of “sustainability, corporate responsibility, corporate citizenship” reporting.  Many such corporate reports explain how a company measures ESG performance, sets goals, and manages programs effectively – and then communicates their impact to stakeholders.

Reporting standards help to streamline the process of corporate reporting and allow stakeholders to better identify non-financial disclosures against widely used and accepted standards.

THE GLOBAL REPORTING INITIATIVE (GRI)
This is a long-established, independent organization (a foundation) that has helped to pioneer sustainability reporting. Since 1997 the organization has been working with the business sector and governments to help organizations (corporations, public sector and social sector organizations) communicate their impact and sustainability issues –such as climate change, human rights, governance and social well-being.

The current GRI sustainability reporting standards evolved out of four prior generations of frameworks dating to 1999-2000 (when the first reports were published, using “G1”) — and today is one of the most commonly-used with diverse multi stakeholder contributions to standards-setting.

GRI has been responsible for transforming sustainability reporting into a growing practice and today about 93% of the largest corporations report their sustainability performance using the GRI Standards.

  • Advantage of use for reporters: corporate reporting using the GRI standards helps to create consistent disclosures and facilitates engagement with stakeholders on existing and emerging sustainability issues. Further, use of GRI standards helps to create a more consistent and reliable landscape for sustainability reporting frameworks for both the reporters and their constituencies, especially including investors.

THE SUSTAINABILITY ACCOUNTING STANDARDS BOARD (SASB)
These more recent standards enable business leaders to identify, manage, and communicate financially-material sustainability information to investors. There are now 77 industry-specific standards (for 11 sectors) available for guidance.  These standards for an industry (and many companies are classified in more than one industry) help managers to identify the minimal set of financially-material sustainability topics and associated metrics for companies in each industry.

SASB standards help company managements to identify topics most relevant to their enterprise, and communicate sustainability data more efficiently and effectively for investors.

  • Can be used alone, with other reporting frameworks, or as part of an integrated reporting process. The G&A Institute team in assisting companies with their reporting activities use a hybrid approach, using both GRI and SASB as best practice.

 

ESG RATINGS/ DATA SUPPLIERS
A growing number of independent third-party providers have created ESG performance ratings, rankings and scores, resulting from assessment and measurements of corporate ESG performance over time against peers for investor clients. These ratings often form the basis of engagement and discussion between investors and companies on matters related to ESG performance.

There are several major ratings with varying methodology, scope, and coverage that are influencing the capital markets. Keep in mind there are numerous ESG data providers and ratings providing information to investors and stakeholders; however, for the scope of this post not all are mentioned.

INSTITUTIONAL SHAREHOLDER SERVICES (ISS) — ESG GOVERNANCE QUALITYSCORES(R)
ISS is a long-time provider of “corporate governance solutions” for institutional asset owners, their internal and external managers, and service providers. ISS provides a variety of ESG solutions for investors to implement responsible investment policies. The firm also provides climate change data and analytics and develops a Quality Score (for G, S and E) that provides research findings on corporate governance as well as social and environmental performance of publicly-traded global companies for its investor clients.

The ESG Governance QualityScore is described as a scoring and screening solution for investors to review the governance quality and risks of a publicly-traded company.

Scores are provided for the overall company and organized into four categories — covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight.

Many factors are included in this score but overall the foundation of scoring begins with corporate governance, the long-time specialty of this important provider.

  • ISS Advantage: as a leading provider of corporate governance, the ISS ESG Governance QualityScore leverages this firm’s deep knowledge across key capital markets. Further, these rankings are relative to an index and region to ensure that the rankings are relevant to the market that the public company operates in.

MSCI ESG RATINGS
MSCI has a specific ESG Index Framework designed to represent the performance of the most common ESG investment approaches by leveraging ESG criteria. Indexes are organized into three categories: integration, values, and impact.

MSCI also creates corporate ESG ratings by collecting data for each company based on 37 key ESG issues. AI methodology is used to increase precision and validate data as well as alternative data to minimize reliance on voluntary disclosure.

Consider:

  • MSCI is the largest provider of ESG ratings with over 1,500 equity and fixed-income ESG Indexes. The firm provides ESG ratings for over 7,500 global companies and more than 650,000 equity and fixed-income securities (as of October 2019).
  • Advantages for investors: Focuses on intersection between a company’s core business and industry-specific issues that can create risks and opportunities. ESG ratings gives companies a rated score of AAA-to-CCC, which are relative to industry peers. Companies are rated according to their exposure to risk and how well they manage risks relative to peers. Companies are analyzed on calendar year basis and are able to respond to the profile developed for investors by MSCI analysts.

SUSTAINALYTICS
This organization rates sustainability of exchange-listed companies based on environmental, social, and corporate governance (ESG) performance. The focus is on ESG and corporate governance research and ratings.

What makes them unique: their ESG Risk Ratings are designed to help investors identify and understand material ESG risks at the security and the portfolio level.

The corporate ESG risk rating is calculated by assessing the amount of unmanaged risk for each material ESG issue that is examined. The issues are analyzed varying by industry and depending on industry, a weight is given to each ESG issue.

  • Key: The assessment focuses on most material risks, using a two-dimensional lens to assess what risks the corporation faces and how well leadership manages the identified risks. Absolute ratings enable comparability across industries and companies for investors; corporate governance ratings are integrated into the ESG risk rating, and controversy research is also considered for the risk ratings. The performance is based on both quantitative metrics and an assessment of controversial incidents, allowing for the complete picture to be demonstrated with the ESG ranking.
  • Unique point: Total ESG risk score is also presented as a percentile so it can be compared across industries. This allows for a better understanding of how the industry performs as a whole, so to better assess how well a company is performing relatively.

SOME OF THE LEADING INDICES
Indexes / benchmarks help to make capital markets more accessible, credible, and products or approaches better structured for investors. They allow for performance benchmarks to represent how equity and/or fixed-income securities are performing against peers.

Specialized ESG indices specifically have been gaining in favor over the recent years as investors become more interested in responsible / sustainable investing. This out-performance is evident in the time of the coronavirus crisis with ESG funds inflow exceeding outflow of traditional indexes. Investors see this as a sign of resilience and excellence in risk performance for ESG companies.

It is evident that ESG index funds have been outperforming key core indexes — such as the S&P 500 Index(r). (The new S&P 500 ESG Index has been outperforming the long-established sister fund.)

Also, the growing abundance of ESG data and research has helped to promote the development and embrace of corporate ESG ratings, which in turn allows for the construction of even more such indices.

Because these indexes represent the performance of securities in terms of ESG criteria relative to their peers, it helps define the ESG market and availability of sustainable investing options.

There are now numerous ESG Indices available to investors – to cover them all that would require another blog post. So, for the sake of this brief post only DJSI is mentioned, as it is one of the mostly widely-known and frequently used by global investors.

DOW JONES SUSTAINABILITY INDICES (DJSI)
This is a family of indices evaluating the sustainability performance of thousands of publicly-traded companies. DJSI tracks the ESG performance of the world’s leading companies in terms of critical economic, environmental, and social criteria. These are important benchmarks for investors who recognize that corporate sustainable practices create shareholder value. The indexes were created jointly with Dow Jones Indexes, and SAM, now a division of S&P Global Ratings (which owns the DJSI).

  • This was the first global sustainability index – created in 1999 by SAM (Sustainable Asset Management of Switzerland) and Dow Jones Indices. Today, owned and managed by S&P Global Ratings.
  • Advantage for investors: Combines the experience of an established index provider with the expertise of a sustainable investing analytics to select most sustainable companies for the indexes from across 61 industries. Calculated in price and total return disseminated in real time. This is an important benchmark for many financial institutions.
  • Selection process is based on companies’ total sustainability score from annual SAM Corporate Sustainability Assessment (the important CSA that results in the corporate profile). All industries are included, and the top 10% (for global indices, top 20% for regional indices, and top 30% for country indices) of companies per industry are selected

CORPORATE DISCLOSURE FRAMEWORKS
Disclosure frameworks are used to improve the effectiveness of financial disclosures by facilitating clear communication about certain criteria. There are long-standing frameworks such as created by the Financial Accounting Standards Board (FASB) that establish standards for U.S. corporate financial accounting.

Similarly, there is now a suggested disclosure framework related to the corporation’s financial information but that focuses on climate related risks and opportunities — the Financial Stability Boards’ “Taskforce on Climate-related Financial Disclosures” — or TCFD. (The FSB is an organization of the G20 countries; member participants are the securities and financial services administrators and central bankers of the largest economies.  The U.S. members include SEC, the Federal Reserve System and the Treasury Department.  The FSB considers future regulations that could be considered in the member countries.)

As the capital markets players interest in corporate sustainability and ESG grows, and public policy makers recognize the threat of many ESG issues to the health of their nations, it is not surprising that there would be a specific resource developed for corporate climate-related financial disclosures.

Investors have a heightened awareness of the risks that climate change issues poses to their holdings, so it is now considered to be a best practice for company managements to report and disclose on these risks and responses to address them – using among other resources the TCFD recommendations for disclosure.  Here is what you need to know:

TASKFORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD)
Developed by the Financial Stability Board (FSB) to encourage voluntary, consistent, climate related financial disclosures that could be useful to investors. N.Y.C. Mayor/Bloomberg LP founder Michael Bloomberg serves as the chairman and founder of the task force (which has a 32-member board).

The “TCFD” recommendations for corporate disclosure are intended to help both publicly-traded companies and investors consider the risks and opportunities associated with the challenges of climate change and what constitutes effective disclosures across industries and sectors.

This approach enables users of financial information to better assess risk and helps to promote better corporate disclosure. The recommendations call for disclosure around four core areas — governance, strategy, risk management, and metrics and targets.

To keep in mind:

  • The initial recommendations applied to four financial sector organizations (bankers, insurers, asset owners, asset managers). And to four industry categories – oil & gas; food & agriculture; transport; building materials and management.
  • Advantage for companies: following the TCFD recommendations represents an opportunity for companies following the recommendations to bring climate-related financial reporting to a wider audience.

INVESTOR-FOCUSED SURVEYS – CORPORATE RESPONSES
Investor interest surveys — such as those conducted by CDP – can provide an advantage for companies in responding to disclose important ESG data and take part in the movement towards building a carbon-neutral economy.

The information provided to CDP by companies makes up the most comprehensive dataset tracking global climate progress. Investors use these volumes of data on climate change, deforestation, supply chain management and water security to inform decision-making, engage with companies, and identify risks and opportunities.

Corporate response to the annual, global surveys benefits investors and provides companies with ways to inform investor engagement strategies.

CDP
Established by investors 20 years ago as the Carbon Disclosure Project, CDP today is an organization that supports the movement of cities and companies toward greater measurement, management and disclosure of key data and information to promote a carbon neutral economy.

These data helps to manage risks and opportunities associated with climate change, water security and deforestation. More than 2,000 companies in North America and 8,000 globally disclose data through CDP.

Disclosure is key, not only for measuring impact but also for setting goals and targets that enable climate action. CDP has been at the forefront of the disclosure movement to track and measure global progress towards building a more sustainable world.

  • Advantage: reporting to CDP is advantageous because it helps companies get ahead of regulatory and policy changes, identify certain ESG risks, and find new opportunities to manage those risks in a way that is beneficial for both business — and the planet.
  • TCFD Connection: The CDP response questions have been aligned with the TCFD and a good comprehensive CDP response can provide a baseline for a majority of the necessary disclosures for TCFD.

INTERNATIONAL GOALS – THE SUSTAINABLE DEVELOPMENT GOALS (SDGS)
The United Nations Sustainable Development Goals are unique in that they are a set of widely-accepted international goals. Countries, cities, and companies all over the world and use these goals as a way to inform and inspire action on sustainable development goals. The goals are very broad in aims so it allows for parties to adapt and use the goals that are most relevant. They are non-binding and therefore their implementation depends on local government or corporate polices to be upheld.

These are a United Nations-developed plan to [among the goals] end extreme poverty, reduce inequality, and protect the planet. The SDGs succeeded the Millennium Goals (2000-to-2015) and extend collaborative and independent action out to year 2030 by public, private and social sector organizations.  The goals (17 in all with 169 underlying targets) have been adopted by 193 countries and emerged as a result of the most comprehensive multi-party negotiations in the history of the United Nations.

The SDGs focus on ways to generate impact and improve the lives of all people. The goals are related to themes such as water, energy, climate, oceans, urbanization, transport, and science and technology.

  • The SDGs are not focused on any sector or stakeholder in specific. Instead they serve as a general guidance that can be used at any level.
  • Distinctions: as one of the most widely recognized frameworks for corporate consideration, companies and stakeholders can use the Goals as a way to guide their sustainability initiatives. Many companies recognize them in corporate reports and many align certain aspects of their mission to relevant SDGs.

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AUTHOR’S CONCLUSION
As asset owners and asset managers now expect – and demand – greater corporate disclosure on climate change-related topics and issues, there are numerous resources available for managers to create and inform comprehensive, compelling reports for public access.

It is up to company leaders to identify the category of resources that would best benefit them, whether that be aligning with a disclosure framework, answering a CDP survey, or using ESG ratings. Most leading companies are taking a hybrid approach and utilizing the best features of the most common frameworks to maximize the ROI of their investments in this area.  We’ve identified some of the most-utilized here but there are still many more resources available in each category depending on industry, sector, geography, nature of the business, and other factors.

While the large universe and diversity of sustainability and ESG disclosure and reporting resources might be confusing to make sense of, it is increasingly obvious that investors are relying on ESG factors when making decisions and that the importance of climate change is only growing.

The team at Governance & Accountability Institute are experts in helping corporate clients work with the frameworks, etc. profiled here.  I serve as a reporting analyst-intern at, reviewing literally dozens of corporate sustainability / ESG / citizenship – responsibility – citizenship et al reports each month.

ABOUT KELLY MUMFORD 
Kelly Mumford is a graduate of the Development Planning Unit at the University College London. She graduated with a Master’s of Science in Environment and Sustainable Development (with Merit). Her course focused on environmental planning and management in developing countries and culminated with a month of field work in Freetown, Sierra Leone. She led a group during their research on the water and sanitation practices of a coastal community in the city of Freetown. Her work in preparation for this fieldwork includes a policy brief, published by their partner research organization.

Kelly has been very active in the environmental sector and prior to this interned at Natural Resources Defense Council. She holds a Sustainability Associate Credential from the International Society of Sustainability Professionals and has been an active member of the organization, planning and executing a successful N.Y.C. chapter’s whale watching event. She holds a B.A. in Environmental Studies and a minor in Spanish studies from the University of Delaware. She plans to pursue a career in sustainability, focusing on ESG and leveraging her research experience and knowledge of sustainability reporting.

ADDITIONAL RESOURCES