‘Data, data, data’ remain biggest challenge to TCFD adoption

New initiatives aim to promote transparency in climate reporting

In March, the US Securities and Exchange Commission proposed a draft rule requiring US-listed companies to disclose their climate-related risks and greenhouse gas emissions. This was announced in response to investors seeking more guidance on how they should be reporting on their climate impacts. However, some critics have accused the regulator of overstepping its authority and creating a burden for businesses in requiring the data to be disclosed.

This is a major step in the development of financial climate reporting. Regulations and requirements in this field vary around the world, but the US has notably lagged behind Europe in mandating firms to disclose climate-related impacts and data. The US favours a ‘market-led’ approach to reporting and disclosures, while the European Union established a taxonomy to provide guidance on what constitutes environmentally sustainable activities, introduced in 2020.

The divergence in approaches to regulation and range of contrasting frameworks creates contradiction, fragmentation and confusion for financial markets. More convergence between approaches with a common language is urgently needed to aid the financial sector in starting to disclose climate information. A forthcoming report by OMFIF and Luxembourg for Finance, ‘Forging the path to international standards in sustainable finance’, analyses these issues in more detail. The report launches at a virtual roundtable on 7 April where players from across the financial sector will come together to examine the alignment of international markets and sustainability standards.

In 2015, the Financial Stability Board established the Task Force on Climate-related Financial Disclosures to provide a framework for firms to disclose climate-related risks and opportunities. The TCFD’s recommendations have become mandatory in certain jurisdictions and many others have plans to follow suit, including the UK from 6 April 2022 – the first G20 country to do so.

The United Nations Joint Staff Pension Fund released its first report based on the recommendations of the TCFD in mid-March. It outlined how the UNJSPF is addressing challenges and risks caused by climate change in its investment activities. Pedro Guazo, representative of the secretary-general for the investment of UNJSPF assets, said the fund wanted to ‘provide our stakeholders full transparency in the processes, scenarios and metrics that we implement to integrate climate-related risks and opportunities into our investment process.’

Magyar Nemzeti Bank, the central bank of Hungary, is one of the first central banks to publish a TCFD report. In a roundtable hosted by OMFIF, Ádám Banai, executive director of Magyar Nemzeti Bank, explained why the bank chose to publish the report and described some of the challenges it came across in the process.

Banai emphasised the important role central banks should play in encouraging the adoption of TCFD recommendations. He said the role of the bank is to ‘lead by example through transparency and hard work.’ He acknowledged that financial markets in Hungary are ‘not ready yet’ to move towards a more sustainable way of working and said the bank must lead the way in providing guidance to smooth this transition.

Part of the reason why markets are not yet ready to integrate environmental, social and governance factors into their investment decisions is ‘data, data, data,’ said Banai. This was the biggest challenge the MNB faced when compiling the report, especially considering the scope of the bank’s portfolio. The more varied and complex the portfolio, the harder it is to find appropriate, comparable data from other organisations.

While this is a big challenge for large corporates and sovereigns, it is even more difficult for small- and medium-sized enterprises that often don’t have access to or the resources to collect and analyse data. Banai was confident that this would improve with time as more financial institutions begin collecting and sharing data because it will increase demand for it, which in turn will lead to more data being produced and collected.

Banai noted that, in compiling the report, it was much easier to find data on scope one and two emissions than it was to find data on scope three. This is because scope one and two emissions are a mandatory part of reporting requirements in many jurisdictions, while scope three is related to factors outside of an organisation’s direct control. However, Banai predicted that scope three data will become more widely available as the TCFD becomes mandatory in more jurisdictions.

Figure 1: Types of greenhouse gas emissions

Source: ESG and US asset management: the future is now, OMFIF

The TCFD goes a long way towards standardising approaches to climate-related financial reporting. The more jurisdictions that adopt its recommendations and the more organisations that produce TCFD reports, the more realistic achieving net zero will become. However, until appropriate and relevant data become more widely available and easily accessible, the barriers to widespread TCFD adoption will remain.

Sarah Moloney is Subeditor at OMFIF.

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