Task Force on Climate-related Financial Disclosures: who has signed up and why should you?
The Task Force on Climate-related Financial Disclosures (TCFD) was formed by the Financial Stability Board (FSB) in December 2015 in response to a request from the G20 countries to better understand the financial risks posed by climate change. The TCFD’s main objective is to develop voluntary and consistent climate-related financial disclosures, and the final recommendations, published in June 2017, set out a framework which standardises the disclosure of climate change costs, risks and opportunities for organisations across the world.
In October 2019, BCS Consulting published the first comprehensive report on the progress the banking sector has made in implementing the TCFD framework. The report highlights several key findings regarding current market coverage and the maturity of disclosures, and provides an insight into emerging best practices across the banking sector.
This post will look at the report’s key market coverage findings and discuss why these are important in the context of today’s climate-conscious economy.
Global Market Coverage
As of 1 July 2019, 76 banks have endorsed the framework, accounting for ~40% of banking assets globally ($59 trillion). This clearly demonstrates that the Task Force has been successful in gathering attention across the global stage. However, only 39 of these 76 banks have actually commenced disclosing on the framework (~24% of banking assets globally). This disparity highlights the scale of the challenge that banks face in implementing TCFD and reiterates the importance of sharing information across the sector in order to embed best practice before there is a regulatory mandate to do so.
The banks supporting the framework are primarily very large: more than 51% that have given TCFD their endorsement have over $500 billion in assets. This is not surprising, given that large banks have more financial resources at their disposal with which to drive an active climate change agenda and are arguably more in the public and regulators’ line of sight, leading to increased pressure from both a reputational and a conduct perspective.
Regional Market Coverage
Figure 1: Endorsement and market penetration of TCFD in the Banking sector.
Looking at the regional breakdown of acknowledgement of TCFD, Europe is the clear leader, with a total of 31 banks endorsing the framework covering 85% of European banking assets. It is followed by North America (13 banks covering 49% of assets) and Asia (23 banks covering 31% of assets).
Europe is also the most advanced region in terms of disclosures, with a disclosure-to-acknowledgement ratio of 68%, followed again by North America with a ratio of 54%. TCFD’s success in Europe is most likely due to greater regulatory pressure, for example, from initiatives such as the European Commission Sustainable Finance Action Plan and the EU Non-Financial Reporting Directive. This emphasises the benefit that such focus and guidance can bring in shaping the industry response to climate change.
Figure 2: Number of banks endorsing TCFD and market share gained per period.
Although a significant proportion of the banking market is covered by those endorsing TCFD (~40%), the rate of adoption of the framework has decreased over the last two years. 2017 has been the strongest year for endorsement so far (38 banks), with 2018 marking a slight slowdown (29 banks) and only 9 banks adding their endorsement of the TCFD framework in 2019 (as of 1 July 2019). Overall, this has only resulted in a market share gain of ~10% since Q4 2017. This observation is mirrored at a regional level in Europe, which, although as mentioned has seen the highest total number of banks adopt the framework, has also experienced a gradual deceleration in its rate of adoption since Q3 2018 – though this change of pace could owe to the high level of European market penetration achieved by the framework to date.
These results highlight the need for increased engagement in other global regions, particularly in Asia, the largest banking market in the world. There is also significant potential for increased market penetration of TCFD endorsement by maintaining a focus on larger banks (28 of the world’s top 75 banks have not yet endorsed TCFD). If this group, for example, were to support the framework, global market coverage would reach a majority share of ~59%.
Why is adopting the TCFD framework important?
Climate change poses a significant threat to future global financial stability. It exposes the economy to asset pricing deteriorations as a result of physical impacts such as droughts, floods, heatwaves, etc. and transitional risks as policy, technology use and consumption patterns evolve for a lower carbon economy. It also exposes businesses to liability risk if they fail to account for and mitigate any damage that their practice might cause to the environment.
Transparency of information will be key to enabling an efficient market reaction to climate change. Businesses that are seen to consider and embed an active response to climate change will be better placed to mitigate risk and attract a greater share of the vast investment (~$60 trillion) expected to support the global transition to a low-carbon economy before 2050. Greater transparency would also improve policymaker understanding of the greatest sources of climate impact and corporate preparedness, which, in turn, will help to shape the regulatory agenda.
TCFD offers a clear standard for providing such information to the market. The support of the FSB gives the framework a unique opportunity to coordinate global engagement in collaboration with national governments. With recommendations across governance, strategy, risk management and metrics/targets, banks, in their engagement with the framework, are able to assess the future cost of doing business (who they lend to as well as their own operations), and whether this is sustainable in the long term.
Engagement with TCFD demonstrates a commitment to climate change risk management. However, it is our view that best practice cannot be achieved through engagement alone, and needs to be supported by mature disclosures that highlight the financial risks and opportunities of climate change.
The maturity of disclosures across the banking sector is explored further in the BCS Global Progress Report. As a result of the research undertaken to produce the report, our team now has detailed assessments of individual climate-related financial disclosures of all 39 banks who are disclosing under TCFD, and is well-placed to advise on best practice and key focus areas across the sector.
Engaging with TCFD will not only improve the banking sector’s ability to manage the risks posed by climate change today, but it will also enable it to capitalise on the opportunities that the framework will provide in the years to come.
 Estimated global banking assets of $148 trillion, DBRS, 2019.
 75th largest banks per the S&P Global Intelligence Report, The World’s 100 largest banks, 2018.