The TCFD recommendations: a missed opportunity for harmonisation?

by Carol A Adams

Photo by Who is Danny ShutterstockThe Task Force on Climate-related Financial Disclosures (hereafter Task Force) was established by the Financial Stability Board (FSB), an international body that monitors the global financial system. Chaired by Michael Bloomberg the UN Secretary-General’s Special Envoy for Cities and Climate Change, it published recommendations in December 2016.

The purpose of the recommendations is to increase transparency to facilitate risk pricing and hence efficient capital markets, lending and insurance underwriting decisions. My own research has found that Boardrooms believe that climate change impacts are long term, out of their control and that as a result they are ignored. One Board Chair of a company with water front property told me that when a Board member raised concerns about rising sea levels anticipated in 90 to 100 years’ time “We all laughed at him”.

It is imperative that the dearth of reporting on climate change issues and the tendency for companies to ignore what they can’t control is addressed, but adding a seemingly new Framework with new content elements is not the most effective way to do it.

The Task Force comprised serious bankers, accountants, asset managers, investors, credit rating agencies and corporate Executives, oddly (?) no academics, but nevertheless a compelling force to recommend that climate-related financial disclosures are mainstreamed.

The Task Force identified two categories of climate risks: those related to the transition to a lower-carbon economy (including policy and legal, technology, market and reputation risks); and, those related to the physical impacts of climate change (such as water security, food security and extreme temperatures). A range of opportunities are also considered including resource efficiency, new energy sources, new products and services and markets.

The recommendations are made in what are referred to as four ‘thematic areas’ – governance, strategy, risk management, and metrics and targets. The first three of these ‘thematic areas’ are consistent with the content elements of IR Reporting Framework, with the document going further spelling out what governance, strategy and risk management disclosures should be with respect to climate change.

It’s unfortunate at a time when reporters are calling for harmonization of reporting frameworks that it didn’t build explicitly on the IR Framework (for example).

The seven recommended principles call for disclosures to be relevant, specific/complete, clear/balanced/understandable, consistent, comparable, reliable/verifiable/objective and timely. These are solid principles, drawn from the Conceptual Framework for financial reporting and with similarities to those of the IR Framework and CSDB Framework (both of which have seven different principles). But why the differences?

The statement:

“The Task Force’s recommendations provide a common set of principles that should help existing disclosure regimes come into closer alignment over time.” (p 34)

is odd given that all the other Frameworks referred to came first.

And whilst the Task Force’s recommendations refer to IAS 36 on “Impairment of Assets” it makes no comment as to its (in)adequacy of dealing with stranded assets.

The metrics and targets overlap with the specific guidance in GRI Standard 305 and the CDSB Framework.

Where the Task Force’s recommendations add significant value, is in the examples given of possible implications for income statement and balance sheet figures and in the guidance on scenario analysis. This is an important contribution of the Task Force’s work and will no doubt, if followed, facilitate Board and senior management consideration of climate-related issues. However, building more explicitly on existing Frameworks with regard to content elements and principles might increase take up.

Main Photo by Who is Danny Shutterstock

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