What is the TCFD?
The Task Force on Climate-related Financial Disclosures is the first international initiative to examine climate change in the context of financial stability and was designed to provide greater transparency for financial institutions in making informed investment decisions. It was formed after a review by the G20’s Financial Stability Board into how the financial sector can best take account of climate-related issues.
New Rule from the SEC Mandates that Climate Risk Disclosures Align with TCFD
Introduction to the new change
On the 21st of March 2022, the U.S. Securities and Exchange Commission (SEC) announced a new measure that will require U.S. listed companies to report detailed disclosures on climate risk and greenhouse gas (GHG) emissions and voted in favor of the proposal 3 to 1. The proposed rule for climate risk disclosure aligns with the Task Force on Climate-Related Financial Disclosures (TCFD) framework and Greenhouse Gas Protocol. TCFD is the first international initiative to examine climate change in a financial stability context, setting out a framework to identify, quantify, and report climate-related financial risks in a consistent manner. The GHG Protocol provides the world’s most widely recognized greenhouse gas accounting standards.
This new measure marks the biggest shift in corporate disclosure policy since post-2008 financial crisis. It will bring additional transparency to shareholders weighing climate risk and greenhouse gas emissions exposure in their investments. The U.S. follows over 30 regions that have already taken action to mandate climate risk disclosure. The draft proposal which is subject to public feedback will likely be finalized by the end of 2022. The comment period is expected to close 60 days from Monday March 21, 2022, or 30 days after the proposal is published in the register, whichever is longer. The SEC will then amend the rule based on public input and hold a separate vote to put the rule into effect. Depending on the company filer type, the rules will take effect as soon as fiscal year 2023 (to be filed in 2024).
What is the GHG protocol?
GHG Protocol establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.
What is materiality?
U.S. case law says that information is material if there is a substantial likelihood that a reasonable investor would find that information necessary when making investment decisions.
Highlights from the proposal
- Requires companies to make climate-related disclosures similar to those outlined in the TCFD Framework and Greenhouse Gas Protocol
- Requires disclosure of the oversight and governance of climate-related risks by the company’s board and management
- Requires companies to disclose direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production)
- Requires companies to disclose indirect emissions from upstream and downstream activities in the company’s value chain (Scope 3), if material, or if the company has set a GHG emissions target or goal that includes Scope 3 emissions, in absolute terms, not including offsets, and in terms of intensity
- Requires companies to separate out physical (wildfires, droughts) and transition risks (carbon tax), and provide clarity on the materiality (actual or likely) of those risks and how those risk will impact the company in the short, medium, and long term
- Requires companies to disclose the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of the company’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements
- Requires companies to identify climate-related risks that have affected or are likely to affect the company’s strategy, business model, and outlook
- Requires companies to disclose processes for identifying, assessing, and managing climate-related risks
Highlights from the proposal (continued)
- Requires companies to disclose if they have adopted a transition plan as part of their climate-related risk management strategy
- Requires companies to disclose if scenario analysis has been used to assess the resilience of its business strategy to climate-related risks
- Requires companies to disclose if an internal carbon price is used, information about the price, and how it is set
- If companies have publicly set climate-related targets or goals, they must disclose information about:
- The scope of activities and emissions included in the target, the defined time horizon by which the target is intended to be achieved, and any interim targets
- How the company intends to meet its climate-related targets or goals
- Annual progress updates on achievement of stated targets or goals
- Carbon offsets or renewable energy certificates (“RECs”) that were used in achieving climate-related targets or goals
How should companies present disclosures in financial statements?
Provide the climate-related disclosure in its registration statements and Exchange Act annual reports, such as the Form 10-K, Regulation S-K, or Regulation S-X
Who does this proposed ruling apply to?
U.S. publicly listed domestic and foreign companies
Investors and asset managers
Sponsors of listed companies
Corporate finance and other advisors
Accountants and auditors
Consumer groups and individual consumers
Industry groups, trade bodies and civil society groups
Policymakers and regulatory bodies
Industry experts and commentators
Academics and think tanks
The intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies — such as increased extreme weather risk leading to supply chain disruptions. In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers.”
The White House
What does this mean for your company?
The SEC’s proposed ruling will phase in reporting requirements based on the size of your organization. In preparing for compliance, there are a number of steps to begin taking action on and working towards:
Short term expectations
- Understand climate risk; this means figuring out which climate risks your company is most vulnerable to and planning ways to mitigate, adapt and strategize on how these impacts will affect the future of your business
- Understand the reporting recommendations of the TCFD framework
- Measure your company’s Scope 1 and 2 GHG emissions and assess whether Scope 3 emissions are considered material for your business
- Implement board and/or management oversight and governance of climate risks
- To provide your Investor Relations team with the necessary tools to report accurate information and effectively communicate with investors on climate risk
- Expect increased scrutiny on all angles related to climate risk disclosures
- Identify and accelerate mitigation and adaptation strategies in each part of the company
Long term expectations
- Understand the business implications under different climate scenarios from moderate to severe impacts
- Establish a thorough understanding of Scope 1, 2 and 3 GHG emissions and your company’s direct and indirect emissions and levers to reduce emissions
- Continue improving disclosure activity through TCFD recommendations, using it as an opportunity to identify, assess, manage, and disclose on climate-related risks and opportunities
- Monitor the convergence of voluntary disclosure frameworks to international standards for corporate sustainability reporting, combined with financial reporting
How could this change relationships with investors and other stakeholders?
- New Performance Baseline: Investors and other stakeholders will leverage these disclosure standards as a “baseline” for performance.
- Improved Benchmarking: Investors and other stakeholders will be able to compare across industries more easily.
- Expect More Climate-Related Questions: Investors will increasingly consider ESG performance, and be favorable to companies that are transparent and serious in their commitment to combat climate change.
- Increased Decarbonization Expectations: Investors and other stakeholders will want to understand the percentage and/or amount of cashflow going to support the company’s transition to net zero carbon emissions.
What does this mean for capital markets?
- Increased Market Efficiency: Increased market efficiency and accuracy due to higher integrity and better-informed asset pricing.
- Reduced Greenwashing Risk: Regulatory oversight from the SEC and standardized reporting requirements will set a level and transparent playing field grounded in data, providing investors with clear insight into the variances in climate risk exposure and strategic action of companies with existing and robust climate strategies against those lagging on climate action.
- Improved Capital Allocation: Help markets allocate capital more effectively, both within and across companies and projects. Also help to ensure that the cost of capital better reflects how well companies are managing climate-related risks and opportunities.
- Green Projects: Supporting climate risk disclosures across the investment chain encourages better business, risk, and investment decisions, helping markets allocate capital to the right projects at the right price.
Why are these changes important?
- Climate change poses significant risks to investors. Nearly $4 trillion worth of assets will be at risk from climate change by 2030.
- Existing measures are not providing enough transparency, with 93% of institutional investors stating that climate-related financial risks have not been accurately priced by markets.
- The systemic impacts felt from global disruption including those caused by the COVID-19 pandemic and emerging geo-political conflicts have proven that the importance of developing climate resiliency plans is greater than ever. Therefore, the SEC has acted to support the flow of accurate climate reporting to reduce climate risk.
When will these changes come into effect?
Disclosure requirements will be phased in based on company size with the first registrants required to comply beginning in 2024 (for FY2023).
The SEC is also proposing that registrants obtain assurance of climate-related reporting beginning in 2024 (for FY2023).
- Beyond climate: While SEC will initially lean on the TCFD framework to shape climate risk reporting requirements, we can expect that the scope will expand; therefore, companies will need to keep their ESG focus broad.
- Beyond risk: Initially, the rule will emphasize climate risk through TCFD considerations; however, looking forward, we can expect updates to the requirements that encourage sharing of information that assesses how companies are contributing on a “net positive” basis. A net positive company is one that gives more than it takes.
- Beyond compliance: In effect, the SEC rule will raise the floor for laggards. However, investors (and other stakeholders) will continue to look “beyond compliance” when assessing the sustainable performance of firms.
Plan to take action
- Revisit existing position: If your company hasn’t already, it’s time to understand emerging frameworks (CDP, CDSB, SASB. TCFD, SBTi, etc.). For those that have, it’s time to revisit reporting strategies and processes with key stakeholders to reassess the clarity, relevance, completeness, and accuracy of your disclosures in all channels including financial regulatory filings, annual reports, CSR reports, websites, sales & marketing materials and any others.
- Envision the ideal future state: Determine what climate resiliency looks like for your company and what needs to change among each business unit to achieve your goals. Anthesis works with clients to build climate resiliency into their strategy.
- Plan for how to get there: Begin to map out the necessary step your organization needs to take towards fulfilling climate risk disclosure requirements following the SEC proposal and TCFD framework. Anthesis helps to prepare clients for TCFD disclosures and build data architecture and processes for robust and transparent reporting.
Anthesis has extensive experience in developing robust climate change and environmental information for mainstream corporate reports, and we have worked with a wide range of companies, including many from the financial services sector.
Our approach allows clients to go beyond the mandatory or required financial disclosure to mitigate the risks that pose the biggest threat to the organisation. We also help you define a powerful, differentiated narrative about your performance and ambitions that inspires and motivates staff, customers, and other stakeholders to understand, communicate and adapt.
How we can help
Through our climate risk services, we support companies and asset managers to gain insight into their climate risks and opportunities. We can assist you from undertaking a high-level analysis of risk and disclosure through to the completion of a more in-depth climate risk and opportunity profile to allow your organisation build resilience. For each of these services, we start by undertaking a review of your current climate strategy and disclosures, such as CDP, CDSB and SASB, to help you understand where you are and where you need to focus.
We recommend completing the following steps in line with the recommendations of the TCFD.
We support companies with:
- Climate Risk Screening: We assess the risks and opportunities that climate change poses to each area of your organisation and define those that will have the greatest impact.
- Scenario Analysis: We model your organisation’s climate-related risks and opportunities and the impact on financial results under different climate scenarios to give you clear, quantitative insight into areas of concern.
- Climate Risk Strategy: We develop a strategy that defines a forward path for setting and meeting targets and prepares you for disclosure to help minimise risk and maximise value.
- Climate Mitigation & Adaptation: We support you to identify and measure the performance of the mitigation and adaptation actions required to reduce climate risk exposure and maximise the opportunities presented in a net zero transition.
We'd love to hear from you
Anthesis has offices in the U.S., Canada, UK, France, the Netherlands, Belgium, South Africa, Ireland, Italy, Germany, Sweden, Spain, Portugal, Andorra, Finland, Colombia, Brazil, China, the Philippines and the Middle East.