The good, the bad and the ugly. What went down?

Last Thursday, CDSB hosted a webinar to look back at some of the common practices of TCFD reporting that have emerged, now that we have had the reporting standard for four years. From "sustain-a-babbling" to TCFD light (diet version), the panellists had seen it all and did not hold back the lassos. Here are some of the good, bad and ugly moments of this London Climate Action Week webinar event.

Mardi McBrien, CDSB Managing Director, laid down the canvas and explained that climate-related financial risk had been CDSB’s priority for the last 15 years. In 2010, when the first iteration of the framework for providing companies a way to disclose climate risks was produced, it was not smooth sailing. Companies never thought their legal departments would authorise these reports. Today, the uptake of the TCFD reporting framework has shifted positively to mainstream, underscored by the G7’s recent support for climate reporting. So, in what ways have the TCFD recommendations been adopted? In Clint Eastwood’s famous words, “every gun has its own tune.”

The good

From the perspective of asset manager, Meryam Omi, Legal & General Investment Management, there is a lot more disclosure and quality coming out of company reports. This has increased by 50% in one year, mostly out of Europe but also from the United States and Japan. There are noticeable differences between sectors and some of the good reports are coming out of the technology, telecommunications and banking sectors. Emerging sectors too are starting to show signs of TCFD reporting.

Simon Weaver, KPMG, echoed Meryam’s findings and reported that in the 2018 Global KPMG CEO Outlook, there was not a single mention of climate. Fast forward to 2020 and climate change is up there as one of, if not the biggest, issue they are discussing in the boardroom. This is hugely positive. But Simon believes the hanging question now is how these CEOs filter the climate disclosure agenda down to the rest of the organisation. A big push through all layers of management is needed for everyone to understand these disclosures.

Breaking it down further into the four TCFD pillars (governance, strategy, risk management, and metrics and targets), governance tops the rest in terms of disclosure. Meryam noted that this was good news since it meant the company boards are starting to embrace climate disclosure and are discussing who takes responsibility within the organisation. 

Metrics reporting has also started to align with science-based measurements. “What we don't want to see are random metrics that are not aligned to NetZero targets, for example,” said Meryam. She added that there was a lot more disclosure around scope 3 (value chain, supply chain, etc.). Maria Petzsch, ClientEarth, confirmed that in a recent study of 52 companies, 40% presented what ClientEarth describe as “clear disclosure of the climate risk.” 

The bad

But then then the reporting falters. Regarding the second TCFD pillar, strategy, there just isn’t yet the integration of climate risks into company strategy that allows investors to assess how the business is going to improve their value going forward. Crucially here, Meryam said investors like her were therefore unable to make decisions based on unclear strategies. 

The reports showed little discussion about opportunities. Investors want to finance companies that are generating revenues from green sources and low-carbon opportunities. But the companies, sadly, are not articulating these. While research and development are difficult to convey, for example, if investors nevertheless do not get a sense of where you are taking the business then it is hard to allocate capital.

Enter sustain-a-babble, a word introduced to the discussion by Lois Guthrie, World Business Council for Sustainable Development, quoted from The Routledge Companion to Accounting Communication book. It describes a lack of coherence in reporting. The chairman, for example, might highlight in the executive summary specific climate risks but then there is nothing in the actual report about that risk thereafter. How they are managed or measured is also sometimes missing.

Maria said a common blurb she found in reports that did not address climate risks was “we are undertaking an assessment of this risk and look forward to reporting it in line with TCFD next year.” This is very frustrating for the investor as that information was needed yesterday. 

The incoherence is made worse by essay writing, rather than reporting. Disclosure does not mean disclose everything. Meryam reminded participants that they were not going to get sued if they did not disclose everything. Climate disclosure, rather, is about materiality. Instead of writing down everything to see what sticks, it needs to be focused on elements of material risk. More is not necessarily better. 

The Ugly

Meryam pointed out that there was a weak use of scenario analysis. Because scenario analysis can be developed to suit the narrative, fancy charts and graphs that are meaningless are sometimes used. The nature of scenario analysis makes it difficult for the industry to establish a standard. This is where it gets ugly.

Having worked with 30 big companies, spread across five industries, to evaluate what they were doing with TCFD recommendations, Lois was concerned that companies were muddled in TCFD reporting with no feedback from the investors.

She described scenarios as “a tangle of spaghetti graphs that cause the academic equivalent of a pub brawl.” Understanding the models of the different scenarios is very complicated. She hoped we could demystify these and create a level of comparability and consistency in the approach. For example, for the 1.5 degrees scenarios, what are the scenarios that lend themselves well in the public domain?

The panel discussion moderator, Louie Woodall, Climate Risk Review, asked Lois then if we needed a TCFD light – the diet version. Lois gave a hard “no.” Scenarios do not need to be simplified but rather corporates need to gain confidence in creating them. Corporates are disclosing information but are also looking for signals (a response) from the users of that information as to whether it is adequate, clear and useful. Companies are not certain what the investors need. More dialogue between companies and investors would solve some of these issues. 

What next?

According to Simon, the ‘D’ in TCFD makes people think it is just about sustainability disclosures. But TCFD is really a strategic risk management framework. When it is viewed from this lens then you start to see the decision-useful information you can get from it.

On writing better reports, Meryam, who herself must write TCFD reports said, “Don’t worry about perfection. When I started writing my first report, I realised that yes it may probably be ugly at first but the only way to make it better is to start writing it.” To sum up, Tuco from The Good, The Bad and The Ugly would have said, “When you have to shoot, shoot. Don’t talk.”

Watch the full panel discussion here

Don’t miss out! Register for our next event here

Written by Enock Chinyenze, Senior Communications Executive, CDSB.