Will Europe be first to adopt the TCFD recommendations?

On 31st January, the EU High-Level Expert Group on Sustainable Finance (HLEG) released its recommendations for Financing a Sustainable European Economy. This is a summary of and initial reactions to its recommendations around TCFD implementation.

Read the HLEG report "Financing a sustainable European economy" here.

TCFD-related aspects of the HLEG report:

  • The HLEG endorses the TCFD recommendations
  • Finance needs to take a long-term view on investments – need long-term disclosure of risks & opportunities to facilitate this
  • All members of the investment chain should report
  • The upcoming review of the EU Non-Financial Reporting Directive in 2018/19 is an opportunity to implement the TCFD recommendations
  • Forward-looking disclosures will be new to many companies. As such, a period of experimentation should be allocated
  • European Supervisory Authorities (ESAs) must be given mandate and resources to regulate sustainability-related matters

Our reactions

A set of interconnected recommendations for sustainable finance

The report rightly highlights that there is no single fix to foster sustainable finance. Crucial to success is providing solutions and co-ordinated action that reflect the complexity of the financial system and address the many levers in the investment chain.

Long-term vision for finance

Perhaps the most fundamental aspect of sustainable finance is to better align short-term horizons common in the investment world with the longer-term horizons of many beneficiaries (pension holders, savers). Adopting this perspective brings sustainability risks into greater focus, allowing these to be better priced and managed.

In turn, this patient capital also allows companies to plan for the future and make necessary investments in sustainability, without fear of losing investors due to temporary dips in share price.

Adoption of the TCFD recommendations, as endorsed by the HLEG, will provide the necessary framework for disclosure of high quality, forward-looking information that is crucial if investors are to assume this long-term perspective.

Catch 22: Smooth transition, but urgently

Urgent action is required to avoid serious damage to Europe's biodiversity and agricultural output from climate change.  However, an abrupt change to economic systems could lead to significant losses from system shocks and stranded assets.

The HLEG's cautious approach to ensure a smooth transition is understandable, but delays could be counterproductive and risk further inefficient allocation of capital and an ever-widening sustainability gap to close.

Business is already adapting to a new disclosure landscape and has adopted reporting frameworks, as provided by CDSB and the CDP questionnaires for many years. Many of these businesses have been vocal in its support for mandatory reporting in line with the TCFD recommendations.

NFR review is the time to implement TCFD recommendations

The review of the EU Non-Financial Reporting Directive, which is set out in the text for 2018, but planned for 2019 by the commission, is the perfect opportunity to embed the TCFD recommendations into regulation across Europe. As the commission demonstrated in its non-binding guidelines, the requirements of the Directive already include strong ties to the TCFD recommendations. Realistically, this would not result in mandatory TCFD before 2021, allowing businesses to prepare and experiment for a few years.

Therefore, we call upon the Commission to start the implementation of the TCFD recommendations now and see the use the upcoming review of the EU Non-Financing Reporting Directive as a perfect opportunity to do so. This strong signal will give a clear message to the business community. This will speed up the process to achieving the goal of a financial system that can provide levels of investment required for a sustainable future while giving business enough time to experiment and prepare.

We must not forget that reporting is not intended to be just a burden, but an opportunity for companies to receive more, long-term investment, which will allow them to transition to a more sustainable business model.

European Supervisory Authorities 

Crucial to the success of any regulations is effective oversight of compliance.  The HLEG rightly highlights the role of the European Supervisory Authorities (ESAs) in terms of these recommendations. However, our engagement with the ESAs and Member State supervisors has led us to the opinion that their mandate is needed updating because it is understood in only the strictest financial sense. For this reason, the HLEG recommended to include sustainability in the supervisory mandate of ESAs and extend the horizon of their risk monitoring.

We see the expansion of the mandate of ESAs to encompass corporate sustainability-related financial information, and the provision of resources to do so, as crucial. While supervisors are often seen as organisations that prosecute or fine businesses, they rarely do so in reality. ESAs have a wide range of tools in their arsenals to give constructive feedback to the market. This is important not only to ensure successful implementation of the HLEG's recommendations but also to fulfil the core mandate of ESAs to promote market stability and protect investors, as well as the wider public.

Sustainability is not just about climate change

Last but not least, the HLEG report rightly highlights that the sustainability does not stop at climate change. In particular, the report highlights the importance of managing natural capital, mentioning the risks to fisheries and agriculture as some of the most pressing sustainability issues in Europe.

More encouraging still is the recommendation that the Commission should support the use of the Finance Sector Supplement to the Natural Capital Protocol as a means for financial institutions to "quantify, report and manage natural capital risks and opportunities in their decision making". Standardisation and rigour are key to make sustainable finance mainstream and proposing a widely used standard will accelerate this process.

We welcome the recommendations of the EU High-Level Expert Group on Sustainable Finance and will continue work with the European Commission and Parliament, as well as European businesses and the finance sector, to foster a resilient financial system in Europe.