From recommendations to regulation – a closer look at Europe's response to the TCFD recommendations

Johann Weicht from KPMG takes a look at Europe's approach to the TCFD recommendations and what future regulation could mean for disclosure.

Whether it’s school children going on strike, the idea of a US Green New Deal or extreme weather events dominating the World Economic Forum’s Global Risk Report for the third consecutive time, society's response to climate change, or the lack thereof, remains a much debated issue. An ever-increasing body of scientific research has made very clear what needs to be done, what the costs of inaction would be and that we must respond quickly. Today’s climate change debate isn’t just about images of polar bears on shrinking ice sheets any longer. It is about air pollution, diseases and health, food and water security, rising sea levels, regions being rendered uninhabitable – and it is about financial impacts, too. The insurance company Munich Re valued the overall global losses from natural catastrophes at US$ 160bn in 2018. To put this figure into perspective, the world is currently experiencing approximately 1 degree of global warming according to the latest IPCC report; and we are likely to exceed 1.5 degrees within the next decade. At the One Planet Summit in Paris in late 2017, AXA warned that a world of more than 4 degrees of global warming would no longer be insurable . It is time for financial markets to understand the implications of climate change and to start acting now. With public and private sector commitments to improve climate governance, Europe may be at the forefront of this crucial movement.

When the Financial Stability Board announced the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) on December 4, 2015, it set out to develop recommendations that would eventually extend the scope of reporting from how companies impact the climate, to the financial impacts of climate change on companies. The TCFD suggests that businesses and investors alike should report on how they have incorporated a climate perspective into their management and governance practices. They should also assess and disclose the financial risks and opportunities posed by climate change as well as the metrics and targets used to manage them. It is critical to understand that these risks and opportunities can either be of physical nature or stem from the transition towards a low-carbon, or even carbon-neutral, economy. Which makes sense, considering that certain emissions-intensive industries already face a great deal of public scrutiny. Their business models are unlikely to yield the same cost and revenue structures fifty, twenty or maybe only five years from now in a politically, technologically, and literally changing climate. 

When the TCFD published their recommendations on June 29, 2017, support from the private sector quickly grew from around 100 CEOs in time for the G20 Summit in Hamburg, to more than 600 companies at the time of writing this article. It is worth pointing out that almost half of these companies are based in Europe. I’m stressing this fact because the TCFD recommendations are strictly voluntary – and despite the TCFD’s origins in the Financial Stability Board, itself a G20 body, political ambition to adopt their recommendations has only been moderate for the most part. Having this kind of private sector commitment enables European countries and the EU to engage with businesses and investors and to quickly develop policies and regulations. 

A Cambridge Institute for Sustainability Leadership study from May 2018 found that France was the only country out of the G20 member states to have encoded the TCFD recommendations into law. Albeit that the according piece of regulation has been passed even before the TCFD recommendations were launched. According to the study, other European member states were either engaging with the recommendations solely politically or in the process of consulting the private sector. The EU itself was ranked second, ready to pass regulations. And rightfully so, as the release of the EU’s Action Plan “Financing Sustainable Growth” in March 2018 undoubtedly catapulted the TCFD recommendations to the very top of sustainable finance policy debates in Europe. 

Looking at the Action Plan, now is a good time to reassess what exactly the EU is doing to promote and enforce the TCFD recommendations. Businesses and investors are already sharing best practices on climate-related financial disclosures under the European Financial Reporting Advisory Group’s roof. The EU Commission is in the middle of reviewing its Non-Financial Reporting Directive and revising the corresponding Non-Binding Guidelines. In addition, a multi-stakeholder technical expert group is assisting the Commission in developing guidelines for climate-related disclosures, a classification system for environmentally sustainable economic activities, benchmarks for low-carbon investment strategies, as well as a Green Bonds standards. The actions outlined above are only some examples of the legislative initiatives proposed as part of the Action Plan, making it safe to say that the EU is doing a lot to foster sustainable financial markets. And while the proposed timelines differ across all action items, you can expect the EU to pick up more speed after the elections in May. 

If you’re wondering where exactly the TCFD recommendations will appear within EU regulation, you don’t have to look further than the Non-Binding Guidelines on Non-Financial Reporting. Although technically speaking not a piece of regulation, these voluntary guidelines are a vital stepping stone for the EU to raise awareness and to increase the political pressure for businesses and investors to act upon the TCFD recommendations. The most recent version of the guidelines, taking from the public consultation that closed on March 20, 2019, lays the TCFD recommendations on top of the Non-Financial Reporting Directive. The guidelines evaluate the concept of materiality in the light of climate-related financial disclosures and map the TCFD recommendations onto the five core elements of the Non-Financial Reporting Directive: business model, policies and due diligence processes, outcomes, principal risks and their management, and key performance indicators. 

It is neither impossible nor unlikely for the EU to make the Non-Binding Guidelines binding going forward. In fact, the High-Level Expert Group on Sustainable Finance recommended that there should be a short and effective phase for the private sector to experiment with the TCFD recommendations, without interfering with the “EU’s ability to deliver, by 2020, a comprehensive and useful EU climate-disclosure regime, compliant with the TCFD recommendations”. That being said, European businesses and investors would be well-advised to thoroughly study the TCFD recommendations, to develop implementation plans and participate in best practice sharing, and to review their non-financial reporting against the updated Non-Binding Guidelines, due to be published in June. 

As the call for a voluntary experimentation phase and examples from early adopters show, following the TCFD recommendations certainly isn't easy. But it is still less of a challenge than living in a world of above 2 degrees or even 1.5 degrees of global warming. If we want to avoid the catastrophic consequences of global warming, we must step up. We need children to remind us of the world we are leaving them behind. We need political commitment and sound policies. And we need the public and private sector to work together to help us build a climate-resilient world through climate-resilient financial markets. 

This is a guest blog written by Johann Weicht, Senior Associate, Sustainability Services at KPMG AG. You can contact Johann on