Six ways to fix sustainable finance – 2: Mandate TCFD

Sustainable finance heads all agree that more data would help convince their colleagues and senior risk management teams to accelerate the transition away from financing fossil fuels, high carbon-emitting industries and those exacerbating deforestation or pollution.

To this end, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) should be helpful.

Nearly 800 public and private-sector organizations have announced their support for the TCFD and its work, including global financial firms responsible for assets in excess of $118 trillion.

The hope is that companies (financial and non-financial) that sign up to the recommendations will start to disclose their actual and potential climate-related impacts and their greenhouse gas emissions. That would give banks the data needed to make informed decisions around financing and help them in their disclosure of Scope 3 emissions (indirect emissions from clients).

But disclosure is slow in coming because some companies say they lack the tools to help them get a handle on their climate risk and emissions.

According to the most recent TCFD update in June, while there has been a 15% increase in the number of companies reporting against some of the TCFD framework, only a quarter of companies disclosed information that aligned with more than five out of the 11 recommended disclosures and only 4% disclosed information aligned with at least 10.

The key conclusion made in the June report was that “not enough companies are disclosing decision-useful climate-related financial information.”

That leaves banks unable to fully assess where clients fall on the green/brown spectrum.

It’s a chicken-and-egg situation. The TCFD recommendations would encourage greater data to be collected, but without better data, TCFD disclosure lacks the impact it is aiming for, say some within the industry.

“At present, I’m not sure TCFD reporting says much, simply because we don’t know what information would be meaningful,” says one sustainable finance head. “The work by the EU Commission on the taxonomy has been useful, but it would be helpful if there was some government and public-sector money dedicated to answering this question.”

A counterpart at a competitor echoes this need for some intervention around data collection.

“We are committed to reducing our Scope 3 emissions, but we need the data from the people we are lending to for us to be able to do that. If regulators are worried about the risk in the financial sector then my question to them is: what are you doing to help the real economy produce that data?”

Michael Zimonyi leads the Climate Disclosure Standards Board (CDSB) global policy and external affairs. The CDSB Framework’s requirements and principles are the most referenced documents in the TCFD’s own framework. He says that firstly people must remember that climate risk is not new. Its own framework has been in place since 2010 for example.

“The reason we need TCFD is that progress of disclosure has been insufficient, both in quality and quantity,” says Zimonyi.

He suggests some of the barriers put forward to TCFD aren’t really valid: “We don’t have the time to get stuck on having the perfect data for reporting. Let’s just get the information out there and make sure we understand its limitations. Some of the learning we need will come from putting pen to paper, but if we delay it will be too late.”

He points to the efforts made in Japan, where there has been concise guidance from the Japanese TCFD consortium that boils down recommendations to a page.

“Japan saw this as an opportunity and is leading the way in spite of the challenges,” Zimonyi adds.

Boston Common Asset Management’s most recent study released in November shows that banks have been supportive of the TCFD guidelines. Forty of the 58 banks in the study endorse the guidelines, and chief executives of 12 banks have formally done so – including Bank of America, Barclays, BNP Paribas, Citi, DNB, HSBC, ICBC, ING, Morgan Stanley, Standard Chartered and UBS.

However, enthusiasm seems to vary regionally. All the Australian and Canadian banks covered in the report are TCFD supporters, as are 19 out of the 20 European banks.

“Less than half of the US banks have endorsed the guidance, however, and more Asian and emerging markets banks still need to take this step,” says the report.

Some banks have taken an extra step and are part of UNEP FI’s TCFD pilot group that is already assessing and reporting in line with the recommendations. These are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Societe Generale, Standard Chartered, TD Bank Group and UBS.

But to reach Scope 3 emissions reports, banks need to encourage their clients to start reporting along TCFD’s guidelines – even with imperfect data.

According to Boston Common Asset Management’s study, only half of the banks looked at are engaging their clients on TCFD implementation (a similar figure to last year) and only seven banks have asked their clients to formally adopt TCFD guidelines.

The report cites HSBC as one example. It has developed a transition-risk questionnaire to help identify customers that need to rapidly adapt to climate risks and to spot potential business opportunities.

One banker says it is crucial for banks to engage with clients about TCFD” “We are talking to clients about it, both in listed and unlisted companies, but if we are the only bank doing this, it’s not going to help.”

He says there is a clear rationale for mandating TCFD so that progress is made faster.

Indeed nearly all of the sustainable finance heads interviewed by Euromoney that supported TCFD agreed that it should be mandated.

“We can sit back and wait until the green economy develops and say it isn’t our role – or we can ask ourselves what kind of bank we want to be,” says one. “And if the answer is a bank that is here for the future, then we should absolutely be reporting on the guidelines and future-proofing the economy. TCFD is part of that, and we all need to do it.”

Mandating TCFD may also force the hand of some banks that are withholding information, which ultimately may be helpful to the progress of the whole industry.

One former sustainable finance head, for example, says: “My bank decided not to disclose simply because we didn’t know how the market would respond.”

Another head of sustainable finance says TCFD just won’t work because: “Asking banks to tell you publicly that they have unmanageable risk is implausible.”

Zimonyi at the CDSB says: “There’s a perspective shift that is needed. I know some companies have liability concerns, but TCFD is asking: ‘What are you doing to manage the risks that may arise?’ If you are disclosing the process you have in place, you are saying that everyone knows the risks exist, but this is how I stand out – because I am managing this risk. The readers of your report can see why you are a more solid investment than if you don’t disclose at all.”

Rhian-Mari Thomas, chief executive of the Green Finance Institute (GFI), adds: “If you disclose, you should see the market reward you; and if you don’t, the market may create a detrimental narrative for you.”

But she notes that for this to work, we need standard scenarios and agreed templates to create a level playing field.

One step along the path may be ING’s Terra approach, which several banks are considering as a template. It uses the Paris Alignment Capital Transition Assessment and the Science Based Target Initiative’s Sectoral Decarbonization Approach (SBTi SDA) methodologies to show how its sector financing is aligning with climate commitments, allowing the bank to set targets and adjust its lending in line with its climate mitigation strategy.

It provides climate risk identification and management, in particular related to transition risk, pinpointing under or over-exposure to low-carbon or high-carbon technologies, which could be useful for banks as a first step towards understanding financial risk as part of TCFD. In September the bank published its first report.