Towards more robust and science-based TCFD reporting with real emissions reduction impacts

WWF reaction to the new TCFD guidance on Climate-related Metrics, Targets, and Transition Plans, and the Portfolio Alignment Technical Supplement

The Task Force on Climate-related Financial Disclosures (TCFD) has proposed new guidance on Climate-related Metrics, Targets, and Transition Plans and a Portfolio Alignment Technical Supplement and would like feedback by 18th July.

Since their introduction in 2017, the TCFD recommendations have fundamentally shifted the way organisations perceive and manage climate-related financial risks and opportunities. Both the coverage and quality of the information disclosed have improved markedly.

Given the widespread adoption and acceptance of TCFD recommendations in recent years, and their importance in supporting corporations in their fight against climate change, it is important that the newly proposed changes deliver on intended outcomes and are in keeping with the latest science.

We welcome the new general guidance that applies to all companies, including financial institutions (FIs). We are also pleased to see that the debate for FIs has now moved beyond disclosing risks and opportunities alone, towards the concept of portfolio alignment. This is the crucial next step as FIs seek to align activities with climate outcomes such as net zero emissions by 2050, consistent with the 1.5°C warming limit of the Paris Agreement. To make the recommendations even stronger, this should ideally be extended to all companies to disclose the alignment of their current and future activities to climate outcomes.

The technical supplement on portfolio alignment outlining recommendations on how FIs may go about measuring their alignment does help to provide some clarity but there are a few points for improvement. Specifically, we are concerned that the recommendation to build benchmarks based on a single climate scenario and on emissions intensity will weaken what could be robust guidance for coherent and science-based disclosures that facilitate real world change. While the underlying metrics and methodologies for portfolio alignment are maturing, for them to gain the trust required for widespread uptake, they need to be anchored in science and transparent and consistent in their assumptions.

Read on to find out what we applaud in the TCFD guidance and what we would like to see further strengthened. If you share our views, please share this article or respond to the consultation.

What’s good and to be commended

We support the following recommendations.

• The requirement to disclose indirect, ‘scope 3’, emissions. For many companies and especially FIs, the majority of their climate impact is in fact in their scope 3 emissions, which is why it’s so crucial to include these in their disclosure. Such disclosure requirements will be instrumental to increase the availability and quality of emissions data across companies and sectors, and to build relevant tools to assess aggregate emissions impacts.
• The recommendation to disclose the metrics for the historical, current and forward-looking periods. In particular the forward-looking information provided by companies will be instrumental to assess to what extent they are prepared for future impacts of climate change.
• The requirement for banks, insurance companies, asset owners, and asset managers to measure and disclose the alignment of their portfolios to below 2°C or lower temperature pathway. We welcome this Paris-aligned approach but we strongly recommend alignment to 1.5°C in line with the latest IPCC findings.
• The recommendation to disclose transition plans. We agree that transition plans are a critical next step that firms need to take to meet the net zero goal. We particularly appreciate the recommendations that such plans must be approved and overseen by the Board and that they should be actionable, detailed and verifiable. We think the guidance is a good start but there are further improvements that could be considered, such as a requirement to report on short-term actions in relation to emission reductions and plans to reduce high carbon capital expenditure.

What needs strengthening within the proposals

We are deeply concerned that some of the proposed recommendations in the Portfolio Alignment Technical Supplement will not lead to climate alignment disclosures by financial institutions that are based on climate science. Here we focus on two main areas:.

1. The TCFD recommendation for the use of a single scenario benchmark rather than benchmarks based on multiple climate scenarios [Recommendation 5]

We acknowledge that a single scenario is easier and quicker but single scenario analyses are fundamentally less robust and more sensitive to bias. If each company selects its own scenario, it will also lower comparability and lead to even greater divergence in alignment ratings. This could ultimately undermine credibility of these metrics.

Alignment assessment must be based on multiple scenarios (i.e. warming function). A multiple scenario approach draws from a much broader set of data from the modelled scenario landscape, ultimately improving the accuracy in determining the overall temperature rating of a company. We also believe that it is crucially important that all method developers use a common set of principles and ideally choose a consistent set of scenarios, based on a strict set of science-based criteria, to improve consistency and comparability between assessments.

2. The TCFD recommendation for the use of emission intensity rather than absolute emission reduction [Recommendations 6 and 9]

Interpretations of net zero to date have identified significant challenges and invited controversy. This will likely be further complicated by the use of emissions intensity as the unit for benchmark construction and analysis as set out in Recommendation 9. Our main concern is that a reduction of emission intensity does not necessarily result in absolute or real-world emission reductions in line with the science and agreed carbon budgets.

Reliance on an economic intensity approach can lead to an underestimation of warming potential and can create the wrong incentives. WWF strongly recommends the use of absolute emission reduction measures that makes sure that emissions are lowered overall and in line with the goals of the Paris Agreement.

Applying absolute emission reduction measures does not mean companies cannot grow, but they should set new targets and pathways that align their business model with a science-led transition to net zero.

In summary

It is crucial that all elements of TCFD reporting are robust, science-based and consistently applied by all market actors. Otherwise it will fail to deliver on the goal to drive real world action. Considering the wide acceptance that the TCFD recommendations have achieved, and the increasing number of markets where this disclosure is or will be mandatory, now is the time to ensure credibility in climate reporting.

If you support our call for strengthening the recommendations, please do share this article and respond to the consultation here. If you have already responded to the consultation you can also supplement your feedback ahead of the consultation deadline on 18th July.

If you have any questions related to this topic or would like to discuss further, please contact Joanne Lee, Specialist, Finance Practice, WWF International.