First steps towards mandatory TCFD reporting

The UN Principles for Responsible Investment (PRI) has announced that it will be making further sections of its reporting framework mandatory for its signatories in 2020. Specifically, this relates to the sections recently created to align to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) on strategy and governance. This is a major step in moving the guidelines published by the TCFD in 2017 from recommendation to requirement. It will obviously have implications for PRI signatories but could also signal wider reporting implications are set to come.

What is the PRI?

The PRI was initially launched in 2006 by the UNEP Finance Initiative and the UN Global Compact in order to develop principles for responsible global investment. It is essentially an international network of investors and businesses reflecting the view that environmental, social and governance (ESG) issues can affect the performance of investment portfolios and are important in order to safeguard the global financial system. The PRI provides a voluntary reporting framework that all signatories can use to incorporate ESG issues into their decision-making processes. There are now over 1,500 signatories with approximately US$ 62 trillion assets under management which this announcement will impact.

EcoAct is a PRI signatory as part of our commitment to responsible investment, in line with the work we do to assist companies from all industries with their corporate climate action.

What is the TCFD?

In 2015, the Financial Stability Board (FSB), a body that makes recommendations on the global financial system, established the Task Force on Climate-related Financial Disclosures (TCFD) at the request of G20 leaders. This was in recognition of the significant threat that climate change poses to the global economy. The Task Force released its recommendations in 2017 with the intent to encourage consistent, reliable and clear climate-related financial disclosures that will enable investors to better take account of climate-related risks. The recommendations focused on four specific areas: Governance, Strategy, Risk Management and Metrics & Targets.

Since their release, they have been endorsed by over 500 organisations and sustainability reporting frameworks have been quick to recognise the importance of the recommendations and incorporate them into their own reporting frameworks. But up until this point, complying with them was only voluntary.

What is PRI making mandatory?

In 2018, recognising the importance of climate risk and taking effective climate action, like other reporting frameworks, the PRI introduced TCFD-aligned indicators into its own. It is those relating to Governance and Strategy specifically that are set to become mandatory next year. It does not affect reporting for this year. 2019 will remain as 2018 but the changes will come into effect from 2020. PRI have stipulated that affected indicators will be mandatory to report but voluntary to disclose. Although the rest of the TCFD-indicators will remain voluntary, they have alluded to the fact that these are likely to move towards mandatory “as good practice develops”.

What do PRI signatories need to do now?

In 2018 the PRI has stated that over 480 investors already opted to complete these particular indicators, but that means there will be many others that will need to prepare. We would recommend undertaking a TCFD gap analysis in order to understand what is required of your organisation against the information that you have and where your business is on strategy and governance in relation to climate change. It might mean new processes and initiatives need to be set up. These will play an important role not just to satisfy the demands of reporting, but also in assisting future-proofing your organisation and in turn contribute to the future stability of the global financial system in the face of a changing climate.

Wider implications

The PRI have already hinted that mandatory requirements may be further extended in relation to the remainder of the TCFD areas of focus (i.e those covering Risk Management, and Metric & Targets). Beyond the PRI, investors are looking for more security from the businesses in which they invest, so the likelihood is that this will have wider implications for other businesses beyond just the financial sector.

The TCFD recommendations are moving further towards being a mandatory requirement demonstrated by this move by PRI as well as concerted alignment efforts by other frameworks. At the very least, it seems the TCFD recommendations have quickly embedded themselves in sustainability reporting and are most certainly here to stay.