TCFD Reporting is a Huge Opportunity for Asset Managers

As investors consider the impact of climate change on their portfolios, it's important asset managers adapt to a changing environment

Joshua McAlpine 6 February, 2024 | 10:32AM
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In 2015, the Financial Stability Board (FSB) established the Taskforce on Climate-Related Financial Disclosures (TCFD), which was designed to bring together industry experts from organisations including banks, insurance agencies, and asset managers.

Chaired by Bloomberg founder Michael Bloomberg, the TCFD's goal is to promote transparent climate reporting so investors and lenders have the data they need to make more informed decisions about how capital is allocated.

As of 2023, the TCFD's recommendations have been publicly supported by almost 5,000 organisations across more than 100 jurisdictions, leading to an increase in TCFD reporting within firms. These supporters represent a combined market capitalisation of $29.5 trillion (£23.5 trillion), with over 1,800 financial institutions responsible for assets of $222.2 trillion.

The International Financial Reporting Standards (IFRS) has now taken over the responsibility of monitoring how companies are approaching climate-related disclosures, which was agreed prior to the TCFD disbanding after the publication of their final report in October 2023.  

What Are the TCFD Reporting Requirements?

The TCFD recommendations outline four thematic areas considered key components of how organisations operate. These are: governance, strategy, risk management, and metrics and targets. Within each of the four categories, the TCFD has provided supporting recommended disclosures.

Governance refers to how organisations oversee climate-related risks and opportunities. As part of the TCFD reporting process, firms should:

1. Describe their boards oversight of activities around climate risks and opportunities;
2. Describe how management assess and manage climate-related activities. 

Strategy refers to the impact both real and potential climate-related risks and opportunities may have on an organisation's overall business, strategy, and financial planning, and how these risks and opportunities are articulated and accounted for.

To fulfil their TCFD reporting requirements, firms should be prepared to:

1. Disclose the short-, medium-, and long-term risks and opportunities they have identified;
2. Describe the impact of climate risks and opportunities;
3. Outline how their organisation will respond to climate-related events and scenarios.

Risk Management outlines how organisations identify, assess, and manage climate-related risks. As part of the climate reporting disclosure process, firms should:

1. Describe their process for identifying and assessing climate risks;
2. Report on how they manage climate-related risks;
3. Outline how climate-related risks are factored into their overall risk management.

Metrics and Targets refer to how climate-related risks and opportunities are measured and tracked, such as the international goal of below 2°C, or physical risks like damages due to losses, to name just a few.

Firms need to disclose:

1. Which metrics are used in their climate assessments and how they align with their risk management process and organisational strategy;
2. Scope 1, Scope 2, and Scope 3 – greenhouse gas emissions (if appropriate), along with the associated risks;
3. The climate-related targets set by the company and how they measure performance.

Why TCFD Reporting is Beneficial for Asset Managers

The financial damage caused by climate-related disasters is increasing.

In the US alone, $92 billion of damage was caused by events such as wildfires, flooding, and severe storms in 2023. For EU Member States, 2022 costs for climate-related incidents exceeded €52.3 billion. As the climate crisis worsens, and extreme weather is set to become more frequent, these costs are expected to increase further.

Asset managers are more likely to be impacted by climate change and the transition to a low-carbon economy, but they are also uniquely placed to mitigate climate risks.

By adhering to the TCFD recommendations and focusing on TCFD-aligned reporting, asset managers will strengthen their ability to communicate climate-related risks and opportunities to potential investors. Additionally, asset managers will benefit from ensuring their internal risk management processes are aligned across their organisation.

By equipping investors with high-quality and transparent data (which will continue to improve and expand over time as more data becomes available), investors will be able to make more informed decisions about how their capital is allocated, combat greenwashing, and be empowered to align their portfolios with their beliefs and play their part in addressing the climate crisis. By drawing on TCFD reports, investors will be much better placed to understand the potential climate risks faced by companies they may wish to invest in.

Making TCFD Reporting Impactful

Alongside the four thematic areas that make up the framework for TCFD-aligned reporting, there are seven principles asset managers need to consider to ensure meaningful disclosure.

To be effective, disclosures must be:

• Relevant;
• Specific and complete;
• Clear, balanced, and understandable;
• Consistent;
• Comparable across companies within a sector, industry, or portfolio;
• Reliable, verifiable, and objective;
• Provided in a timely manner.

Is TCFD Reporting Mandatory?

This depends very much on where asset managers are based. However, many of the wealthiest nations publicly support the TCFD recommendations. Many of the world's largest asset owners require TCFD reporting.

Around the world, various governments have made TCFD reporting mandatory in certain organisations and jurisdictions. In the UK, central government departments must follow guidance regarding TCFD compliance statements, while the Financial Conduct Authority requires asset managers to make TCFD disclosures at both a portfolio and entity level.

Outside the UK, countries that have TCFD mandates include Canada, Japan, Brazil, Switzerland, and the European Union. In the United States, the Securities and Exchange Commission has proposed that all registrants make climate-related disclosures in line with the TCFD recommendations, though it is not yet mandatory.

How Morningstar is Helping Asset Managers Adapt

Given the complex nature of the climate crisis, alongside the various requirements and recommendations for effective reporting, it's no wonder many financial participants – such as asset managers – are feeling overwhelmed. 

In response to this rapidly evolving landscape, Morningstar has compiled an extensive suite of holistic solutions to help professionals navigate this field. To learn more, download The Asset Manager’s Guide to Climate Reporting, a free resource designed to help you explore Morningstar's solutions.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Joshua McAlpine  Joshua McAlpine is content writer at Morningstar

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