‘Garbage in, garbage out’ - why data is key to climate disclosures
Key takeaways
The Task Force on Climate-Related Financial Disclosures (TCFD) started in 2015 as a voluntary initiative with the backing of global financial leaders. The initiative was designed to be broad and inclusive, and aimed to bring a strategic focus to climate management in the financial world.
Since then, the initiative has taken root with local regulators, proxy advisors and investors around the world. Indeed, the TCFD has become a baseline requirement for most listed corporations. Looking at the different regulations in the table below indicates the global nature of this trend.
Regulators in the United Kingdom, United States, Hong Kong and Singapore, all require companies to disclose climate-related metrics. Most countries focus on emissions data (defined as scope 1, 2 and 3), while in Hong Kong and the UK the regulators have gone further and asked for scenarios like implied temperature-rise metrics. The common thread is that regulations are getting more specific and detailed, all under the umbrella of the TCFD.
| Category | Details | Standard | United Kingdom FCA | Hong Kong SFC | Singapore MAS | United States SEC |
|---|---|---|---|---|---|---|
| Scope 1 and 2 Greenhouse gas emissions | Scope 1 – direct GHG emissions Scope 2- consumption of purchased electricity heat/ steam |
TCFD |
Y (incl. historical) |
Y (in terms of intensity) |
|
Y |
| Scope 3 Greenhouse gas emissions | Scope 3 – indirect emissions |
TCFD |
Suggested |
Suggested |
|
Y |
| Total Carbon emissions | Absolute greenhouse gas emissions associated with portfolio; expressed in tons CO2e |
TCFD |
Y (incl. historical) |
|
|
Y |
| Total carbon footprint | Total carbon emissions for portfolio normalized by market value of portfolio; expressed in tons CO2e/ $M invested |
TCFD PCAF Standard |
Y (incl. historical) |
Y enterprise value as base |
Suggested |
Y |
| Weighted average carbon intensity | Portfolio exposure to carbon-intensive companies; tons CO2e/ $M rev. |
TCFD |
Y (incl. historical) |
|
Suggested |
Y (per unit econ value or production) |
| Scenario Analysis | Scenario Analysis of investment strategies to climate risks |
NGFS |
Y (incl. historical) |
Suggested |
Suggested |
If scenario analysis done, incl. scenarios used, parameters, principal financial impact |
| Climate value at risk | Assessing the potential future financial impact of a product’s or portfolio’s climate exposure |
TCFD |
Suggested |
Suggested |
Suggested |
If scenario analysis done, incl. scenarios used, parameters, principal financial impact |
| Implied temp rise | Forward-looking view of a product’s or portfolio’s carbon exposure |
TCFD |
Suggested |
Suggested |
Suggested |
If scenario analysis done, incl. scenarios used, parameters, principal financial impact |
The US Securities and Exchange Commission (SEC) recently announced its climate disclosures proposal, which was deemed as incredibly significant for the industry. Mandating scope 1 and 2 and material scope 3 disclosures, in an audited fashion for scope 1 and 2, is a big step for many US companies.
By our estimates1 approximately 90% of the S&P500 report some form of emissions to the CDP, formerly known as the Carbon Disclosure Project, or in their sustainability or annual reports. Still, the remaining 10% requires modelled emissions. Assurance would be a much greater step. It’s been reported that only 6% of S&P500 constituents externally audit their environmental, social and governance (ESG) information2.
The focus on increased disclosure by companies is helpful for investors who are in turn required to disclose fund-level metrics and aggregate these metrics into portfolio-level disclosures. “Garbage in, garbage out,” as the saying goes. Although investors are trying their best to provide meaningful disclosures, they’re limited by the quality and consistency of the data input.
The International Sustainability Standards Board, a new standard-setting body, was formed in recognition of this challenge and has since issued draft guidance for corporate disclosure. As ever, there are geopolitical tensions on these issues. It remains to be seen what the final result and ultimately what the uptake by local regulators will be, after the consultation period.
In the meantime, proxy advisors have started incorporating baseline ESG practices into the standard policies. Institutional Shareholder Services (ISS) and Glass Lewis, the two largest providers of proxy guidance by market share, both have disclosure to the TCFD as a standard requirement. Both have stopped short of dictating the nature of the disclosure but both are bringing shareholder attention to this topic.
All these developments continue to raise the bar for companies around the world.
A version of this article first appeared on Incisive Media’s Sustainable Investment website.
