Early Adoption of Climate Disclosure Frameworks: The Benefits and Challenges

Published: April 2021

 

As investor support for the Task Force on Climate-Related Financial Disclosure (TCFD) continues to grow, firms should carefully consider the benefits and potential setbacks of this new disclosure approach to help lay the groundwork for successful ESG strategies and goals.

Every company is at their own stage of the environmental, social and governance (ESG) journey, with some further along in terms of policies and disclosures than others. To help push efforts forward, The Financial Stability Board created the Task Force on Climate-Related Financial Disclosure (TCFD) to improve and encourage companies to report their climate-related financial information in the hopes of providing clear and comprehensive data to support our rapidly changing world.

While many businesses in the U.K. market are already disclosing their climate-related risks and opportunities using the TCFD framework, it is only just becoming common practice in the U.S. market. Thus far in this region, climate-related risk disclosures are not prevalent outside of certain industries (i.e., energy, mining and real estate) and outside of larger cap companies. However, with an increased focus by investors and the new administration on how companies are tackling climate risks and opportunities, many firms with these strategies already in place are starting to think through what they should be disclosing. They are also contemplating whether to immediately utilize TCFD reporting, as it is expected to become the most widely adopted and required disclosure framework. 

In this article, we discuss the benefits of early disclosure reporting adoption, as well as potential challenges firms could face when implementing this new framework.

Benefits and Challenges of Early TCFD Disclosure

As noted, sustainability disclosure via TCFD has become standard within certain industries in the past two years, while remaining rare in other sectors and markets. However, recent statements by major stakeholders, such as BlackRock’s 2021 Letter to CEOs recommending broader adoption of TCFD, may indicate the likelihood of increasing investor reliance on this disclosure approach in the future.

As such, companies in the U.S. and other regions, where climate-related disclosures are less prevalent, are actively considering how to undertake climate disclosure. There is also the question of whether to utilize TCFD-based disclosure over another reporting framework. Being an early adopter of TCFD disclosure can offer both benefits as well as pose some challenges along the way.

Some benefits of early adoption include the ability for firms to:
  • Outline climate strategy for investors, regulators and other stakeholders who might otherwise make inaccurate assumptions about the firm’s climate performance
  • Access future capital funding through engagement with potential opportunities in the transition to a low-carbon economy
  • Capture increased market share through a “first-mover" advantage as consumer preferences shift
  • Increase business and supply chain resilience by identifying and addressing climate-related risks
  • Promote engagement by board of directors and senior management on climate-related issues
  • Be seen as an early adopter of the framework to determine and adapt business strategy before regulations, lawsuits and proxy proposals demand changes
  • Engage experts and identify problems before they reach a tipping point
  • Tie disclosures to material risks, which can strengthen the perceived future performance of a company in the eyes of investors, lenders and insurance underwriters
  • Stay ahead of any future mandatory regulations, class action lawsuits or shareholder actions related to climate disclosures and action plans

A few challenges to be aware of include:
  • The requirement to maintain, update and verify TCFD information following initial disclosures
  • Questions about disclosure transparency might expose the company to litigation risks
  • Failure to meet stated goals may expose the firm to reputational damage or other consequences
  • Difficulty in retracting or amending goals once they are made public

While the benefits seem to largely outweigh the challenges, there are other things to consider through the development of disclosures. These could potentially include:
  • The technology needed for the transition to lower-carbon operations may not yet be available, making concrete transition plans difficult
  • The company may need to create new roles and reporting structures to be responsible for the disclosure and data collection process
  • The company may need to adapt their preexisting reporting approach to meet TCFD recommendations, rather than building it from the ground up

Next Steps

Assessing sustainability risks and meeting investors’ disclosure expectations can be a significant undertaking for a firm. For companies already engaging with climate initiatives in the context of broader reporting frameworks, like the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB), the additional disclosure required to meet TCFD requirements may be minimal. Since these reporting frameworks already aim to align with TCFD recommendations, they can ultimately help streamline the reporting cycle. In any case, understanding the pros and cons associated with early adoption of climate risk disclosures will be extremely helpful in paving the way for success as companies continue to plan their ESG disclosure strategies and goals.

Aon has the expertise and broad range of solutions to fit your company’s disclosure needs. We welcome the opportunity to further discuss and outline best practices and next steps. To learn more or to speak with a member of our team, please visit rewards.aon.com/esg or write to rewards-solutions@aon.com

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