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November 23, 2021

TCFD reporting set to accelerate as net-zero commitments proliferate globally

Erika Bruce and Natalie Ambrosio Preudhomme
Moody's ESG Solutions
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As net zero commitments increase, so do the calls for transparency around companies’ climate risks and transition plans. The Task Force for Climate-related Financial Disclosures’ (TCFD) recommendations have emerged as the foundational framework upon which many companies across the globe are providing climate-related information. And in some jurisdictions, financial regulators have set out plans to mandate TCFD disclosures. With the release of updated TCFD guidance on metrics and targets in October, we expect strong growth in comparable, forward-looking climate risk disclosures based on TCFD recommendations – particularly across carbon-intensive sectors.

Our analysis of 4,875 companies shows that there is little correlation today between sectors’ average carbon footprint and the share of companies that are TCFD signatories. We find that banks exhibit the highest adoption of TCFD recommendations despite a relatively low reported average carbon footprint. This reflects growing acknowledgement of the need for climate risk assessment in the financial sector to better identify “financed emissions," or the GHG emissions associated with a financial institutions’ loans and investments.

However, for banks to better understand and disclose their climate risks, there is a need for enhanced corporate climate disclosure across the board. High-emitting sectors currently show low rates of TCFD-aligned reporting based on our analysis. For example in the energy sector only 12% of companies in our data universe today are TCFD signatories.   Going forward, we expect an increasing number of companies in carbon-intensive sectors, such as electric & gas utilities, energy and building materials, to commit to TCFD-aligned reporting as investors, lenders and regulators call for greater global consistency in disclosures.

Figure 1, Sectors’ average carbon footprint do not correlate with the share of companies that are TCFD signatories

Source: Moody's ESG Solutions

Our assessment of climate disclosure includes whether companies disclose an internal carbon pricing and an integrated long-term strategy of a low-carbon business, which are particularly relevant for high-emitting sectors. In the electric & gas utilities sector, our data shows that 20% of companies utilize an internal carbon price and 30% of companies have developed a low-carbon transition plan to support their long-term business strategy. While in the diversified banks sector, only 21% and 10% have developed an internal carbon price and low-carbon transition plan, respectively. This indicates that some sectors may prioritize disclosure of relevant low carbon transition indicators to their business operations to signal their commitment to decarbonizing.

Understanding progress on TCFD commitment provides important insight into the progress made to date and the room for improvement in climate risk disclosure. This can, in turn, inform financial institutions’ own disclosures, and catalyze investor engagement with companies around their climate risks and opportunities. With net zero pledges likely to increase further, the focus on TCFD-aligned reporting will only increase in the years ahead.

Moody’s ESG Solutions provides insights and analyses on ESG themes and multi-stakeholder performance, climate-related risks and opportunities and global sustainable finance trends.

For more information, visit esg.moodys.io/climate-solutions