Apac has second-highest level of climate-related financial disclosures at 36%: TCFD report

THE Asia-Pacific region has the second-highest level of disclosures aligned with the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD).

Companies in this region had an average level of disclosure of 36 per cent across all 11 recommendations in the TCFD framework, based on company reports in the 2021 fiscal year. These 11 recommendations cover climate-related disclosures relating to governance, strategy, risk management, as well as metrics and targets.

This was an improvement of 11 percentage points from 2019, according to the TCFD 2022 status report released on Thursday (Oct 13).

The task force said, in response to queries from The Business Times, that companies in this region have “significantly increased” their rate of climate-related disclosures.

It also noted that Asia-Pacific has the highest percentage of TCFD supporters at 47 per cent, largely driven by supporters in Japan. Of the 1,877 supporters in the Asia-Pacific region, 486 are from the financial sector (26 per cent), 1,309 are non-financial companies (70 per cent), and 82 are other types of organisations such as government entities, trade associations and non-profit organisations (4 per cent).

Several developments from official bodies, such as regulators requiring disclosures to be aligned with the TCFD framework, as well as peer adoption and investor demand, are some factors that have led to the increased disclosures in Asia, said the task force. 

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Efforts by government bodies, listed companies and financial institutions have led to a ripple effect downstream onto other businesses through the supply chain, said Cherine Fok, partner at KPMG ESG (environmental, social and governance).

She added that businesses can see that climate risk is no longer a scientific concept, but a real phenomenon that has implications to operational models and financial positions. This is especially so for asset-heavy companies, or those holding significant investments in these sectors, as their exposure to physical climate risk is high.

Despite these improvements, disclosure rates in this region still lag behind that of Europe, which remains the leading region for TCFD disclosures at 60 per cent. European companies reviewed in this year’s status report were also found to have the highest level of disclosures for each of the 11 recommendations.

As for Asia-Pacific companies, over half disclosed climate-related metrics, but only 36 per cent did so for their targets.

Beyond disclosure rates, Praveen Tekchandani, partner of climate change and sustainability services at Ernst & Young, said that the gap between the coverage and quality of TCFD disclosures is higher in Asia than compared with Europe. Hence, it is important to focus on internal capabilities and effective integration of how climate change is addressed across the organisation.

Fok said that much more can still be done in terms of Asia-Pacific’s regulatory enforcement, the implementation of climate mitigation and adaptation initiatives, as well as environmental and social impact assessments. 

According to her, it would be practical to map out yardsticks that are tailored to the region’s context, rather than to directly contrast with yardsticks of other regions, although it can be used as reference points. “We must keep in mind the unique economic structure and business practices of Asia and ensure that the measures are taken with these considerations,” she noted.

Overall, the task force, which reviewed publicly available reports of over 1,400 companies from eight industries and five regions, found that the proportion of companies across the globe making these disclosures have increased by 14 percentage points between the fiscal years of 2019 and 2021. Compared to fiscal year 2017, which was when the framework’s recommendations were finalised, the percentage of companies disclosing these information increased by 26 percentage points in 2021.

In addition to an increase in disclosures, the task force found that market players felt there was an improvement in the quality of disclosures over the last five years. This was based on an implementation survey conducted by the task force, which drew 399 responses, and is separate from the review.

While the average number of recommended disclosures addressed per company has steadily increased each year – from 1.4 in 2017 to 4.2 in 2021 – there are only about 4 per cent of companies under review disclosing all 11 recommendations. About 43 per cent disclosed at least five recommendations.

Out of the 11 recommendations, climate-related risks and opportunities has the highest level of disclosure, while reporting on the resilience of companies’ strategies under different climate scenarios is the lowest. Over 80 per cent of respondents in the implementation survey rated this particular recommendation as somewhat difficult or very difficult to implement.

Companies in the energy, materials and buildings, banks, as well as insurance sectors have average disclosure levels of more than 40 per cent. Those in the transport, technology and media sectors had the lowest disclosure rates. 

Asset managers and asset owners

As for asset managers and asset owners, the report stated that 93 per cent of them have already implemented TCFD recommendations or had planned to do so in the future, based on another survey sent out to around 3,000 financial institutions in February this year and which drew 229 responses.

On average, 42 per cent of asset managers and 65 per cent of asset owners currently report information aligned with the 11 recommended disclosures.

Assessing climate-related risks to be material, as well as instructions or requests from senior management or beneficiaries, were the most often cited reasons for reporting.

Out of asset managers who are currently reporting, metrics used to assess risks and opportunities had the highest level of disclosure out of all 11 TCFD recommendations. As for asset owners, a board’s oversight of climate-related risks and opportunities was the most reported.

Just like companies, the recommendation which was the least reported among both asset managers and asset owners was the resilience of their strategy under different climate scenarios.

The survey also found that nearly two-thirds of asset managers and asset owners identified insufficient information from investee companies as a significant challenge in reporting climate-related information.

The second-biggest challenge, identified by nearly 60 per cent of the survey respondents, was the lack of methodologies for calculating climate-related metrics.

The TCFD report also found that these disclosures are having an impact on how financial assets are priced.

Based on the implementation survey, 90 per cent of respondents who identified themselves as being responsible for making investment or lending decisions based on companies’ climate disclosures said they use these disclosures to make financial decisions. Among these respondents, 66 per cent said that it affects how they price financial assets.

Looking ahead

The general consensus is that disclosure rates would continue to increase going forward. A lingering concern is that not enough companies are disclosing decision-useful climate-related financial information, which may hinder investors, lenders, and insurance underwriters’ efforts to appropriately assess and price climate-related risks, said the task force in its report.

Echoing similar sentiments, Fok said that professional scepticism around TCFD disclosures have gone up along with its adoption rates. “We foresee a need to further challenge businesses to go deeper with their TCFD disclosures. For example, by asking questions around assumptions, asking if business implications have been comprehensively considered, and what else needs to be done differently and how to address these fast-developing issues,” she added.

Tekchandani said that Ernst & Young expects to see more quantitative physical and transition risk disclosures that are relevant for investors and financial institutions. “This would also lead to increased commitments such as net-zero ambitions to reduce exposure to emerging risks,” he noted.