TCFD backs carbon disclosure, but not temperature scores

The most widely used standard setter for climate disclosures has omitted temperature scores, which reveal how much global warming a company is on track to cause, from a list of metrics that it is recommending.

The Task Force on Climate-related Financial Disclosures, which was set up by the Financial Stability Board, urged companies to publish climate metrics in seven areas as it unveiled its annual review of compliance with its recommendations.

The TCFD, which is chaired by Michael Bloomberg, asked all organisations to disclose their greenhouse gas emissions for the first time, regardless of their size. It also called for businesses to reveal their indirect emissions, including for asset managers to disclose the carbon emitted by their investment portfolios. However, the TCFD stopped short of pushing finance firms to publish the implied temperature rise of the stocks and bonds in their portfolios.

“Implied temperature rise, although important, just is not ready today,” said Mara Childress of the TCFD’s secretariat. “We did a consultation on forward-looking metrics for the financial sector. And we received over 200 responses to that. We’ve heard, essentially, that these forward-looking metrics for the financial sector are important. But they’re still new. So there are still some data challenges. There is still variation in methodologies. And there are still things that financial institutions are working on internally.”

The TCFD recommended that firms calculate their emissions intensity – the carbon they emit for every $1 million of revenue or every $1 million invested. Asset managers need to know both the greenhouse gas emissions of the firms they invest in and the emissions intensity of those firms before they can calculate an implied temperature rise for their portfolios.

Asset managers can mark their progress in cutting the carbon emitted by their portfolio by monitoring emissions intensity. If emissions intensity declines, the asset manager’s contribution to global warming is falling even if its assets under management, and therefore its absolute greenhouse gas emissions, significantly increase. Emissions intensity, however it is calculated, is based on a company’s current behaviour, not how much it will pollute in future.

No measure of emissions intensity is forward looking, says Todd Bridges, global head of sustainable investing at Arabesque, which runs an implied temperature rise methodology. “You can do all you want to decarbonise, but the minute you want projections, you need an implied temperature rise tool,” he says.

Asset managers that calculate the temperature rating of individual securities can either sell them or pressure management to change their business practices.

“Understanding which companies within high-emitting sectors are emerging as climate leaders, rather than climate laggards, is a critical part of the transition,” says Hubert Keller, senior managing partner at Lombard Odier, which also supplies an implied temperature rise score. “Implementing forward-looking approaches such as implied temperature rise metrics is fundamental to our ability to successfully navigate the climate transition.”

The TCFD commissioned a report on forward-looking climate metrics, including implied temperature rise scores, which was also published on October 14. The report by the Portfolio Alignment Team – a group set up by Mark Carney – recommended three ways to improve tools that show whether a portfolio is on track to deliver the Paris Agreement’s target of “well below 2C” of global warming.

The report said that more companies need to disclose their emissions, there needs to be more research into climate scenarios, and the firms that operate methodologies need to disclose more information about how they calculate their ratings.

The TCFD review of compliance with its standards revealed that few institutional investors have calculated their contribution to global warming.

Just 3.3% of institutional investors disclosed an implied temperature rise score. Just 3% of asset owners and 1.5% of asset managers have aligned their group-wide portfolios with a goal to reduce carbon emissions to net zero.

These results came from the UN-affiliated member group, Principles for Responsible Investment, because the range of public reporting methods for the investment industry meant it was largely excluded from the main results of the TCFD report. Asset managers and owners pay to belong to PRI. 

This was the first year that the 2,720 asset managers and owners which are signatories to the PRI, including pension funds and insurance companies from 60 different countries, published a portion of their results publicly.

Three-quarters of these investors said there was a strategy for the risks and opportunities that climate change presented their firm and more than half spoke about how global warming would impact their organisation.

While a fifth of investors used some kind of climate-related metrics, 8% of asset managers and 12% of asset owners shared information on how much greenhouse gas emissions they were responsible for as a company (Scopes 1 and 2) and their investments and supply chain (Scope 3). Even fewer set targets for reducing these – 7% of asset managers and 10% of asset owners.

The number of PRI signatory investors represent a tenth of the industry in the US, according to numbers by data provider Preqin included in the TCFD report.

Update, October 15, 2021: This story has been updated with details of the TCFD-commissioned report into portfolio-alignment tools, adding context on the finance industry’s efforts to make forward-looking metrics such as implied temperature rise scores more effective.

Editing by Alex Krohn