TCFD & SASB poised for rapid growth in 2021 & beyond

Mounting investor pressure drives increased company adoption.


Summary

  • New milestones reached in numbers of companies using and supporting the frameworks, driven largely by investor pressure.

  • UK to become the first major country to mandate TCFD reporting by companies, which could inspire regulators in other geographies to follow suit.

  • SASB and TCFD will remain priority reporting frameworks for investors among growing calls by standards setters, companies, investors, and others for the creation of a single set of globally accepted sustainability reporting standards.

  • Companies that incorporate the standards in their reporting will be better positioned to meet investors’, and potentially regulators’, demands for fuller ESG disclosures.


Despite the pandemic, which has brought new challenges and priorities for companies, 2020 still saw a steady increase in the number of companies integrating the recommendations of both Sustainability Accounting Standards Board (SASB) and The Taskforce on Climate-related Financial Disclosures (TCFD) into their sustainability reporting. Support from some of the world’s largest investors means that these frameworks will continue their steady growth in 2021 and beyond among growing investor demand for greater reporting uniformity and comparability on material and financially relevant ESG factors. Companies that adopt the standards in their reporting will be better positioned to satisfy investors’, and potentially regulators’, demands for clear and comprehensive disclosures on material ESG factors.


More companies using or supporting the frameworks


Many investors favour the TCFD and SASB frameworks given their focus on financially-material ESG risk factors. The TCFD recommendations are focused specifically on climate change governance, risks, and opportunities, while SASB’s standards are focused on financially material, sector relevant ESG factors. Investor preference, and pressure, has helped drive an uptick in the number of companies that are using or supporting these frameworks.


The TCFD’s 2020 Status Report showed an additional 700 organisations supporting its recommendations since 2019, an 85% increase. This brings the total number of supporters to over 1,500. Nearly 60% of the 100 largest publicly listed companies now support the TCFD, report in line with its recommendations, or both.[1] The TCFD also found an increase in the number of companies that have adopted the TCFD recommendations, an increase of 6 percentage points on average between 2017 and 2019.


While the support and reporting to TCFD has increased, the method of implementation is evolving and not many companies have yet fully adopted all recommendations. This in part reflects the challenges in reporting against all recommended disclosures, namely those relating to strategy resilience under different climate scenarios (Figure 1). Companies may also lack internal resources and expertise to begin reporting against the recommendations in a comprehensive way. However, investors look for progress, not perfection from the outset and companies should not let this be a deterrent to beginning the reporting process.


Figure 1: Percentage of companies disclosing information aligned with TCFD recommended disclosures

Source: Financial Stability Board, 2020 TCFD Status Report


Like the number of companies that are reporting to SASB has also grown steadily in the last 18 months. SASB reports 500 global companies that are using its standards to some degree.[2] While other frameworks address the concept of materiality to some extent, SASB’s standards are focused on a limited number of financially relevant factors for each sector. The manageable number of voluntary reporting topics and metrics, as well as the ability of companies to choose metrics that are the most relevant for them, has also helped drive uptake.


Increased backing from investor heavyweights driving adoption


Some of the world’s largest investors including BlackRock and State Street Global Advisors (SSGA) have been very vocal in their support for TCFD and SASB. In January 2020 BlackRock began asking companies to demonstrate they are adequately managing climate and other sustainability-related risks by reporting in line with the TCFD framework and SASB standards.[3] In that same timeframe, SSGA announced it would begin to vote against board members at S&P 500 companies that are laggards on their R-Factor scores, SSGA’s internal ESG scoring system that leverages SASB.[4]


Elsewhere, investor support for SASB is also strong. SASB’s Investor Advisory Group (IAG), a group of 55 investors managing $41 trillion in assets has urged companies to use SASB’s standards, stating that “other reporting standards and frameworks may complement SASB standards, but are not replacements for them.”[5] The group includes the “Big 3” passive fund managers (BlackRock, SSGA, and Vanguard) as well as other global investors including Allianz, Fidelity, and UBS.


UK first major country to require TCFD reporting


In addition to growing investor pressure for more comprehensive and consistent reporting on climate risks, some regulators are beginning to act as well. The UK government has announced that it plans to make TCFD reporting mandatory for all listed UK companies by 2025, starting with the largest listed companies beginning in 2022 (Figure 2).[6] Paving the way for mandatory disclosures, premium listed companies, covering two-thirds of UK equity market capitalisation, will be required to make TCFD-aligned disclosures on a “comply or explain” basis as of January 1, 2021.[7] Given these close deadlines, companies that are not currently providing TCFD-aligned disclosures will need to do so soon.


Figure 2: UK roadmap towards mandatory TCFD-aligned disclosures

Source: HM Treasury


In the EU, the Green Finance Taxonomy and Non-Financial Reporting Directive (NFRD) already aim to address the need for more comprehensive and consistent ESG reporting. Although it is not a stated requirement in current EU rules, the European Commission has incorporated the TCFD recommendations into its guidelines for reporting climate-related information. EU regulators or member states could decide in the future to strengthen corporate climate risk disclosure requirements, including making the disclosures mandatory.


SASB and TCFD strength in an ever-evolving sustainability reporting landscape


While consistency and global comparability are the two key aspects of reporting that both investors and companies have been calling for, the very nature of the reporting landscape is dynamic. Reporting continues to change and evolve to suit the needs and wants of companies’ various stakeholders. Currently there is a saturation of frameworks, guidelines, and standards that can make it difficult for companies to understand which they should prioritise and for investors to gain a clearer picture of a company’s material ESG risks and opportunities.


The November 2020 merger announcement between SASB and the International Integrated Reporting Council (IIRC) to create a single organisation, the Value Reporting Framework, is the latest example of the consolidation that is starting to take place among standards and frameworks providers.[8] This announcement followed earlier news that the organisations behind the leading frameworks - CDP, Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), and SASB - announced their intention to work together to develop more comprehensive and cohesive corporate reporting.[9] The IFRS Foundation is also in the process of assessing the demand from stakeholders for the role it could play in creating a unified set of standards,[10] which has gained the backing of the GRI, SASB, and BlackRock, among other groups.


Conclusions


It remains unclear whether these organisations will ultimately succeed in creating a set of globally comparable standards that meet the requirements of many different stakeholders with different views on reporting materiality. SASB and TCFD, however, will remain priority reporting frameworks given the backing of some of the world’s largest investors and their focus on financial materiality. Additionally, we expect the growing regulatory pressure to increase the adoption of TCFD, particularly in the UK and Continental Europe. Companies can therefore feel confident about incorporating the standards in their sustainability reporting.


Navigating the ESG reporting space can be time-consuming and challenging given the wealth of considerations and available resources. Sustainability and communication officers should not feel overwhelmed, however. It is important to remember that ESG reporting is a journey and that investors will both understand and value incremental improvements.



For companies looking to get ahead and meet growing investor and

regulatory demands, get in touch with Leaders Arena to discuss how we can support your ESG reporting and communication goals support@leadersarena.global


Notes:

[1] https://www.fsb.org/wp-content/uploads/P291020-1.pdf

[2]https://www.sasb.org/company-use/sasb-reporters/

[3] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

[4] CEO’s Letter on Our 2020 Proxy Voting Agenda (ssga.com)

[5] https://www.sasb.org/wp-content/uploads/2020/11/IAG-Press-Release-2020_11_17_web-1.pdf

[6]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933783/FINAL_TCFD_ROADMAP.pdf

[7] FCA introduces rule to enhance climate-related disclosures | FCA

[8] IIRC-SASB-Press-Release-Web-Final.pdf

[9] https://www.cdp.net/en/articles/media/comprehensive-corporate-reporting

[10] https://cdn.ifrs.org/-/media/project/sustainability-reporting/consultation-paper-on-sustainability-reporting.pdf?la=en

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