Tonia Plakhotniuk on the importance of global sustainability reporting

Q. Do you think the world of sustainability reporting will differ as a result of COVID-19?

A. Despite some scepticism, COVID-19 crisis has not deprioritised the sustainability agenda and has further reinforced the need for more resilient and sustainable business models. Embedding sustainability across economies would require a joined-up effort globally. This would need to be underpinned by better transparency around environmental, social and governance (‘ESG’) matters and would require the harmonisation of sustainability reporting internationally as well as deeper integration with financial reporting. There are already various regional and international initiatives calling for global cooperation on the development of a uniform reporting framework. In my opinion, given its important role in supporting sustainable finance, such a framework will eventually develop.

Q. What are the challenges with developing harmonised reporting standards?

A. Indeed, it will be challenging and will take time; but in my view, it is not impossible. In fact, the development of generally accepted financial reporting frameworks took decades and continues today. However, I don’t think we have a lot of time to develop harmonised sustainability reporting standards. Therefore, a globally coordinated approach from the outset is necessary. The TCFD is a well-recognised and widely used framework that specifically targets issues related to the climate. A uniform sustainability reporting standard would need to cover a broader spectrum of “E” and “S” issues, however the TCFD is certainly one of the tools that should contribute to the development of such a standard.

Q. How is the European Commission integrating TCFD and other frameworks?

A. In the European Union, some companies already report under the EU Non-Financial Reporting Directive (NFRD), which requires large companies to disclose certain information on how they manage social and environmental issues. In June 2019, the Commission published voluntary on reporting climate related information to supplement the existing requirements with the aim to align them with the TCFD as much as possible. The European Commission has now taken a major step and launched a process of revising the NFRD to ensure that the new sustainability reporting rules better respond to the needs of investor communities and help address significant ESG data gap issues. The aim of the Commission is to take the most helpful and relevant elements from existing globally recognised frameworks, such as the TCFD, and embed them in the new EU reporting standard. 

Q. How will the framework benefit investment decisions?

A. The TCFD framework provides a tool to help companies report on climate related risks and opportunities in a more consistent and comparable manner. More detailed information on whether and how companies incorporate climate risk into their business would help investors make more informed decisions as to where allocate their capital. For example, there is a growing number of investors with strong environmentally conscious investment preferences who need to analyse, differentiate, and choose from various investment opportunities based on information disclosed by companies. Moreover, any mainstream investor pursuing other investment objectives beyond sustainability (return, liquidity, etc.) would also need to be aware of the effect from climate risk on the longer-term value of their investment.

Q. What are the current challenges and opportunities with the framework and how might they be overcome?

A. The main challenge with the use of the TCFD framework lies with climate risk scenario analysis. This is because the capabilities for this exercise are at early stages of their development (e.g. data and models). Solving this issue would require a coordinated approach globally which is already in action to a certain degree, for example, through the Network for Greening the Financial System (NGFS). Another issue is that the TCFD framework focuses on climate risks specifically and does not cover a broader spectrum of “E” and “S” issues. Therefore, information disclosed might not meet investor needs with investment preferences residing with other sustainability objectives. Finally, the TCFD, similar to any other major non-financial information reporting framework, is voluntary. Though the uptake of the TCFD recommendations have grown significantly among companies since the framework was issued over three years ago, the proportion of such companies in the total world market capitalisation is still relatively small. On the other hand, it is generally known as a user-friendly and well understood framework, which has introduced climate-related reporting principles that can be applied across various industries and types of organisations. It is an example of an effective international effort and has the potential to catalyse future work on sustainability reporting standards to support.

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Tonia Plakhotniuk will be sharing further insights during the 'The evolution of regulatory standards aligned to TCFD' virtual panel on Wednesday 24 June at 15:00 BST/GMT+1. Register here.