In June 2017, the Task Force on Climate-related Financial Disclosure (TCFD) released climate-related disclosure recommendations to companies and investors that included a framework for better company disclosure and a request for climate scenarios as part of that disclosure.1 But for investors looking to incorporate environmental risk into their process, there might be a pretty big catch: We mapped over 140 MSCI ESG Research climate-related data points to the TCFD framework and found a significant gap between what investors need to know under these recommendations and what companies are telling them.
BETTER DISCLOSURE IS STILL A WORK IN PROGRESS
Backed by the Bank of England Governor Mark Carney, the TCFD framework has been widely endorsed by many of the world’s largest investors as a critical step forward allowing for effective capital allocation and asset pricing in the face of growing climate related risks.2 The most extensive data available is carbon data, specifically scope 1 and 2 emissions, which have steadily improved looking backwards through our CarbonMetrics data. As of August 2018, over 55% of the constituents of the MSCI ACWI Index had reported on their carbon emissions, up 10% since 2016.
We also were surprised to find that the number of qualitative disclosures around governance and risk management have increased as well. In fact, 89% of the companies we analyzed reported at least some measures for managing carbon-related risks, though these were typically limited to energy efficiency measures or sourcing renewable energy.
MSCI ACWI Index constituents disclosing TCFD criteria
Data as of August 2018
However, if carbon and climate governance represent the best of TCFD-related disclosure today, the data our clients viewed as most valuable during our consultations3 with them still is out of reach. Forward-looking disclosure around strategies and targets, a part of the TCFD recommendations, represent the weakest disclosures in our analysis. Only 11% of MSCI ACWI Index constituents disclosed all TCFD recommended information regarding their carbon emissions reduction target. Of the remaining firms:
- 51% had not disclosed any carbon emissions target.
- 38% had disclosed targets without further specifying the base year, targeted reduction per annum or target year.
QUALITY SCENARIO ANALYSIS COULD BE A LONG WAY OFF
Future climate scenarios are designed to challenge current thinking, provide alternatives to business as usual states and enhance critical thinking.4 If TCFD’s disclosure recommendation is a work in progress, the recommendation about scenario analysis may be a long way off:
- Fewer than 3% of the constituents of the MSCI ACWI Index as of Aug 18 had mentioned scenario considerations and/or analysis in their disclosures.
- Even for companies that disclosed forward-looking indicators, almost none in the set had science-based targets aligned to a 2⁰C warming scenario as of Aug. 31, 2018.
That said, there are some positive signs in the first year of the TCFD recommendations. Specifically, from an unlikely source – among the 20 largest integrated oil & gas and exploration & production (O&G) companies of the MSCI ACWI Index by market capitalization,5 55% had conducted some level of scenario analysis. This is encouraging but not unexpected, as the O&G sector has been targeted more than any other by shareholder activists over the last two years regarding their climate change action and disclosures.6
Oil & gas and exploration & production companies conducting scenario analysis
Data as of August 2018
HOW CAN INVESTORS MEASURE WHAT THEY CANNOT SEE?
As investors look to implement TCFD’s recommendations, narrowing the disclosure gaps might be a key focus. This may come through direct engagement with non-disclosing or poorly disclosing companies, as with the O&G sector, or through collective engagement schemes such as the Climate Action 100+, which has been backed by 296 institutional investors representing USD 31 trillion in assets.7 But engagement can be a long process and it is likely to take years for companies’ scenario reporting to generate comparable, investment-relevant information. So what options are available for investors who are not willing to wait?
Some institutional investors are using proxies to measure the resilience of their portfolios and allocate to investment strategies informed by climate change data. Using our ESG Ratings data, it is possible to approximate companies’ vulnerability to climate risks based on the specifics of their business activities and location of their physical assets; and stringent targets – combined with a track record meeting past targets – can provide a proxy of a company’s adaptability and preparedness relative to peers.
These types of measures may be effective interim tools as engagement processes unfold and disclosure (hopefully) improves.
3 In August and September 2018, MSCI consulted with 55 institutional investors around the use of climate scenarios including 29 asset managers, 20 asset owners, and 6 other stakeholders (investment consultants, etc.). The consultation included 30 participating institutions in Europe, 20 institutions in the Americas, and 5 institutions based in the Asia-Pacific region
4 Task Force on Climate-related Financial Disclosures. (2017). “Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities,”
5 Source: MSCI ESG Research; Ranked by market cap as of August 2018
6 MSCI ESG Research based on analysis of 97 shareholder resolutions tied to ‘2-degree scenarios’ and ‘reporting on climate change financial risks’.