California enacts climate reporting laws, TCFD issues latest status report, and more.

October 13, 2023

The top five climate risk and disclosure stories this week.

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California enacts landmark climate reporting laws

California Governor Gavin Newsom signed two groundbreaking climate disclosure bills into law on Saturday, setting a precedent for climate reporting in the US. 

The first bill, SB 253, mandates that companies with at least USD$1bn in revenue report their direct (Scope 1 and 2) and indirect (Scope 3) greenhouse gas (GHG) emissions. The second bill, SB 261, requires organizations with over USD$500mn in revenue to publicly disclose their financial risks associated with climate change. SB 261 also directs the California Air Resource Board (CARB) to contract with a climate reporting organization to publish a report every two years reviewing public companies’ climate-related disclosures and the “systemic and sector-wide climate-related financial risks facing the state.”

Newsom wrote in his SB 261 signing statement that the policy would “illustrate the real risks of climate change for businesses operating in California.” However, he cautioned that the law gives insufficient time for CARB to carry out its requirements under the bill. As a result, he said he has instructed his administration to explore ways to address this issue next year.

Sustainability non-profit Ceres estimates that SB 253 will affect over 5,300 organizations, while SB 261 will apply to more than 10,000 companies. Both bills closely align with the reporting recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the leading global climate reporting framework.

Global regulators highlight climate disclosure momentum

More central banks and supervisors have taken steps to establish climate-related risk management and disclosure requirements over the last year, a report by a panel of global financial regulators shows. 

Published October 12, the Financial Stability Board’s (FSB) latest progress report on climate-related disclosures shows 20 of 24 FSB member jurisdictions have taken additional actions since the last stocktake in 2022. These include setting requirements, guidance, and expectations for climate risk and opportunity disclosure.

While the TCFD recommendations are still widely referenced by jurisdictions, the FSB found that regulatory authorities are also considering the new standards out of the International Sustainability Standards Board (ISSB). A total of 17 of 24 jurisdictions have stated they are putting structures and processes in place to incorporate the ISSB’s standards into local requirements. 

Survey responses gathered by the FSB indicate that three-quarters of jurisdictions already have measures in place to make companies incorporate climate disclosure within their mainstream disclosures, including the majority of emerging market and developing economies.

EU watchdog wants bank capital rules to consider ESG

Banks in the European Union (EU) face potentially higher capital charges to reflect their environmental, social, and governance (ESG) risks, the bloc’s primary banking regulator says.

The European Banking Authority (EBA) published a report on Thursday, recommending “targeted enhancements” to the current Pillar 1 framework — a package of rules used to determine banks’ minimum capital requirements.

Short-term actions proposed by the EBA include incorporating environmental risks into stress testing programs that are used to assess banks’ credit and market risk capabilities. The report also encourages the inclusion of environmental and social factors into credit rating agencies’ assessments of companies’ credit risks. The EBA expects these changes to be made over the next three years.

In the medium to long term, the report suggests potential revisions to the Pillar 1 framework, including the use of scenario analysis, the integration of transition plans, the reassessment of  credit risk capital requirement calculations to better incorporate ESG risk, and the introduction of environment-related concentration risk metrics for sectors that are particularly vulnerable to climate, environmental, and social shocks. These changes could potentially raise minimum capital requirements for banks with high exposure to borrowers that are at risk due to climate physical and transition impacts.

“Environmental and social risks are changing the risk profile for the banking sector and are expected to become more prominent over time. They affect traditional categories of financial risks, such as credit, market and operational risks. Hence, environmental and social factors may affect both the risks faced by individual institutions and the financial stability of the entire financial system,” the EBA wrote.

TCFD calls for more transparency on climate impacts

More progress is needed to get organizations to consider how climate risks affect their bottom lines and to “improve transparency” on the material climate impacts that they face, the Task Force on Climate-related Financial Disclosures (TCFD) says. 

In its most recent status report, published Thursday, the task force laid out the results of its AI-powered review of 1,350 large companies’ climate disclosures from the past three years, as well as insights on asset managers’ and asset owners’ reporting practices. For fiscal year 2022, the report found 58% of organizations disclosed in line with at least five of the 11 TCFD recommendations, up from just 18% in 2020. However, only 4% reported in line with the whole set of recommendations, indicating most companies’ climate-related disclosures were far from comprehensive.

Diving deeper, the TCFD also revealed that the share of companies disclosing information on their climate risks and opportunities, board oversight, and climate-related targets increased substantially between 2020 and 2022 — by 26, 25, and 24 percentage points, respectively. Still, most TCFD-aligned information is filed in discretionary reports —  not financial ones. For fiscal year 2022, the TCFD found that, on average, climate-related information was four times more likely to be disclosed in sustainability and annual reports than in financial filings.

The task force said it is “encouraged” by different jurisdictions’ recent efforts to compel companies to put climate-related information in their financial filings. This is because this aligns with the TCFD’s initial recommendations on where climate-related information should be located.

The Thursday report is the last status report that will be published by the TCFD. Going forward, the International Financial Reporting Standards (IFRS) foundation will take over the monitoring of climate-related disclosure trends.

Transition Plan Taskforce debuts climate disclosure framework

The UK’s Transition Plan Taskforce (TPT) released a new climate reporting framework for organizations and financial institutions that it’s calling the “gold standard.”

The TPT’s co-chairs unveiled the framework on Monday and called on companies to start developing their climate transition plans, leveraging the TPT’s best practices guidance and resources. The new framework was developed to help companies generate consistent and comparable climate reports and to simplify the climate disclosure process for organizations. It’s also intended to provide a basis for companies that are looking to develop “credible and robust” climate transition plans.

In addition to TPT’s new disclosure framework, the organization has also published guidance for preparers and users of climate transition plans. This includes high-level guidance tailored toward 40 sectors, instructions for the climate transition planning cycle, and legal considerations for organizations reporting in line with the TPT’s new climate disclosure framework.

The new framework both builds on and aligns with the International Sustainability Standards Board’s climate rule and the transition planning framework out of the Glasgow Financial Alliance for Net Zero. TPT is also consulting with both international and national bodies to harmonize climate reporting and regulation around the world.

“Backing up net zero ambitions with high quality and clear transition plans is crucial if we are to collectively deliver net zero,” said Amanda Blanc, the TPT’s co-chair and group CEO of the insurance company Aviva Group. “The TPT Disclosure Framework will help businesses understand just what makes a climate transition plan robust and credible.”