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TCFD Climate reporting in the financial sector

The study aims to make an initial assessment of current climate reporting practices to provide guidance in an educational manner to assist financial market participants when publishing climate information. It may also help them prepare for the forthcoming entry into force of the European Regulation on Sustainability-Related Disclosures in the Financial Sector (“Disclosures” or “SFDR” Regulation) and for a potentially more stringent regulatory framework for corporate climate reporting at the European level.

Key points

The report presents 5 key lessons:

  • This is a demanding exercise but everyone agrees that it is useful. The French framework provides a solid basis for governance and risk management due to regulatory and prudential requirements supplemented by codes of practices. It also includes climate-related disclosure requirements with the non-financial information statement and Article 173. However, meeting all TCFD’s recommendations, which call for in-depth changes in practices, remains challenging for financial institutions.
  • While the publication of a TCFD report helps shape a company’s climate approach and raise awareness internally, the integration of climate factors into the company’s overall strategy remains a challenge for the signatory companies and needs to be demonstrated independently of setting commercial objectivesfor “green” products.
  • The reporting exercise is an opportunity to set out the issues to be addressed, the difficulties encountered and to initiate a process of continuous improvement for the more advanced companies. Nevertheless, the TCFD’s objective of publishing information that is useful for decision-making and that facilitates understanding of the financial risk posed by climate change for a financial institution has not yet been achieved and requires to continue efforts, both at the individual level and through market initiatives.
  • Analysis of the reports reveals the wide variety of climate risk analysis and management tools that financial institutions are experimenting with. Nevertheless, these tools are still rarely integrated into the companies’ risk management processes with, for example, alert thresholds or limits that could have an impact on asset allocation or financing decisions, even if the companiesindicate that they want to move in this direction.
  • As in other non-financial areas, the TCFD reports analysed use a wide variety of metrics. Although the relative newness of the exercise has not yet led to any harmonisation, it has nevertheless encouraged innovation. Transparency on the approaches pursued and their limitationsis a determining factor in improving the maturity of practices.