Untangling the TCFD web: Insights from FE fundinfo's breakfast discussion

In the world of financial reporting, the landscape is shifting. Among the myriad of evolutions, TCFD Reporting stands out, beckoning financial entities to grapple with this evolving requirement.

An FE fundinfo breakfast discussion, held recently, shed light on the nuances within this conversation.

High carbon intensive sector exposure

One of the central dilemmas discussed revolved around high exposure to carbon-intensive industries and the session was ablaze with inquiries on determining what actually constitutes "high exposure". Amidst the fervent exchanges, consensus remained elusive.

The crux of the matter emerged: defining "carbon-intensive" proved to be a Gordian knot. Some advocated a broad approach, urging entities to report all exposures while conducting scenario analyses across the spectrum.

On the flip side, others proposed a weighted approach, leveraging Weighted Average Carbon Intensity (WACI) as a guiding metric.

The cautious approach of some entities involves reporting the scenario analysis due to the varying interpretations of what constitutes significant exposure. The disparity revealed in an IA survey, where reported exposures ranged from 0-15% to over 50%, further emphasises the industry's struggle to establish a consistent metric.

Inclusion conundrum: Sovereigns or corporates?

The conversation took a twist when considering the inclusion of sovereigns or confining the scope solely to corporates. Some in attendance championed the inclusion of both, while others teetered on the fence, muddled by uncertainties.

This lack of alignment adds complexity to an already intricate process, raising questions about the uniformity of TCFD reporting standards and because it’s primarily a corporate disclosure regulation there is a need for clear communication in TCFD reports.

On-demand reporting: A commercial quandary

The discussion delved into the challenges of on-demand reporting, with varying client expectations and no consistent format. The commercial pressure to provide reports before the regulatory deadline of June 2024 adds complexity, as institutions grapple with differing client preferences and the evolving landscape of reporting requirements.

These varying demands from clients, even before the official deadline, underscores the absence of a standardised approach.

Funds of funds: Aggregation or external data?

Entities with Funds of Funds (FOFs) are leaning towards fund managers to supply information, highlighting the reluctance to aggregate underlying data due to potential inaccuracies. This approach underscores the industry's acknowledgment of the complexities involved in data aggregation.

The value quandary: Entity-level disclosures

The perceived value of entity-level disclosures came under scrutiny, with concerns about aggregating fund-level metrics. The challenge lies in presenting a comprehensive picture without inadvertently combining disparate data, emphasising the need for clarity in reporting methodologies.

The quandary of purpose: Who benefits?

Amidst the complexities, a fundamental question emerged: who are these reports for? While there is agreement that the current reports may be too complex for retail clients, misalignment in coverage calculations and aggregation of fund-level data raise concerns.

It prompts reflection on whether the primary audience for these reports is the industry itself, allowing institutions to benchmark against peers rather than providing clarity to the wider public

As financial institutions navigate the intricate landscape of TCFD reporting, the need for standardised definitions, transparent methodologies, and a shared understanding of industry best practices becomes increasingly apparent.

FE fundinfo’s breakfast discussion highlighted the challenges of a lack of clarity, but also showcased the collective willingness to address them, underscoring the industry's commitment to transparency and sustainable financial practices.

It's encouraging the FCA did consider the users of the reports for SDR reporting. The clear drive for a consumer faced report will help to reach the intended target group.

Discover how FE fundinfo can help you comply with the UK’s climate-related disclosure requirements.