From expectation to obligation:

The disclosure of reliable and comparable climate-related data, and consistent and relevant climate-related metrics, is a major responsibility for financial institutions (FIs).

Climate-related and other sustainability disclosures have held a prominent place in the broader regulatory landscape for several years now, and this is set to continue. Several jurisdictions (including the UK) have now outlined – and in some cases already started implementing – plans to move from voluntary to mandatory climate disclosures. This increased reporting responsibility is anticipated to come with more regulatory expectations on what constitutes a ‘best practice’ approach, putting further pressure on FIs to ensure those new standards are met.

This won’t come without its challenges. Existence of various reporting frameworks, difficulties integrating climate risks in existing policies and financial planning, incomplete data, as well as greenwashing remain key barriers to decision-useful climate disclosures, placing a large reporting burden on FIs.

Combine this with further voluntary and mandatory disclosure frameworks under development – the UK Green Taxonomy or Transition Plan Taskforce (TPT), to name a few – all which may require different sets of information, and the burden on firms only becomes more significant.

To help the financial sector navigate these disclosure requirements and identify best practice approaches, a vast number of resources have been published by regulatory and industry bodies. This blog provides a regulatory outlook as well as some insights on the current state of play for climate-related disclosures and suggests some helpful tools for FIs at all stage of their disclosure journeys.

Regulatory outlook of climate-related financial disclosure

The above timeline is a snapshot of the requirements that are already in place, as well as what is emerging when it comes to climate-related financial disclosures. In terms of key developments – the Taskforce on Climate-related Financial Disclosures (TCFD) has been mandatory for the largest FIs in the UK since April 2022, and from 2025 the reporting will be applicable to all sectors. The UK government has proposed the mandatory disclosure of separate transition plans through the work of TPT and the consultation on the long awaited UK Green Taxonomy is expected in the autumn of 2023. The Basel Committee on Banking Supervision (BCBS) has published principles for the effective management and supervision of climate-related financial risks and issued responses to FAQs to clarify how climate-related financial risks may be captured in the existing Basel Framework. They also publicly stated that they ’will consult on a Pillar 3 framework by the end of this year‘. Finally, the International Sustainability Standards Board (ISSB) standards on climate-change disclosures (IFRS S2) were released at the end of June 2023 and will apply from 1 January 2024 subject to adoption from individual jurisdictions.¹

These, alongside increasing supervisory expectations around climate and development in regulatory standards for other environmental and sustainability risks (e.g. TNFD), underline how reporting is becoming ever more complex.

To help navigate this complex environment, Deloitte’s EMEA Centre for Regulatory Strategy developed a publicly available interactive tool that provides a forward-looking view of key regulatory events, as split by theme and sector. The list is extensive, reflecting how the regulatory spectrum not only on climate but sustainability overall is growing.

Current state of play

While the financial sector is mobilising resources to help firms respond to the increasing regulatory demands, key challenges in achieving financial regulatory and supervisory expectations remain.

To better understand the current state of play and main challenges relating to the disclosure of climate-related financial risks, Deloitte undertook a climate disclosure benchmarking exercise. The climate disclosures assessed are the most mature seen to date, relative to TCFD recommendations, representing a key push forward by industry to disclose relevant and decision-useful climate-related risk information. However, the continued evolution and introduction of reporting frameworks, including transition planning, will require FIs to remain ambitious in their response to climate-related challenges, not only to remain compliant but also to help understand and navigate the risk that climate change poses to their balance sheets.

Some of the key challenges in disclosing climate-related risks, and ways in which industry is responding, are identified as follows:

1. The existence of many (mandatory and voluntary) reporting frameworks, all with different supplementary guidance, leave room for flexibility in company reporting and create difficulties in settling on a comprehensive suite of final metrics. For example, while the TCFD recommendations provide some examples of metrics to capture climate-related risks and opportunities, these have remained relatively high level to date.² The GHG Protocol, while it gives organisations freedom to develop their own more sophisticated models, only focuses on emissions reporting, thus overlooking other climate-related matters such as avoided emissions, transition planning or physical risks. The recently published ISSB standards, and the pass of control of TCFD to the IFRS should assist in the harmonisation and granularity of standards for FIs to adopt.

2. While FIs have become increasingly comfortable quantifying their climate-related risk exposure in their Pillar 2a or 2b assessments, less work has been done on embedding climate-related considerations into existing policies, procedures, financial and capital planning. While regulators are working on whether and how to incorporate climate into Pillar 1 capital requirements, in the absence of strict guidance, firms are developing their own potentially disparate modelling methodologies. There is an additional focus on ensuring robust approaches to climate model and methodology validation to ensure the information being presented in FI’s disclosures is sufficiently robust to be used for strategic decision-making.

3. Data remains incomplete and approaches to data gathering are fragmented, meaning that quantification of the financial effects of climate-related issues remains a challenge. The disclosure of total financed emissions and climate scenario analysis to date remains limited to portfolios where data and methodologies are available. Data tends to be gathered by different areas of the business, making it difficult to build a holistic picture of the climate-related risks faced across the organisation, and how these relate to financial performance. Many firms are now looking to revisit their data strategies to ensure a centralised approach, and in doing so enable a robust quantification of financial impacts. However, with the reporting requirements becoming broader and types of data more diversified, matters such as accuracy and greenwashing cannot be overlooked.

4. Firms continue to face increased greenwashing risk. As more firms make net-zero commitments, announce decarbonisation targets, and introduce new products to help meet them, they face heavy public scrutiny on the quality and robustness of their approach to sustainability. Regulators have a heightened focus on greenwashing, as sustainability matters have increasingly become commercial drivers. Some targeted regulation on greenwashing has already been published, for example the FCA’s proposed package of measures to protect the interests of different stakeholders within this area, including supervisory action to be taken against those who mislead the relevant parties.³ It is likely the rules related to Environmental, Social and Governance (ESG) products and powers exercised by regulators in this area will only continue to grow. FIs are now looking to develop robust ESG criteria utilising existing frameworks and seeking external assurance to identify, measure, monitor and report on their risk of greenwashing.

Certainly, steps have been made to respond to these challenges. These range from companies incorporating climate/ESG related risks in their annual/periodic reporting, developing robust ESG product development criteria, setting targets, and finding innovative ways to gather relevant data (e.g. using AI-generated solutions).

Different responses to these challenges can be expected from FIs, depending on which stage of the climate disclosure journey they are on. One resource that aims to draw this out and provide guidance for firms at every stage of their climate disclosure journey, is the recently published Climate Financial Risk Forum (CFRF) Climate Disclosures Dashboard.

How relevant is the CFRF Climate Disclosures Dashboard 2.0 to climate disclosures?

The CFRF, chaired by PRA and FCA, was established in 2019 to enable collaboration between regulators and industry to more effectively manage climate-related risks and respond to opportunities. The Climate Disclosures Dashboard was developed by the CFRF’s ‘Data, Disclosures and Metrics Working Group’ – a group comprising banks, asset managers and insurers, and of which Deloitte was a member. The Dashboard reflects the current thinking and practice of industry, aligning (and in some instances going beyond) relevant industry frameworks and standards such as the ISSB, TCFD and TPT. It presents recommended approaches across five categories of disclosure metrics (transition risks, physical risks, financed emissions and portfolio alignment, financing the transition, and engagement activities) to assist practitioners with their own disclosures. For each category, the Dashboard proposes three levels of recommended metrics (Foundation, Stretch and Advanced) in recognition that, as internal knowledge and capabilities on climate improves, disclosure approaches will naturally evolve over time, supported by increasingly sophisticated climate data and analytics.

The Dashboard helps with indicating how to collect and report on relevant information:

1. It reflects best practice that is currently present in the industry (and specifically the financing activities of asset managers, banks and insurers), and at the same time has a forward-looking approach and aligns with the existing and emerging regulatory requirements in the UK.

2. It supports firms at all stages of their disclosure journey, from helping them to get started, identifying future direction of travel, and supporting the most advanced firms in continuing to build on their disclosure approach.

3. It addresses data gaps by explicitly calling out challenges with data and methodologies and the development of idiosyncratic approaches by institutions, and recommends key steps required by regulators and industry to address these challenges going forward.

4. Borne out of the CFRF – a PRA- and FCA-led forum of industry participants – all five categories of metrics proposed to be included in the Dashboard are considered relevant in meeting the expectations of supervisors, as set out in SS3/19.

How Deloitte can help

We bring together regulatory, financial services and climate expertise to support clients with their climate-related reporting needs.

Supported by our ECRS Regulatory Strategy team, our experts have a proven track record of working closely with international, regional and national financial institutions on disclosure topics.

Ways we can help:

• providing gap analysis on TCFD recommendations, ESG risk management frameworks and data capabilities,
• developing TCFD implementation and net zero roadmaps,
• developing target operating models for ESG/climate risk management frameworks,
• conducting climate-related stress testing and scenario analysis,
• developing metrics and targets and data-related capabilities, including helping with vendor selection, and
• developing approach to Pillar 2b stress testing for climate change.

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¹ The UK have committed to adopting the ISSB standards within the next 12 months. IFRS S2 fully incorporate the recommendations of the TCFD, and from 2024, the IFRS will take over the monitoring of the progress on companies’ climate related disclosures from the TCFD.

² This is likely to change in the near future with the adoption of the ISSB standards that provide more granularity than the TCFD recommendations.