Financial institutions’ climate disclosures are evolving

Financial institutions’ climate disclosures are evolving 

Guided by the recommendations issued by the Taskforce on Climate-related Financial Disclosures (TCFD) in 2017, financial institutions (FIs) have started to consider climate change as a potential financial risk, not only in relation to their own activities but also in relation to their clients’ activities. 

Since 2021, ECOFACT has been monitoring the evolution of FIs’ climate-related disclosures through our Peer Policies analysis. We primarily focus on the practical actions that support FIs in reaching their net-zero goals — specifically, we monitor climate transition plans, target-setting, and governance elements, such as climate-related incentives and training. 

Climate disclosure trends 

Our latest evaluation shows that some characteristics of climate reports are changing — almost half of the FIs we assess published more concise and focused reports compared to their reports published in 2022. FIs are also starting to put TCFD/climate-related disclosures in their annual report or ESG report; this is a recent development as industry practice for some time was to publish a standalone climate report. Many FIs’ climate disclosures communicate that progress had been made toward achieving operational targets and financed emission targets (see Figure 1). 

Figure 1. ECOFACT’s year-on-year analysis of financial institutions’ climate-related disclosures reveals more mentions of progress toward existing targets, the setting of new climate targets, and a “Just Transition.”  

FIs are setting new sector climate targets 

Interestingly, ECOFACT’s analysis revealed FIs are increasing the number of high emitting sectors that they set climate targets for, as shown in Figure 2, aiming to further reduce their financed emissions and meet their climate goals. Several of the reports we examined indicated targets for agriculture, residential real estate, commercial real estate, shipping, and aviation would be in place for the next disclosure cycle, and these are not reflected in the data in Figure 2.  

Figure 2. Financial institutions are setting portfolio emissions targets for more sectors. Several have indicated that target-setting for new sectors is underway and will be reflected in their reporting issued in 2024.

Transition plans are becoming important 

Client engagement plays an essential role in FIs’ pursuit of lower emissions — they want to actively work with their clients to meet climate goals. Up to this point, climate reports primarily detailed engagement practices but many now have or are developing frameworks to assess their clients’ transition plans. These frameworks draw on methodologies from the CDP, the Transition Pathway Initiative (TPI), and the Science-Based Targets Initiative (SBTi), for example, and adopt a two-step approach to assessment: 

1. FIs first evaluate the degree of alignment between their clients’ transition plans and their own portfolio climate targets; and 

1. FIs assess the actions their clients are taking to implement their transition plan, considering factors such as a client’s level of ambition, the quality of information provided, and credibility.  

Don’t forget the “Just Transition” 

Furthermore, ECOFACT noticed that some FIs are integrating “Just Transition” elements into their assessment frameworks (see Figure 1). This includes evaluating whether clients are addressing adverse social impacts linked to their business activities, like economic opportunity loss in communities, and determining if they are taking action to mitigate these impacts and engaging with affected stakeholders. 

Curious about our analysis? 

At ECOFACT, we closely monitor ESG developments and the environmental and social risk policies of leading financial institutions. We can help you understand and align with evolving stakeholder expectations. If you need support in adjusting your company’s approach to climate change, biodiversity, coal, oil and gas, human rights, or other topics, do not hesitate to reach out.