- Providing quantitative data is a challenge for Chinese financial institutions’ alignment with TCFD, especially in target setting, Scope 3 data and emission breakdown disclosure
- UK PACT pilot program finds responding to CDP Questionnaire accelerates TCFD alignment
(BEIJING, 1 October 2020), New research from global environmental non-profit, CDP, supported by UK PACT (UK Partnering for Accelerated Climate Transitions) shows that Chinese financial institutions are still in the early stages of TCFD alignment (Task Force on Climate-related Financial Disclosures). Given the potential high impact of this sector on environment and climate change, it is critical that organisations across the financial sector in China now ramp up efforts to understand what financial markets want from disclosure in order to measure and respond to climate change risks and align with investors’ needs.
Chinese financial institutions have a vital role to play in decarbonizing the global economy and must act fast to avoid the economic and environmental risks of climate change, and to support China’s new 2060 carbon neutral target. CDP’s questionnaire –which is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) – asks financial institutions to disclose information on their governance of climate-related issues, on their climate-related risks and opportunities in their financial portfolios, as well as their financed emissions and exposure to carbon-related assets/sectors. This helps financial institutions understand what investors require.
The UK PACT Program in China launched in December 2018, aimed at advancing the UK-China green finance agenda through disclosure and demand-led capacity building. Funded by the Department for Business, Energy and Industrial Strategy (BEIS), the program has ambitious goals and partnerships. Within this framework, CDP’s intervention reviewed levels of environmental disclosure from Chinese financial institutions and their alignment with the TCFD framework.
The project worked in a targeted manner with 4 Chinese financial institutions, members of the UK-China Green Finance Pilot. Two of these financial institutions and five non-pilot financial institutions responded to CDP’s questionnaire in 2019 – a total of 7 financial institutions (10.8 % of the sample). Responding to CDP’s questionnaire showcases the financial institutions’ level of alignment with TCFD (see Fig 1), providing an excellent baseline for future alignment and leadership in the financial space.
Sabrina Zhang, Country Director, CDP China:
“Environmental transparency and accountability are vital to tracking progress towards a thriving, sustainable future. Reporting to CDP helps Chinese financial institutions to fully align with the best-practice TCFD recommendations, and therefore to mitigate the Climate related risks and further support and incentivise China’s low carbon transition as well as green finance development.”
CDP’s analysis of all finance companies disclosing through CDP on climate change in 2019 found that among the total of 356 respondents worldwide, 7 of 65 invited financial institutions were from China. This compares with 67 of 143 and 26 of 62 financial institutions invited in Europe and the UK respectively.
According to the 2019 CDP data, only 1 Chinese financial institution achieved a B score, which was the highest score among all the Chinese financial respondents. In contrast, the majority of the other Chinese financial institutions received a D. However, the B score was an exceptional achievement for a first- time discloser, demonstrating that the level of readiness to align with TCFD was already high. This achievement points to leadership potential – i.e. for Chinese FIs to become trailblazers in the sector and start leading the way. Compared with European and British financial institutions, the number of financial respondents in China lagged behind in 2019 (Fig 2).
Looking into climate change performance by module, the program found a clear gap between Chinese financial institutions and their global counterparts in terms of TCFD alignment, based on 2019 CDP data. Chinese respondents lack quantitative information and practices in the ‘Governance’, ‘Target’ and ‘Metrics’ parts relating to the TCFD framework, particularly in the “target setting” session, Scope 3 data and emission breakdown disclosure.
Measuring quantitative information is especially difficult for global financial institutions, due to difficulties in finding a universal method to measure the impact from investments. Despite this, 83% global institutions disclose their scope 3 impact, much higher than the proportion of Chinese respondents. That said, there are some areas where the Chinese financial institutions are outperforming, or at least compare favourably with, their global counterparts. For example, R1 identifying, assessing and managing climate-related risks, and S1, climate related strategy and low-carbon transition plans. (fig 3)
A deeper look at the four pilot Chinese financial institutions’ disclosure performance in alignment with TCFD recommendations reveals a much more obvious gap between CDP respondents and those who did not respond to the CDP questionnaire.
Based on the analysis, the two institutions which did not reply to the CDP questionnaire merely disclosed Scope 1 and Scope 2 emissions in their sustainability reports, leaving their Scope 3 emissions data and targets blank. In contrast, CDP respondents performed better in their environmental disclosures. In particular, as a result of disclosing via CDP’s questionnaires, one respondent not only provided quantitative targets for its absolute and intensity emissions, but also quantified its impact of Scope 3 on investment. This institution gained a B, which was above the global average score in the financial services sector [Fig 4)
Compared to global peers, Chinese financial institutions are still in the early stages of TCFD alignment. Too few are disclosing through CDP, which can accelerate TCFD alignment, and providing assessment of Scope 3 and setting acceptable environmental targets are challenges for those that do. To build an effective reporting method as well as continuous corporate engagement will be the next steps to improve the transparency of China market.
Given their critical role in tackling our environmental challenges, Chinese organizations in the sector across China must now ramp up their efforts to meet market demand and investors’ needs for comprehensive, reliable disclosure.
Notes to Editors
CDP is an international non-profit that drives companies and governments to reduce their greenhouse gas emissions, safeguard water resources and protect forests. Voted number one climate research provider by investors and working with institutional investors with assets of US$106 trillion, we leverage investor and buyer power to motivate companies to disclose and manage their environmental impacts. Over 8,400 companies with over 50% of global market capitalization disclosed environmental data through CDP in 2019. This is in addition to the over 920 cities, states and regions who disclosed, making CDP’s platform one of the richest sources of information globally on how companies and governments are driving environmental change. CDP is a founding member of the We Mean Business Coalition. Visit https://cdp.net/en or follow us @CDP to find out more.
To help identify the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities, the Financial Stability Board established an industry-led task force: the Task Force on Climate-related Financial Disclosures (TCFD, hereafter referred to as the “Task Force”). The Task Force was asked to develop voluntary, consistent climate- related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks. The 32-member Task Force is global, and its members were selected by the Financial Stability Board. Members come from various organizations, including large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies. In its work, the Task Force drew on member expertise, stakeholder engagement, and existing climate-related disclosure regimes to develop a singular, accessible framework for climate-related financial disclosure.**
Figure 1. CDP questionnaire corresponds with TCFD Framework
Figure 2. Scores of CDP questionnaire respondents in the financial sector in 2019
Figure 3. Chinese financial disclosers performed well in climate related “Governance”, but faced challenges in disclosing Scope 3 data compared with global financial disclosers
Figure 4. Status of the 4 pilot financial institutions in China aligned with TCFD Framework