Climate-related reporting standards including the TCFD framework and their impact on the aviation industry

Background

Historically, it has been difficult for investors and others to access high quality, consistent and comparable information on how companies are managing climate-related financial risks and opportunities. This is in large part due to the inconsistencies across and within disclosure regimes globally, as reporting requirements – both mandatory, where they exist, and voluntary – vary considerably around the world.

Due to particular concerns about the impact on the financial sector of inadequate information around climate-related risks, in 2015 the G20 asked the Financial Stability Board to launch its Task Force on Climate-related Financial Disclosures (TCFD). The TCFD’s remit was to help companies better understand what financial markets need from disclosures to be able to measure and manage climate risks. In 2017, the TCFD published a set of recommendations for voluntary company financial disclosures (TCFD Recommendations). These clarify what may constitute material and relevant climate-related financial risks, establish principles for effective disclosure, propose key disclosures across four thematic areas (governance, strategy, risk management, and metrics and targets) and provide both general and sector-specific guidance to support their implementation.

The TCFD also prepare supplemental guidance for non-financial sectors and industries, selecting those sectors and industries with the highest likelihood of climate-related financial impacts due to their exposure to certain transition and physical risks around greenhouse gas (GHG) emissions, energy and water dependencies associated with their operations. One of the four groups selected on this basis was transportation, with airfreight and passenger air transportation included in the list of associated industries within that group. That supplemental guidance (in Annex E to the TCFD Recommendations) focuses in particular on certain recommended disclosures relating to strategy and metrics and targets. The supplemental guidance was updated generally for the first time in October 2021, the key change to Annex E being to remove the illustrative examples of metrics for the four non-financial groups, including transportation, as the TCFD states that work by other frameworks and standard setters provide more detailed guidance on sector-specific metrics and are updated on a regular basis.

Specific Issues for Airlines and Operating Lessors

In the TCFD Recommendations, there are some disclosures which affect players in the aviation industry perhaps more than in other sectors, the most notable of which are the GHG reporting requirements. These categorise GHG emissions into Scope 1, 2 and 3.

Scope 1 emissions are emissions that a company makes directly. Airlines have high levels of scope 1 emissions by the very nature of their operations. Operating lessors, in contrast, would have minimal levels of this type of emission.

Scope 2 is likewise a relatively straightforward concept — indirect emissions arising from the companies’ operations, such as from electricity for heating, lighting or cooling its buildings which are produced by others on a company’s behalf. These affect airlines and lessors as much as they affect all companies generally.

Scope 3 is where things become difficult and this category has the ability to increase a company’s total emissions score significantly. This is because Scope 3 emissions are all GHG emissions associated with the company’s business – not just those generated by and on behalf of the company itself, but any organisations for which the company is indirectly responsible. This includes both upstream (its suppliers) and downstream (its customers). So an operating lessor’s Scope 3 emissions would include those emissions produced by the airlines operating its aircraft. Importantly, for an airline, this will include the emissions of its fuel suppliers.

Whether a company should report Scope 3 emissions is important and will have large impact on a company’s reports, related analyses and, of course, other ramifications – not least of which being any plans to achieve net zero emissions. Whether to include Scope 3 emissions in reporting requirements and emission benchmarks remains controversial.

The TCFD Recommendations provide that “GHG emissions should be calculated in line with the GHG Protocol methodology to allow for aggregation and comparability across organizations and jurisdictions” However, it only states that Scope 3 emissions should be provided “if appropriate”, without further elaboration or guidance.

It is clear that, for investors assessing operating lessors, a comparison between those lessors who include Scope 3 emissions and those who don’t is like comparing apples with pears. As such, even where such reporting is voluntary, increasingly investors are encouraging all companies to report Scope 3 emissions.

How GHG Scope 3 emissions are reported is also controversial, as some argue it can lead to the double-counting of total emissions – by an airline and also by the operating lessor which owns the relevant aircraft. Nevertheless, the perceived transparency which this reporting facilitates is, at this stage, considered sufficiently important to investors that companies are encouraged to comply. Another central aspect of this debate is how companies should track and measure Scope 3 emissions, with a proliferation of carbon calculators now available to choose from, each using different data sets.

There is no globally agreed methodology yet for this so variations in how the underlying data is captured and assessed will also complicate the push for consistent and comparable reporting. These are issues which most of the stakeholders – companies, investors, trade bodies, regulators, government to name but a few – are increasingly alive to.

There is some momentum towards a global reporting regime, not just to allow consistency and comparability of information given to investors, but also because of considerations around the costs associated with reporting across multiple disclosure frameworks, access to global markets and facilitating an equal playing field for issuers. The G7 in a 2021 communique backed mandatory disclosures and said they should be made according to existing TCFD Recommendations.

UK approach to TCFD Recommendations

The UK Government considers the TCFD Recommendations to be one of the most effective frameworks for companies to analyse, understand and ultimately disclose climate-related financial information against. The UK was one of the first countries to formally endorse the TCFD Recommendations in 2017. However, the UK Government now considers that a voluntary approach to climate-related financial disclosure is insufficient. As a result and as part of its Green Finance Strategy launched in 2019, the Government set out its expectation that all listed companies and large asset owners should disclose in line with the TCFD Recommendations by 2022. In November 2020 it went further, with the Chancellor of the Exchequer announcing that the UK would become the first country in the world to make TCFD aligned disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach referred to below.

For financial years commencing on or after January 1, 2021, a change by the Financial Conduct Authority (FCA) to its Listing Rules means that commercial companies with a premium listing in the UK must now ‘comply or explain’ against the TCFD Recommendations in their annual financial report. While the general expectation is that such companies should be able to comply, it is recognised that some companies may need more time to deal with data, analytical or modelling challenges.

Subsequently, in June 2021, the FCA published a consultation seeking to extend the application of these requirements to a wider scope of listed issuers, namely to issuers of standard listed equity shares (excluding standard listed investment entities and shell companies). In addition, in March 2021, the Government launched a consultation seeking views on proposals to introduce mandatory TCFD-aligned disclosure requirements under secondary legislation for a wider range of UK companies and limited liability partnerships (LLPs), including those with more than 500 employees and a turnover of more than £500 million. These requirements will be applicable to a significant number of large UK airlines and airfreight and logistics companies. Both consultations have now closed and, in relation to the latter, the Government has recently announced that, in light of widespread support for the proposals, regulations bringing these into force will be published in the near future.

The Financial Reporting Council (FRC), the UK body responsible for (among other things) setting and monitoring reporting standards, supports global standards for non-financial reporting, including in relation to climate-related reporting, but recognises that these will take time to develop and implement. As a result, in the meantime it has also encouraged listed companies and other public interest entities to report against the TCFD Recommendations and, with reference to their sector, to use the metrics produced by the Sustainability Accounting Standards Board (SASB), as this should help meet the information needs of investors and other capital providers. The SASB has developed metrics/standards for 77 industries across 11 sectors and, within the transportation sector, airlines and airfreight and logistics are industries for which particular metrics apply.

With mandatory climate-related disclosures being rolled out to other organisations and entities such as occupational pension schemes, asset managers, banks and insurance companies, the UK Government is making steady progress towards the goal it has set itself in this area for 2025.

EU approach to TCFD Recommendations

The EU Non-Financial Reporting Directive (NFRD) requires in-scope EU companies to report on sustainability matters, including environmental issues. In 2019, the European Commission published specific non-binding reporting guidelines on climate-related information to supplement existing guidelines on non-financial reporting more generally. The 2019 guidelines integrate the TCFD Recommendations and provide guidance consistent with those Recommendations.

However, there are concerns over the quality and consistency of climate-related disclosures by EU companies and a report in December 2020 by the Climate Disclosure Standards Board, ‘The State of EU Environmental Disclosure in 2020’, expressed concern at the selective approach taken by many EU listed companies to disclosure against the TCFD Recommendations, given the voluntary nature of their adoption. That report recommended that the TCFD Recommendations be adopted in full and embedded explicitly in the NRFD.

Since then, in April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) which would expand the scope of the NFRD to cover a broader range of companies (including all listed issuers) and, among other things, introduce more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards. In order to minimise disruption for companies that already report sustainability information, the proposal states that sustainability reporting standards should take account of existing standards and frameworks for sustainability reporting and accounting where appropriate, including the TCFD Recommendations. The first set of standards is to be produced by October 2022, with a further set to be produced the following year.

The NFRD already applies to a number of large European airlines and airfreight and logistics providers, and the introduction of the CSRD is set to significantly expand the scope of the NFRD to cover smaller providers. This will increase the availability of sustainability information and data in the aviation industry and hopefully bring greater standardisation and consistency in reporting practices.

Australian approach to TFCD Recommendations

Australia does not yet mandate compliance with the TFCD Recommendations. However around 60 per cent of Australia’s top 100 companies are following the TFCD Recommendations, as noted by Australian Securities and Investments Commission (ASIC) Deputy Chair Karen Chester in a speech to the Australian Institutional Investor Roundtable on April 22, 2021. Stakeholders in the aviation context have similarly adopted the Recommendations, including major Australian airlines QANTAS and Virgin Airlines, with QANTAS having committed to align itself with the TFCD Recommendations since 2017.

A number of institutional investors are calling for mandatory disclosure, with a report being issued by the Investor Group on Climate Change (IGCC) in June 2021 entitled ‘CONFUSION TO CLARITY: A plan for mandatory TFCD-aligned disclosure in Australia’. This report argues that a voluntary approach is insufficient, given the “urgency of the climate threat and need for transparency, consistency and comparability of disclosures for informed and efficient asset allocation, and an orderly transition to net zero emissions”. In this report, the IGCC propose that Australia should complete phasing in mandatory TFCD-aligned disclosure by 2024, suggesting reporting requirements should be on an “if not, why not” basis and should apply to entities operating across the economy and expanding over time, starting with the Australian Securities Exchange 300 and large unlisted non-financial companies, as well as large financial institutions.

The Australian Prudential Regulation Authority (APRA) has also increased its scrutiny of the climate change disclosures undertaken by banks, insurers and superannuation trustees and, in April 2021, released draft guidance entitled ‘Prudential Practice Guide for Climate Change Financial Risks’. ASIC has similarly focussed on corporate governance and disclosure in connection with climate change risks, and has issued several media releases on climate change related disclosure.

New Zealand’s approach to TFCD Recommendations

While the New Zealand Government has introduced legislation to make TFCD disclosures mandatory for some organisations, it is unlikely that the mandate will apply to airlines. Instead, TFCD obligations will be generally applied to entities in the banking and finance sphere. The mandatory regime was introduced through an amendment to the Financial Markets Conduct (FMC) Act 2013 which received Royal Assent on 27 October 2021 and requires the relevant entities to start making disclosures for financial years beginning in 2023. The New Zealand Government estimates around 200 entities will be required to comply with the new disclosure requirement, including:

• All registered banks, credit unions, and building societies with total assets of more than $1 billion.
• All managers of registered investment schemes with greater than $1 billion in total assets under management.
• All licensed insurers with greater than $1 billion in total assets or annual premium income greater than $250 million.
• All equity and debt issuers listed on the NZX.
• Crown financial institutions with greater than $1 billion in total assets under management.

US approach to TCFD Recommendations

Although the US does not mandate compliance with the TCFD Recommendations, some of the largest US airlines already align their ESG disclosures with the TCFD Recommendations.

With respect to mandatory disclosure obligations, the US Securities and Exchange Commission (SEC or Commission) recently reminded reporting companies that the Commission’s 2010 Guidance Regarding Disclosure Related to Climate Change (2010 Guidance) requires companies to disclose material climate change-related risks and opportunities and explain their potential impact on the company. On September 22, 2021, the SEC published an “illustrative” Sample Letter that it might send issuers which identifies several areas that could require further disclosure under the 2010 Guidance, including:

• Material “pending or existing climate change-related legislation, regulations, and international accords”, including a description of “any material effect on [the company’s] business, financial condition, and results of operations”;
• Material “past and/or future capital expenditures for climate-related projects” and if material, quantification “of those expenditures”;
• “To the extent material, … the indirect consequences of climate-related regulation or business trends,” for which the SEC provided the following examples:

1. "decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources”;
2. “increased demand for goods that result in lower emissions than competing products”;
3. “increased competition to develop innovative new products that result in lower emissions”;
4. “increased demand for generation and transmission of energy from alternative energy sources”; and
5. “any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.”

• If material, “the physical effects of climate change on operations and results,” which may include “the severity of weather, quantification of weather-related damages”, the impacts on “major customers or suppliers”, “decreased agricultural production capacity due to drought or other weather-related changes”, and “weather-related impacts on the cost or availability of insurance”;
• Quantification of “any material increased compliance costs related to climate change”; and
• If material, the “purchase or sale of carbon credits or offsets” and “material effects” therefrom.

Notably, in the Sample Letter, the SEC further requests an explanation as to why a company is providing more expansive disclosure in their corporate social responsibility reports than in their SEC filings (as guided by the 2010 Guidance).

SEC Chair Gary Gensler has said the Commission will propose new mandatory climate change-related disclosures by the end of the year, which could include qualitative and quantitative components. Qualitative components could “answer key questions, such as how the company’s leadership manages climate-related risks and opportunities and how [those] factors feed into the company’s strategy,” whereas quantitative components could “include metrics related to greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals.”

In March 2021, the SEC requested public comment on potential climate change disclosures, setting out 15 multipart questions, including “the advantages and disadvantages of rules that incorporate or draw on existing frameworks, such as, for example, those developed by the [TCFD], Sustainability Accounting Standards Board (SASB), and the Climate Disclosure Standards Board (CDSB).” In addition, in July 2021, the SEC’s Asset Management Advisory Committee (AMAC) recommended that the Commission encourage issuers to adopt a disclosure framework for material ESG matters or provide an explanation as to why not. The AMAC advised that disclosure frameworks could include those developed by third-party standard setting organizations (like the TCFD) or industry groups dedicated to ensuring consistent, comparable disclosures within the industry.

In June 2021, US Treasury Secretary Janet Yellen signed on to the G7 Finance Ministers and Central Bank Governors Communiqué, which calls for mandatory climate disclosures in accordance with the TCFD Recommendations.

Overall, the SEC’s 2021 agenda and recent statements by Commissioners indicate the Commission will propose new disclosure rules by the end of the year, which could include some level of quantitative metrics (such as Scope 1 and 2 greenhouse gas emissions).

Singapore's approach to TCFD Recommendations

Singapore does not yet mandate compliance with the TCFD Recommendations. There is currently no legislation providing that the TCFD Recommendations must be strictly followed. The Singapore Government has launched the Singapore Green Plan 2030, which is a national sustainability movement to rally bold and collective action to tackle climate change. This includes, among other things, promoting sustainable fuels for international trade and travel, raising sustainability standards of buildings through the next edition of the Singapore Green Building Masterplan, relying on solar energy deployment, tapping on cleaner electricity imports and requiring all newly-registered vehicles to be of cleaner-energy models from 2030. The Singapore Green Plan 2030 underlies the reforms initiated by (among others) the Singapore Exchange Regulation (“SGX RegCo”) and Monetary Authority of Singapore’s (“MAS”) outlined below.

Currently, the only requirement for any environment related disclosure is found in Rule 771A of the Mainboard Listing Rules of the Singapore Stock Exchange (“SGX”), which mandates every listed company to prepare an annual sustainability report for its financial year which must describe the listed company’s sustainability practices with reference to the following components on a ”comply or explain” basis:

1. material environmental, social and governance factors;
2. policies, practices and performance;
3. targets;
4. sustainability reporting framework; and
5. board statement.

• All issuers to adopt climate reporting on a ‘comply or explain’ basis for their financial year (“FY”) commencing in 2022;
• From the FY commencing in 2023 onwards, climate reporting will be mandatory for some sectors of issuers while ‘comply or explain’ will remain the approach for the others; and
• From the FY commencing in 2024 onwards, more sectors of issuers will adopt mandatory climate reporting with the rest doing so on a ‘comply or explain’ basis.

On top of the TCFD framework, SGX suggested seven environment-related metrics for reporting, including absolute GHG emissions, emission intensity, total energy consumption, energy consumption intensity, total water consumption, water consumption intensity and total waste generated. It is envisaged that issuers will need to consider GHG emission disclosure beyond Singapore's national boundary, especially for listed companies in the shipping and aviation sectors. It is likely that directors of listed companies may be personally criminally or civilly liable for failure to comply with these regulations once they come into force.

The MAS’ Green Finance Industry Taskforce (“GFIT”), established in May 2021, has issued several initiatives aligned with TCFD Recommendations to accelerate green finance in Singapore through improving disclosures and fostering green solutions.

The GFIT issued a detailed implementation guide for climate-related disclosures by financial institutions; a framework to help banks assess eligible green trade finance transactions; and a whitepaper on scaling green finance in the real estate, infrastructure, fund management and transition sectors. The guide also outlines specific disclosure practices for each of the banking, insurance and asset management sectors, taking into consideration the different approaches that individual sectors could take.

Whilst TCFD Recommendations have not yet been brought into domestic law, certain airlines, banks and global investment companies in Singapore have voluntarily complied and made disclosures in accordance with the TCFD Recommendations.

Singapore’s sovereign wealth fund, the Government of Singapore Investment Corporation, joined Climate Action 100+ in November 2020, an investor-led initiative (including the Asia Investor Group on Climate Change, Ceres, the Investor Group on Climate Change, the Institutional Investor Group on Climate Change and the Principles for Responsible Investment) engaging high-emission companies to reduce emissions of greenhouse gas (“GHG”), strengthen climate governance and enhance climate disclosure.

Canada's approach to TCFD Recommendations

In Canada, there has been strong support for broader mandatory disclosures from the Canadian federal government. The government’s Expert Panel on Sustainable Finance in 2019 endorsed a phased “comply or explain” approach to the adoption of the TCFD framework. The Canadian government has mandated TCFD aligned disclosure for Crown corporations with the rollout beginning in 2022 for Crown corporations holding more than $1 billion in assets and others following in 2024 at the latest. The government also included an affirmative covenant requiring annual climate-related financial disclosure in their Large Employer Emergency Financing Facility (LEEFF) as part of Canada’s response to COVID-19; however this did not specifically refer to the TCFD recommendations. In its 2021 budget, the federal government committed to engaging with provinces and territories with the objective of making TCFD consistent climate disclosures part of regular corporate practice. Canada also supported the G7 finance ministers’ communique in 2021, which saw the G7 put its full support behind mandatory TCFD disclosures.

Securities regulation in Canada is enforced by provincial commissions and corporations are currently awaiting definitive guidance on climate-related disclosures from them. There are existing requirements for public companies to disclose information material to investor decision-making, which includes material environmental matters such as climate change, but these requirements are generally not as specific and do not specify a process for determining materiality (as found in the TCFD Recommendations). In October 2021, however, Canadian securities regulators published proposed climate-related disclosure requirements. The Canadian Securities Administrators (CSA) stated that its proposed requirements seek to address the issues of consistency and comparability of information provided to investors. Notably, the CSA asserted “the CSA’s commitment in favour of the growing international movement toward mandatory climate-related disclosure standards”.

The proposed requirements contemplate disclosure largely consistent with the TCFD Recommendations. Under the proposed requirements, issuers would be required to disclose Scope 1, Scope 2 and Scope 3 GHG emissions and the related risks, or their reasons for not doing so (“comply or explain”). However, the CSA is also consulting on an alternative approach that would require issuers to disclose Scope 1 GHG emissions but disclosure of Scope 2 and Scope 3 GHG emissions would not be mandatory.

In the absence of final guidance, some corporations are already moving forward with voluntary compliance with the TCFD Recommendations, including former Crown corporation and Canada’s largest national carrier, Air Canada. In March 2021, the airline announced a goal of net zero emissions by 2050 and its intention to report through the TCFD framework starting in 2022. In May of 2021 Air Transat also released its 2020 Climate Disclosure Report which was aligned with TCFD Recommendations.

Conclusions

Many airlines already report on their carbon-related activities in some form or another, with some using Global Reporting Initiative (GRI) standards on sustainability reporting and others already adhering to the TCFD Recommendations.

It is clear that the different jurisdictions discussed are at different stages with climate-related disclosures - whether these are mandatory or voluntary and which organisations are (or will soon be) in scope. One thing which is clear is that the direction of movement is clearly towards increased reporting with more organisations facing obligations.