Highlights

• The Taskforce on Climate-Related Financial Disclosure (TCFD) has drawn attention in the capital markets which will have a direct impact on all businesses regardless of sector and size.’

• Over 2,600 organizations globally support the TCFD’s recommendations, including over 1,000 financial institutions with aggregate assets under management of $194 trillion¹.

• In March 2022, the SEC proposed rules to enhance and standardize climate-related disclosures to investors. The proposal modeled recommendations off TCFD, lending regulatory firepower to the framework.

• The TCFD framework includes four high-level recommendations – governance, strategy, risk management, and metrics & targets – that include two primary, quantitative components that require a great degree of complexity and assumptions – scenario analysis and metrics and targets around Scope 1, 2, and 3 emissions.

• More than half of S&P 1500 Energy companies leverage TCFD’s recommendations, but sophistication and extent of integration varies.

• Only 23% of S&P 1500 Energy companies currently disclose all major elements of TCFD’s recommendations.

• The average CDP score across all S&P 1500 energy companies was 1.9, which is equivalent to a D. Looking only at the companies that filled out the survey, and excluding those not scored, the average for the S&P 1500 is 4.3, which is roughly a C.

• Based on our empirical analysis detailed in this report, it is clear that there is still improvement to be made in terms of the sophistication of TCFD disclosure.

The Need for Climate-Related Disclosure

There is rising pressure from a multitude of stakeholders to recognize the need for standardized climate-related disclosure to aid in capital allocation and risk management strategies. This is due to the increased economic effects climate change has posed on financial risks and financial stability. Over the last two years, we have seen ESG topics, such as transparency around political contributions, board diversity and skills policies, climate lobbying reporting, and emissions reduction plans, coming up in proxy voting. In the latest round of proxy voting, we observed a trend of large asset managers voting against board members that sit on a company’s sustainability committee if the company doesn’t have metrics and targets in place. In addition to proxy voting, we see investors engaging through activist campaigns. Examples include Engine1 & Exxon, Third Point & Shell, and Bluebell Capital & Glencore. Outside of public equities, the Sustainable Finance Disclosure Regulation (SFDR) in Europe has begun impacting access to banking and insurance in the United States. Finally, and perhaps most topically, the Securities Exchange Commission (SEC) laid out a set of proposed climate-related disclosures this year. While the proposal is still in the comment period, it is clear that the lack of transparency and consistency has challenged investors and regulators and has led to mounting support for one standard that can be widely adopted across fundamentally different businesses.

Framework Emergence and Consolidation

There is growing support from investors and regulators to have frameworks aligned into one universal standard to accelerate climate-related disclosure. To support this trend there has been a convergence of frameworks with aspirations to establish one standard. Emerging from COP26, a joint initiative was developed among 5 of the top frameworks and standards to tackle this challenge. These frameworks originally consisted of Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), Value Reporting Foundation (VRF – formerly SASB), Climate Disclosure Standards Board (CDSB), and Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations. This led to the creation of the International Sustainability Standards Board (ISSB) in late 2021 with the goal to improve the global consistency of reporting.

In parallel with the larger collaboration, we were already observing framework alignment and consolidation, namely CDP & TCFD. In efforts to align with TCFD, CDP constructed its questionnaire to operationalize the TCFD recommendations. Specifically, 40 of the questions in CDP’s Climate Change Survey directly map to one of TCFD’s four recommendations. We often see companies submitting the CDP questionnaire to garner a rating that quantifies their alignment with TCFD. Where the two diverge is in the focus of CDP on environmental topics outside of emissions. The organization has created Water and Forestry surveys that provide an assessment of a company’s impact on natural resources.

Recognition of TCFD in the Finance Sector

TCFD is gaining support along with worldwide recognition from a range of stakeholders, including financial institutions, companies across all sectors, and local, national, and international regulators. Investors globally recommend or require that companies align with the recommendations laid out by TCFD.

In 2020, Mark Carney, the former Governor of the Bank of England, noted in his speech Road to Glasgow that “Every major systemic bank, the world’s largest insurers, its biggest pension funds, and top asset managers are calling for the disclosure of climate-related financial risk through their support of the Task Force for Climate-related Financial Disclosures (TCFD)”². In 2021, the International Organization of Securities Commissions (IOSCO), which is the leading international policy forum for securities regulators, has been working with the International Financial Reporting Standards (IFRS) to assist in developing a common set of sustainability standards. After COP26, IOSCO created the International Sustainability Standards Board (ISSB) which will leverage the recommendations laid out by the TCFD framework as well as the SASB and CDSB.

Also in 2021, the announcement of TCFD in the US began to make headlines. The US Treasury Secretary Janet Yellen, who endorsed and expressed support for the framework drew a lot of attention. She recognized the need for reliable, consistent, and comparable disclosure to help investors make informed decisions. A few months later May 28th, 2021, Finance Ministers and The Central Bank Governors of the G7 met virtually, and a component of their meeting centered on transformative efforts to tackle climate change and biodiversity loss. Leaders concluded there needs to be established mandatory climate-related financial disclosure which would be aligned based on the TCFD framework. Again, we see this discussion of investor needs for comparable and reliable climate-related disclosure. In his 2022 CEO Letter, Larry Fink calls out TCFD as the recommended framework for assessing climate-related risks³. We believe the attention TCFD has drawn in the capital markets will have a direct impact on all businesses regardless of sector and size.

Regulatory Adoption of TCFD

On March 21st, 2022, the Security and Exchange Commission (SEC) proposed mandatory climate disclosure that was patterned off the TCFD framework. The proposal was an impressive 500+ page document that included components that overlapped with TCFD including the governance of climate-related matters, the impact of climate on business strategy, management of climate risk, and established targets in place. This proposal would specifically require companies to disclose in their applicable SEC filings report how climate-related risks would impact the financials of a company, the management and oversight process of those risks, as well as disclose Scope 1-3 emissions. As part of a company’s financial statements, these components of reporting would also be subject to audit by a public accounting firm. This proposal was signaled by increasing demand for transparency and further solidifies TCFD as the leading framework.

Globally, we have seen the adoption and impending mandatory climate reporting using the TCFD recommendations across some of the largest economies in the world including Canada, Europe, New Zealand, Japan, and India. In 2019, the European Union supplemented its 2017 guidelines on the Non-Financial Reporting (2014/95/EU), which encompassed recommendations by the TCFD framework. In 2020, New Zealand announcement made headlines as one of the first countries to pass laws requiring banks, insurers, and investment managers to report on climate which would leverage the TCFD recommendations and become mandatory starting in 2023. A few months after this announcement in November 2020, the UK Financial Conduct Authority (FCA) announced they have plans in place to expand current climate-related disclosures and then eventually have economy-wide- mandatory climate-related disclosure aligned with TCFD by 2025. We saw adoption progress as last year, countries including Japan and India both declared increased requirements on climate-related disclosure for companies.

Overview of TCFD

Background

The Taskforce on Climate-Related Financial Disclosures (TCFD) was established in December 2015 with the goal of developing a set of voluntary climate-related financial disclosures. At its launch, over 100 CEOs publicly supported the TCFD recommendations. Now, almost 7 years later, over 2,600 organizations globally support the TCFD’s recommendations. These 2,600 organizations include over 1,000 financial institutions that manage over $194 trillion in assets.

Recommendations

The TCFD recommendations are designed to be adoptable by all organizations, be included in financial filings, solicit decision-useful, forward-looking information on financial impacts, and have a strong focus on the risks and opportunities related to transitioning to a lower-carbon economy. The core elements of the recommendations include four widely adoptable recommendations tied to governance, strategy, risk management, and metrics and targets.

First, the TCFD recommends companies describe the board’s oversight of, and management’s role in, assessing and managing climate-related risks and opportunities.  In this section, companies are recommended to disclose the process and frequency by which the board and its committees are informed about climate-related risks and opportunities as well as how these factors influence strategy, policies, annual budgets, and performance objectives. At the management level, companies are recommended to disclose the positions and/or committees that are responsible for assessing and managing climate-related risks and opportunities.

Next, the TCFD recommends companies describe identified climate-related risks and opportunities and the potential financial impact of these risks and opportunities. Climate-related risks can be categorized as either physical or transition risks, where physical risks are those resulting from climate change and transition risks relate to transitioning to a lower-carbon economy. Physical risks resulting from climate change can be further broken down into those that are event-driven (acute) or result from longer-term shifts (chronic) in climate patterns. Transition risks are categorized into policy and legal, technology, market, or reputational risks. Climate opportunities are those that result from efforts to mitigate and adapt to climate change. TCFD provides examples of climate-related opportunities, such as resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain.

The third pillar of TCFD’s framework is risk management. The TCFD recommends companies describe processes for identifying, assessing, and managing climate-related risks and describe how these processes are integrated into overall risk management. In this section, TCFD recommends that companies disclose whether they consider existing and emerging regulatory requirements related to climate change. Companies are guided to describe their processes for managing climate-related risks, including how they make decisions to mitigate, transfer, accept, or control those risks. Finally, the TCFD recommends that companies discuss their processes for prioritizing climate-related risks, including how materiality determinations are made within their organizations.

Finally, the TCFD recommends companies disclose metrics and targets used to assess and manage climate-related risks and opportunities. On top of these four recommendations, TCFD lays out additional recommended disclosures that provide guidance for all sectors as well as supplemental guidance for certain sectors (including energy). These disclosures are augmented by additional supporting materials.

Scenario Analysis

One of the Task Force’s key recommended disclosures focuses on the resilience of an organization’s strategy, taking into consideration different climate-related scenarios, including a 2° Celsius or lower scenario.  Typically, we see scenario analysis getting included in the “Strategy” section of their disclosure, as companies discuss how strategies might change to address potential climate-related risks.

Within the Energy sector, scenario analysis can be particularly challenging for companies to conduct. A key resource that companies are leveraging is the World Economic Model, developed by the International Energy Agency (IEA). For the World Energy Outlook 2021, four scenarios were modeled: the Net Zero Emissions by 2050 Scenario (NZE), the Announced Pledges Scenario (APS), the Stated Policies Scenario (STEPS), and the Sustainable Development Scenario (SDS).  The NZE sets out a narrow but achievable pathway for the global energy sector to achieve net-zero CO2 emissions by 2050. It doesn’t rely on emissions reductions from outside the energy sector to achieve its goals.  The APS assumes that all climate commitments made by governments around the world, including Nationally Determined Contributions (NDCs) and longer-term net-zero targets, will be met in full and on time.  The STEPS reflects current policy settings based on a sector-by-sector assessment of the specific policies that are in place, as well as those that have been announced by governments around the world. Finally, the SDS specifies a pathway to ensuring universal access to affordable, reliable, sustainable and modern energy services by 2030 (SDG 7); substantially reducing air pollution (SDG 3.9); and taking effective action to combat climate change (SDG 13).  In the NZE and the SDS; there is no trade-off between achieving climate objectives and delivering on energy access and air pollution goals.

Path To Implementation

The TCFD expects that reporting of climate-related risks and opportunities will evolve over time as organizations, investors, and others contribute to the quality and consistency of the information disclosed. It lays out a five-year time frame for full implementation that will result in more complete, consistent, and comparable information for market participants, increased transparency and appropriate pricing of climate-related risks and opportunities.

The Importance of Climate-Related Disclosures for Energy Companies

Energy companies face unique challenges when it comes to ESG reporting.  Historically, the sector has underperformed financially and lagged in terms of ESG disclosure. Energy companies have failed to control the narrative and, as such, have targeted by detractor groups. The reputation of the sector as poor stewards of the environment has influenced investor perception and access to capital over the last couple of years.

That said, we believe that the Energy Transition cannot take place without the knowledge and experience of traditional Energy companies. The IEA that the Energy Transition will take roughly $150 trillion dollars invested by 2050. Thus, it is critical for Energy companies to maintain and enhance their access to capital. Resulting from the trends identified earlier in this report, TCFD has become a critical tool to leverage in investor-facing disclosures. A strong ESG story can support and justify entrance into an Energy stock by a fund manager that historically divested all sector holdings. Strong ESG performance can also indicate operational efficiencies and thus justify a higher valuation at exit.

How Energy Companies Are Implementing TCFD

Methodology & Summary

To understand how companies are implementing TCFD’s recommendations, Pickering Energy Partners’ ESG Consulting team (we) gathered the publicly available ESG disclosures of the 64 S&P 1500 Energy Companies. These disclosures included ESG websites, ESG reports, and TCFD reports. We leveraged natural language processing and machine learning algorithms to understand the metrics and topics disclosed and the frameworks referenced. We then layered in data relating to third-party ESG ratings and scores, accessed through Bloomberg.

Of the companies analyzed, 53 have published a Sustainability Report and 14 have a standalone TCFD report (13 companies have both). Outside of TCFD, the most prevalent frameworks include the Sustainable Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the United Nations Sustainable Development Goals (SDGs). Sector-specific frameworks and initiatives include American Exploration and Production Council (AXPC), IPIECA (which is endorsed by the American Petroleum Institute and  International Association of Oil & Gas Producers), and Energy Infrastructure Council (EIC) / GPA Midstream. Of all of these frameworks and standards, TCFD is the only forward-looking set of recommendations.

Prevalence of TCFD Recommendations

To understand the influence of TCFD on Energy companies’ reporting, we start by identifying those companies that, in the latest round of reporting, claim to leverage TCFD’s recommendations in creating their Sustainability Report or publish a separate TCFD report. 61% of the companies analyzed fall into at least one of these categories. As an additional lens, we also assessed which companies fill out CDP’s Climate Change questionnaire, which is based on TCFD’s recommendations. 17 companies completed the CDP questionnaire and received a score. 66% of S&P 1500 energy companies leverage the TCFD recommendations, either directly through their ESG report or TCFD report or indirectly by completing the CDP questionnaire. Thus, we conclude that TCFD is not only influential, but prevalent. However, only 6% of the companies analyzed completed all 3 sets of disclosures – ESG report, TCFD report, and CDP questionnaire. This indicates that the extent of integration and sophistication of disclosures varies.

Status of TCFD Integration

To expand on the analysis of the prevalence of TCFD, we leveraged machine learning and natural language processing techniques to better understand the extent of TCFD integration. In this analysis, we looked at the individual components of TCFD’s recommendations and analyzed whether these components are present in companies’ ESG and TCFD reports.

First, we assessed the presence of Governance, Strategy, Risk Management, and Metrics & Targets sections of ESG reports and standalone TCFD reports. While Governance, Strategy, and Risk Management are themes that are commonly disclosed outside of TCFD reports, a section dedicated to Metrics and Targets is unique to the TCFD framework and is much more frequently disclosed in standalone TCFD reports. 48% of the companies analyzed disclose all four qualitative components of the TCFD recommendations.

Next, we reviewed the reports for the more quantitative and complex elements of TCFD’s guidance, including Scenario Analysis and Scope 1 – 3 disclosure. 70% of the companies describe conducting a Scenario Analysis, either in their ESG report or their standalone TCFD report. Only 33% of the companies analyzed disclose estimates for Scope 1, 2, and 3 emissions.

Finally, we analyzed the proportion of ESG reports, TCFD reports, and S&P 1500 Energy companies overall which include the four TCFD recommendations, scenario analysis, and Scopes 1 – 3. The companies that disclose all three categories have reporting that aligns completely with all of the recommendations of TCFD. There are 24 companies that disclose all four elements of TCFD’s recommendations, provide a scenario analysis, and provide data on Scope 1 – 3 emissions as part of their metrics and targets.

Use of the IEA Scenarios

Of the 64 companies analyzed, 44 disclose that they conduct (or plan to conduct in the next year) scenario analysis part as of their strategy setting. For those companies that provide details about their scenario analysis in their ESG or TCFD reports, the IEA Sustainable Development Scenario (SDS) and Stated Policies Scenario (STEPS) appear to be the favored scenarios. Interestingly, of the companies analyzed, very few companies utilize the Announced Pledges Scenario (APS).

Estimation Of Scope 3

While disclosure of Scope 1 is fairly common and Scope 2 disclosures have become more common over the last year, only 33% of S&P 1500 Energy companies disclose Scope 3 estimates. This is intuitive, as direct emissions as a result of operations are required to be disclosed to the EPA and indirect emissions from purchased electricity can be estimated with a relatively simple set of assumptions. Scope 3 emissions, or those that result from a variety of activities across the value chain, are far more complex to estimate. The TCFD recommendations reference the GHG protocol, which provides guidance on 15 categories of Scope 3 emissions and methods for calculation. TCFD is one of the only frameworks or standards that recommends disclosure of all 15 categories, through its alignment with the GHG Protocol. In contrast, IPIECA guides companies towards disclosing only downstream emissions resulting from the use of sold products (Category 11 in the GHG Protocol).

While disclosure of Scope 1 is fairly common and Scope 2 disclosures have become more common over the last year, only 33% of S&P 1500 Energy companies disclose Scope 3 estimates. This is intuitive, as direct emissions as a result of operations are required to be disclosed to the EPA and indirect emissions from purchased electricity can be estimated with a relatively simple set of assumptions. Scope 3 emissions, or those that result from a variety of activities across the value chain, are far more complex to estimate. The TCFD recommendations reference the GHG protocol, which provides guidance on 15 categories of Scope 3 emissions and methods for calculation. TCFD is one of the only frameworks or standards that recommends disclosure of all 15 categories, through its alignment with the GHG Protocol. In contrast, IPIECA guides companies towards disclosing only downstream emissions resulting from the use of sold products (Category 11 in the GHG Protocol).

Of the 21 of S&P 1500 Energy companies that do publish their Scope 3 estimates, only 4 companies mention all 15 categories, and none disclose estimates for all 15. For those companies mentioning all 15 categories but not disclosing estimates, it is most common to report that the category is not applicable or is too challenging to estimate. None of the companies analyzed disclose Category 14: Franchises, because this category doesn’t pertain to the sector. Category 11: Use of Sold Products is the most widely disclosed, followed by Category 4: Upstream Transportation & Distribution and Category 6: Business Travel. Even the most sophisticated of the companies disclosing these categories heavily rely on estimates and assumptions.

Interestingly,  we noted a trend in companies reporting Scope 1-3 data. Companies that disclose Scope 3 emissions tend to be those that have filled out the CDP questionnaire, indicating they are spending the time to fill out the survey once they collected Scope 3 data. We see this trend diminishes when looking at only Scopes 1 and 2 signaling companies may not be as motivated to fill out the survey until they have a more complete emissions profile.

Takeaways from the Most Sophisticated Reporters

We feel the regulatory landscape and investor expectations will be molded and influenced by today’s most sophisticated reporters.

There are 15 companies, out of the 64 analyzed, that disclose all components of TCFD’s recommendations. 100% of these companies issue an ESG report and 50% publish a standalone TCFD report.

To assess how these companies’ disclosures are accepted by stakeholders within the capital markets, the team analyzed the ESG scores and ratings for these companies and benchmarked them against the broader set of S&P 1500 Energy companies. The ratings and scores analyzed include S&P, MSCI, Bloomberg, Sustainalytics, and (most importantly) CDP. The team started first by benchmarking ESG scores across all agencies but CDP. S&P scores range from 0 to 100 and are based on the nuances and differences of policies and programs and in-depth ESG information. The MSCI ESG Rating is designed to measure a company’s resilience to ESG risks. They use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers. MSCI ESG Ratings range from leader (AAA, 10) to laggard (CCC, 4). Bloomberg’s ESG performance scores are based both on the presence of disclosure and the performance on certain topics over time. Scores range from 0 to 10. Sustainalytics assesses business risk driven by ESG issues. The rating combines an assessment of a company’s exposure to industry-specific ESG issues with how well the company is managing those issues. The final scores are a measure of unmanaged risk on an absolute scale of 0-100. In this case, the lower the score the better, so these scores are shown on a negative axis. On average, the most sophisticated reporters score 58% higher on S&P, 6% higher on MSCI, 26% higher on Bloomberg, and 6% better on Sustainalytics.

Next, the team focused in on CDP scoring, because of the survey’s reliance on the TCFD framework. CDP scores range from A (8) to F (0). When looking at all S&P 1500 companies, the team saw only 27% completed the CDP questionnaire. Those companies that did not respond to the survey received a N.S. (coded as 0 for the purpose of benchmarking). Companies that did respond to the survey but did not provide adequate information received an F (also coded as a 0 for the purpose of benchmarking). The average CDP score across all S&P 1500 energy companies was a 1.9, which is roughly a D. Looking only at the companies that filled out the survey, and excluding those not scored, the average for the S&P 1500 is a 4.3 , which is roughly a C. This indicates that while those companies provide enough information to be scored, their disclosure sophistication and performance is not enough to grant them a high CDP score. Looking now at the most sophisticated reporters, 67% of companies filled out the CDP questionnaire and those that did received an average score of 4.7, or B-. This indicates that even across the most sophisticated reporters in the Energy space, there is still improvement to be made in terms of disclosure under TCFD.

Aligning with TCFD

It is challenging not to feel overwhelmed when assessing to report under TCFD. Based on how the competitive curve is evolving, the Pickering Energy Partners ESG Consulting team believes that companies should take an incremental approach to reporting, starting with the simplest disclosures and increasing sophistication over time. While the team doesn’t necessarily agree with the extent of the SEC’s proposed climate disclosures, the pursuit of quality, long-term capital now requires management teams to implement the TCFD infrastructure within their reporting strategy.

Recommendations for a Phased Approach

Step 1. Start by understanding your company’s physical and transition risks and begin taking steps to integrate scenario planning in strategy and disclosure over the next 2-3 years

TCFD recommends that companies identify climate-related transition risks like policy change, legal, and market risks, and physical risk including acute (event-driven) and chronic (long-term weather impacts). Identifying and establishing processes and structures for mitigating risks under these categories is the first step in aligning strategy and reporting with TCFD.

Step 2.  Begin by monitoring Scope 1 and set the foundation for emissions monitoring, reporting, and performance targets. Over time, focus on developing strong estimates for Scope 2 and, within 3 years, Scope 3.

Once climate-related risks and opportunities are integrated in broader strategy, risk management, and governance structures, we would recommend quantifying metrics related to climate change and setting targets for performance. Direct emissions (Scope 1) reporting is the most prevalent across not only sectors but also public and private capital markets. It is critical to develop Scope 1 measurement and reporting that is accurate, auditable, and consistent over time. Indirect emissions through purchased electricity (Scope 2) is a 1 to 2 year consideration. While it may rely on some estimates for the emissions related to electricity purchased, the underlying data is fairly accessible. Scope 3 is perhaps the most challenging. There are 15 categories of emissions, each requiring unique measurements, assumptions, and estimates. As companies develop their emissions monitoring and reporting strategies, we see them partnering with customers and suppliers to aggregate data related to upstream and downstream emissions.

Step 3. Integrate scenario analysis related to global climate change in business strategy and reporting, both ESG reporting and financial reporting.

Publicly disclosed results of scenario analysis represent the “final frontier” in TCFD alignment. Scenario planning reviews potential risks and applies them to hypothetical construct, to challenge how different alternatives can yield various outcomes. This showcases to stakeholders that the company is thinking critically about a variety of potential situations that could impact the financial positioning of the company. TCFD requires companies to assess at least 2 different scenarios. As described in “Scenario Planning”, Energy companies currently leverage some combination of the four scenarios developed by the IEA. One trend we noted in our analysis is that Energy companies aligned with IPIECA predominantly leverage the Sustainable development Scenario (SDS) in combination with one other IEA scenarios⁵. Because the SDS pathway is aligned to meeting the SDGS, we see that companies that are already reporting IPIECA are including this scenario in their TCFD reports. Additionally, we observed that Energy companies tend to favor the SDS and STEPS scenario plans overall. Our recommendation for scenario planning is to leverage a base case and two scenarios including one conservative scenario (such as STEPS or APS) and one more aggressive scenario (such as SDS or NZE).

The team believes companies can control the narrative by proactively telling a consistent, bottom up ESG story that is rooted in data and trend. To stay ahead of the curve, it is critical to be proactive in engaging with stakeholders throughout the year. ESG disclosure is not just a single touchpoint – There are many opportunities throughout the year for consistent messaging including earnings, investor days, analyst days, and governance roadshows.

Glossary

American Exploration and Production Council (AXPC): The American Exploration and Production Council (AXPC) is a national trade association representing the largest independent oil and natural gas exploration and production companies in the United States. AXPC works with regulators and policymakers to better educate them on our operations so that they will be able to create sound fact-based public policies that result in the safe, responsible exploration and production of America’s vast oil and natural gas resources.

Announced Pledges Scenario (APS): A scenario which assumes that all climate commitments made by governments around the world, including Nationally Determined Contributions (NDCs) and longer-term net zero targets, will be met in full and on time.

Bloomberg ESG Rating: Bloomberg’s ESG performance scores are based both on the presence of disclosure and the performance on certain topics over time. Scores range from 0 to 10.

Carbon Disclosure Project (CDP): CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP runs the global environmental disclosure system. Each year CDP supports thousands of companies, cities, states and regions to measure and manage their risks and opportunities on climate change, water security and deforestation.

CDP ESG Score: CDP scores focus on the ‘E’ from ESG, and cover climate change, forests, and water security. Scores are on a letter grade scale with A being the highest and F being the lowest. An F indicates that not enough information was supplied to receive a score.

2021 Conference of the Parties (COP 26): The UN Climate Change Conference in Glasgow (COP26) brought together 120 world leaders and over 40,000 registered participants, including 22,274 party delegates, 14.124 observers and 3.886 media representatives. For two weeks, the world was riveted on all facets of climate change — the science, the solutions, the political will to act, and clear indications of action.

Climate Disclosure Standards Board (CDSB): CDSB is an international consortium of business and environmental NGOs. We are committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital.

Energy Infrastructure Council (EIC): The Energy Infrastructure Council (EIC) is a non-profit trade association dedicated to advancing the interests of companies that develop and operate energy infrastructure. EIC addresses core public policy issues critical to investment in America’s energy infrastructure.

Global Reporting Initiative (GRI): GRI (Global Reporting Initiative) is the independent, international organization that helps businesses and other organizations take responsibility for their impacts, by providing them with the global common language to communicate those impacts.

GPA Midstream: The GPA Midstream Association has been engaged in shaping the midstream sector of the U.S. energy industry since 1921: setting and adopting standards for natural gas liquids; developing simple and reproducible test methods to define the industry’s raw materials and products; managing a cooperative research program that is used worldwide; providing a voice for the industry on Capitol Hill; being the go-to resource for a multitude of technical reports and publications; and more.

International Energy Agency (IEA): The International Energy Agency is a Paris-based autonomous intergovernmental organization established in the framework of the Organization for Economic Co-operation and Development in 1974 in the wake of the 1973 oil crisis.

International Organization of Securities Commissions (IOSCO): The International Organization of Securities Commissions (IOSCO) is an association of organizations that regulate the world’s securities and futures markets. Members are typically primary securities and/or futures regulators in a national jurisdiction or the main financial regulator from each country.

IPIECA: IPIECA is the global oil and gas association for advancing environmental and social performance across the energy transition.

MSCI ESG Rating: The MSCI ESG Rating is designed to measure a company’s resilience to ESG risks. They use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers. Their ESG Ratings range from leader (AAA, AA), average (A, BBB, BB) to laggard (B, CCC).

Net Zero Emissions Scenario (NZE): A scenario which sets out a narrow but achievable pathway for the global energy sector to achieve net zero CO2 emissions by 2050. It doesn’t rely on emissions reductions from outside the energy sector to achieve its goals.

Physical Risk: Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations’ premises, operations, supply chain, transport needs, and employee safety.

S&P ESG Rating: S&P Global ESG Scores capture the nuances and differences of policies and programs and in-depth ESG information by directly engaging with companies and conducting independent research. Scores range from 0-100. The higher the score the better.

Scenario Analysis: Scenario analysis is a process for identifying and assessing the potential implications of a range of plausible future states under conditions of uncertainty. Scenarios are hypothetical constructs and not designed to deliver precise outcomes or forecasts. Instead, scenarios provide a way for organizations to consider how the future might look if certain trends continue or certain conditions are met. In the case of climate change, for example, scenarios allow an organization to explore and develop an understanding of how various combinations of climate-related risks, both transition and physical risks, may affect its businesses, strategies, and financial performance over time.

Scope 1: Scope 1 emissions are direct greenhouse (GHG) emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles).

Scope 2: Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. Although scope 2 emissions physically occur at the facility where they are generated, they are accounted for in an organization’s GHG inventory because they are a result of the organization’s energy use.

Scope 3: Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Stated Policies Scenario (STEPS): A scenario which reflects current policy settings based on a sector-by-sector assessment of the specific policies that are in place, as well as those that have been announced by governments around the world.

Sustainability Accounting Standards Board (SASB): SASB Standards guide the disclosure of financially material sustainability information by companies to their investors. Available for 77 industries, the Standards identify the subset of environmental, social, and governance (ESG) issues most relevant to financial performance in each industry.

Sustainable Development Scenario (SDS): An integrated scenario specifying a pathway aiming at: ensuring universal access to affordable, reliable, sustainable and modern energy services by 2030 (SDG 7); substantially reducing air pollution (SDG 3.9); and taking effective action to combat climate change (SDG 13).

Sustainalytics ESG Risk Score: Sustainalytics assesses business risk driven by ESG issues. The rating combines an assessment of a company’s exposure to industry specific ESG issues with how well the company is managing those issues. The final scores are a measure of unmanaged risk on an absolute scale of 0-100.

Sustainable Finance Disclosure Regulation (SFDR): The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.

Taskforce on Climate-Related Financial Disclosures (TCFD): The Task Force on Climate Related Financial Disclosures provides information to investors about what companies are doing to mitigate the risks of climate change, as well as be transparent about the way in which they are governed.

Transition Risk: Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations.

United Nations Sustainable Development Goals: The 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries – developed and developing – in a global partnership. They recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

Value Reporting Framework (VRF): The Value Reporting Foundation is a global nonprofit organization that offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value—how it is created, preserved and eroded.

Sources Referenced

1. 1https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
2. 2https://www.axpc.org/who-we-are/
3. 3https://www.blackrock.com/us/individual/larry-fink-ceo-letter
4. 4https://www.cdp.net/en/info/about-us
5. 5https://www.cdsb.net/
6. 6https://eic.energy/
7. 7https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance#:~:text=Scope%201%20emissions%20are%20direct,boilers%2C%20furnaces%2C%20vehicles
8. 8https://www.eurosif.org/
9. 9https://www.fsb-tcfd.org/
10. 10https://www.fsb.org/2021/10/2021-status-report-task-force-on-climate-related-financial-disclosures/
11. 11https://gpamidstream.org/
12. 12https://www.iea.org/
13. 13https://www.iea.org/reports/world-energy-model/understanding-weo-scenarios
14. 14https://www.iosco.org/
15. 15https://www.ipieca.org/
16. 16https://ghgprotocol.org/scope-3-technical-calculation-guidance
17. 17https://www.globalreporting.org/
18. 18https://www.sasb.org/
19. 19https://sdgs.un.org/
20. 20https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26
21. 21https://www.un.org/en/climatechange/cop26
22. 22https://www.valuereportingfoundation.org/about/

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