A heightened awareness of ESG and an unprecedented generational wealth transfer presents the perfect opportunity for wealth managers to get serious about climate reporting.
In 2015, a group of financial experts came together under the Financial Stability Board (FSB) to form the Task Force on Climate-Related Financial Disclosures (TCFD).
Its mission? To create clear and transparent climate reporting standards. Why? So financial market participants could make more empowered decisions about how capital is allocated.
Following the TCFD’s disbandment after its final report in October 2023, the responsibility for monitoring companies’ climate reporting transitioned to the International Financial Reporting Standards (IFRS), as previously agreed.
While the benefits and end results of TCFD reporting will differ for asset managers and wealth managers, the recommendations themselves are the same.
What are the TCFD Reporting Requirements?
The TCFD recommendations highlight four thematic areas that should be included as part of climate reporting best practices. These four areas are:
- Governance: how organisations oversee climate-related risks and opportunities;
2. Strategy: the impact of climate-related risks (both real and hypothetical) on an organisation’s overall business, strategy, and financial planning, and how these risks and opportunities are communicated and accounted for;
3. Risk Management: how organisations identify, assess, and manage climate-related risks;
4. Metrics and Targets: How climate-related risks and opportunities are measured and tracked, such as the international goal of “below 2°C” or physical risks like damages due to losses.
How TCFD Reporting Can Help Wealth Managers
Concerned about the devasting impact of climate change, end investors are increasingly turning to their finances and portfolios as a way to mitigate the effects of the climate crisis. The demand for climate-focused funds resulted in the number of assets in Europe-domiciled climate funds reaching a peak of USD 453 billion in 2023.
Assets in European Climate Funds (USD Billions)
Assets have been increasing dramatically since 2018, but increased transparency requirements are now upping the ante
Chart: Ollie Smith Source: Morningstar Direct, Morningstar Manager Research
It’s essential that wealth managers respond to shifting client demands. As ESG awareness grows, more and more clients will want to align their investments with their values. Climate change is the most prominent and pressing sustainability issue for many consumers, and this is especially true for younger generations.
It’s here that climate-conscious wealth managers have two distinct advantages. First, those who can develop and articulate a climate-focused strategy will be better positioned to appeal to and acquire new Millennial and Gen Z clients – the next generation of investors with a much stronger inclination towards impact investing and sustainable financial goals.
Second, beyond expanding their client base, wealth managers also have the unique opportunity to retain existing clients, or at least, their wealth. As the world prepares for a seismic transfer of generational wealth, with capital and assets set to be transferred from so-called boomers to their children, wealth managers who bolster their strategies with ESG and climate-focused solutions may avoid losing clients (and their sizable portfolios).
For wealth managers, adhering to the TCFD recommendations can only be a benefit. By equipping their clients with high-quality and transparent data on climate risks (which will continue to improve as more information becomes available), wealth managers can empower them to make informed decisions about their finances, whether their focus is combatting greenwashing or aligning their portfolios with their sustainability goals and objectives.
Those who demonstrate best-in-class TCFD reporting practices will foster better relationships with their climate-savvy clients, ultimately leaving them better off in the long term. From highlighting disclosures around Scope 1 and Scope 2, to metrics around Scope 3 greenhouse gas (GHG) emissions, wealth managers who are transparent and proactive in their climate reporting are well-positioned for success.
Impactful TCFD Reporting for Wealth Managers
The TCFD reporting requirements consist of a framework built on four thematic areas. Within these four core areas are seven recommended principles that wealth managers must consider when making meaningful disclosures to their clients.
To be effective, disclosures must be:
- Relevant;
• Specific and complete;
• Clear, balanced, and understandable;
• Consistent;
• Comparable across companies within a sector, industry, or portfolio;
• Reliable, verifiable, and objective;
• Provided in a timely manner.
TCFD Reporting: Navigating the Landscape for Your Clients
While TCFD reporting requirements may vary depending on your jurisdiction, it’s essential to be aware of the growing trend. Major world economies, including the UK, Canada, Japan, and the EU, have either implemented mandates or are strongly considering them.
Additionally, large asset owners are increasingly requesting TCFD disclosures from their investment managers.
Importantly, even if it’s not currently mandated in your jurisdiction, incorporating TCFD principles in your reporting can position you as a leader in this ever-growing area.
How Morningstar Can Support Wealth Managers
Evolving regulations paired with ever-changing client demands means wealth managers are under tremendous pressure. However, navigating regulatory requirements while also giving your clients the metrics that matter can be an overwhelming, confusing, and time-consuming process.
That’s where Morningstar comes in. We’ve compiled an extensive suite of holistic solutions to help financial market participants adapt.
To learn more, download our Guide to Climate Reporting, a free guide developed for both asset and wealth managers designed to help you explore Morningstar’s solutions.
