The recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) offer direction to all participants in the market on disclosing information about the financial effects of climate change.
The TCFD is designed to promote well-informed investment and lending decisions by providing stakeholders with a better understanding of a company’s reliance on carbon-based assets and services, as well as the level of exposure to climate-related risks of individual companies and the broader financial system.
Definition of TCFD
The Task Force on Climate-Related Financial Disclosures (TCFD) is a voluntary initiative launched by the Financial Stability Board in 2015 to develop recommendations for companies to disclose information on the financial risks and opportunities associated with climate change.
The TCFD provides a framework for companies to disclose their climate-related risks and opportunities in four areas: governance, strategy, risk management, and metrics and targets. The framework is intended to help companies identify and manage climate-related risks and opportunities, and to help investors and other stakeholders make informed decisions about the companies they invest in.
The TCFD framework is becoming increasingly important as more investors are seeking to incorporate climate-related risks and opportunities into their investment decisions. Many companies have already started to adopt the TCFD recommendations and are using them to disclose their climate-related risks and opportunities in their financial reporting.
Overall, the TCFD aims to promote more transparent and consistent reporting of climate-related financial risks and opportunities across all sectors and industries, which can help companies, investors, and other stakeholders make more informed decisions about the risks and opportunities associated with climate change.
How many companies report using TCFD?
The TCFD recommendations offer direction to all participants in the market on disclosing information about the financial implications of climate-related risks and opportunities to inform business and investment decisions.
As of now, more than 1,600 enterprises and organizations in almost 80 countries and six continents, with a combined market value of almost $16 trillion, have adopted or expressed support for the TCFD. Investors have increasingly used the TCFD to assess the performance of their portfolios.
The G7 nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) have made TCFD-aligned reporting mandatory. In the United Kingdom, premium listed companies must comply with TCFD recommendations by March 2022.
What was the beginning of TCFD?
The Task Force on Climate-Related Financial Disclosures (TCFD) was set up by the Financial Stability Board (FSB) in 2015 to create consistent disclosures of financial risks related to climate change that corporations, banks, and investors can use to communicate with stakeholders.
In 2017, the TCFD issued its ultimate report on recommendations for disclosing climate-related financial information, which were intended to help companies provide more comprehensive information to facilitate informed capital allocation.
What makes TCFD unique?
The Task Force on Climate-Related Financial Disclosures (TCFD) is unique in several ways:
- Focus on Financial Impacts: The TCFD’s focus is on the financial risks and opportunities of climate change, rather than environmental or social impacts. This makes it particularly relevant for financial market participants and investors who are primarily interested in the financial implications of climate change.
- Industry-led: The TCFD was established by the Financial Stability Board (FSB), but its recommendations were developed by a private sector-led task force, which included representatives from a wide range of industries and sectors.
- Voluntary: The TCFD’s recommendations are voluntary, which means that companies can choose whether or not to adopt them. However, the increasing number of companies adopting the TCFD framework suggests that it is becoming widely recognized as a best practice.
- Comprehensive: The TCFD’s recommendations cover a wide range of issues, including governance, strategy, risk management, and metrics and targets. This makes it a comprehensive framework for companies to disclose information about the financial implications of climate change.
- Broad Support: The TCFD has received broad support from a range of stakeholders, including investors, regulators, and industry groups. This suggests that the framework is widely recognized as a useful tool for promoting transparency and accountability around climate-related financial risks and opportunities.
Themes covered by TCFD
The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations cover four main themes:
- Governance: This theme covers how companies integrate climate-related risks and opportunities into their governance processes, including how boards and senior management oversee and manage these risks.
- Strategy: This theme covers how companies identify and analyze the potential financial impacts of climate-related risks and opportunities, and how they integrate this analysis into their overall business strategy.
- Risk Management: This theme covers how companies identify, assess, and manage climate-related risks, including physical risks (such as extreme weather events) and transition risks (such as policy and technology changes).
- Metrics and Targets: This theme covers how companies measure and report on their climate-related risks and opportunities, including greenhouse gas emissions and energy use, as well as how they set targets for reducing emissions or adapting to climate change.
Recommendations include 11 supporting disclosures
The TCFD recommendations include 11 supporting disclosures, with three recommended for each of the four thematic areas (except for governance, which has two).
In addition, the recommendations apply to all industries, with supplemental guidance provided for certain sectors.
The guidance includes industry-specific guidelines for the financial sector and 12 other sectors with the highest greenhouse gas emissions, energy consumption, and water use.
This supplemental guidance provides further details on how different industries can respond to the required supporting disclosures.
Finally, the recommendations include an appendix with illustrative metrics for non-financial sectors.
The TCFD identifies two types of climate risks
TCFD identifies two types of climate risks – physical risks and transition risks. Physical risks are associated with the impacts of climate change and can be divided into acute and chronic categories. Acute physical risks are event-driven, such as severe weather events like cyclones, storms, and flooding, while chronic physical risks result from longer-term climate patterns, such as rising sea levels and heat waves.
On the other hand, transition risks arise from the transition to a low-carbon economy and include regulatory and legal risks related to evolving technology and changing demand and consumption patterns, as well as reputational risks associated with inadequate adaptation to climate change.
The TCFD recommendations also include guidance on how to report on these themes, including specific disclosures that companies should make. By adopting the TCFD recommendations, companies can provide more consistent and comprehensive information about their climate-related risks and opportunities, which can help investors and other stakeholders make better-informed decisions.
Four Themes practical implications
The TCFD has identified four key thematic areas – governance, strategy, risk management, and measurements and goals – that companies must address.
These areas have practical implications that companies need to consider in their reporting.
Source: TCFD’s Final Report, Recommendations of the Task Force on Climate-related Financial Disclosures
For governance, companies must demonstrate how their boards supervise risks and opportunities related to climate change and describe the role of management in managing these issues.
In terms of strategy, companies must identify short, medium, and long-term climate-related risks and opportunities and their impact on the business, strategy, and financial planning. They must also explain how their strategy can adapt to different climate scenarios, including a 2°C or lower scenario.
For risk management, companies need to outline the methodology used to identify and analyze climate-related hazards and the methods used to manage these risks. Companies must also integrate the management of climate-related risks into their broader risk management process.
Finally, for measurements and goals, companies must disclose the indicators used to assess climate-related risks and opportunities based on their strategy and risk management approach.
They must report greenhouse gas emissions from different sources and associated risks. They must also define objectives for managing climate-related risks and opportunities and report on their performance against those targets.
How TCFD outlines financial impacts of climate-related risks and opportunities
The TCFD provides guidance on how companies can disclose information related to the financial impacts of climate-related risks and opportunities.
The TCFD recommends that companies include information on the potential impact of climate-related risks and opportunities on their financial statements, including balance sheets, income statements, and cash flow statements.
This information can help investors and other stakeholders better understand a company’s exposure to climate-related risks and opportunities and make more informed decisions about their investments.
Additionally, the TCFD recommends that companies disclose information on the metrics and targets they use to manage climate-related risks and opportunities, including greenhouse gas emissions, energy efficiency, and other relevant sustainability metrics.
By providing this information, companies can help stakeholders understand how they are managing the financial impacts of climate-related risks and opportunities, and how they plan to mitigate or adapt to those risks and opportunities in the future.
Some potential advantages of using TCFD recommendations include:
- Improved risk management: By disclosing climate-related risks and opportunities, companies can better manage these risks and take advantage of opportunities related to climate change.
- Better-informed decision-making: TCFD recommendations can help investors, lenders, and other stakeholders make more informed decisions about which companies to invest in or lend to based on their climate risk exposure and management.
- Enhanced transparency and comparability: By following TCFD recommendations, companies can provide more transparent and comparable information about their climate-related risks and opportunities, making it easier for investors and other stakeholders to compare and assess their performance.
- Increased resilience: By managing climate-related risks and taking advantage of opportunities, companies can increase their resilience to the impacts of climate change and potentially avoid significant financial losses.
- Regulatory compliance: With more regulators requiring TCFD-aligned reporting, companies that follow the recommendations can ensure compliance with relevant regulations and avoid potential penalties.
Overall, TCFD recommendations can help companies, investors, and other stakeholders understand the financial impacts of climate change and take steps to manage associated risks and opportunities.
How to leverage TCFD
To make use of the TCFD, companies should focus on what to disclose rather than being burdened with additional reporting requirements. The TCFD principles have been aligned with current disclosure frameworks to facilitate effective reporting processes and help businesses report serious risks to investors, lenders, and insurance underwriters.
Align climate strategy: The TCFD recommends that companies consider the impact of climate change on their operations, strategies, and financial planning. They should align climate strategy with the larger business plan and have a clear understanding of how it will match the organization’s operating model in the short, medium, and long terms.
Assign key individuals: Companies should also assign climate risk responsibilities within the governance framework and provide board-level and enterprise-wide training and competence development in climate risk management.
Conduct audit: To leverage the TCFD effectively, companies should conduct an audit to identify gaps in information available, identify areas of emphasis for disclosure around the four basic pillars of TCFD reporting, and recognize the physical and transition risks and opportunities associated with climate change relevant throughout the organization.
Establish KPIs: They should establish climate-related key performance indicators (KPIs) and risk metrics, define and track them appropriately through internal reporting systems, and manage business risks with formalized and documented discussions on climate risk among all stakeholders.
Preparation is key: Companies should adopt these reforms well in advance of mandatory disclosures and reporting obligations to avoid struggling to meet compliance requirements and missing out on emerging opportunities associated with being aware of exposure to climate-related risks and being an active contributor to a more sustainable economy.
Assess financial risk: Companies must assess financial risk when dealing with climate change-related concerns, which may be difficult due to the scope, unpredictability, and long-term nature of the challenges.
Manage and mitigate risk: Failure to properly manage these risks may have ramifications across the entire organization, and investors and stakeholders require increased transparency on how companies are analyzing and responding to these risks.
Failure could invite commercial risk: Companies must not ignore transition risks, as they may have short-term effects on organizations, and those that fail to identify them may expose themselves to severe commercial risk.
TCFD disclosure Where should the information be disclosed?
The TCFD does not specify where the information should be disclosed. Instead, it recommends that companies integrate climate-related financial disclosures into existing reporting processes, such as annual financial filings, sustainability reports, or other relevant documents.
The TCFD encourages companies to disclose information in a manner that is relevant, clear, and understandable for investors, lenders, and other stakeholders. The aim is to make climate-related financial disclosures a standard part of mainstream financial filings, rather than an add-on or separate reporting exercise.
How does TCFD work?
The Task Force on Climate-Related Financial Disclosures (TCFD) provides a voluntary framework for companies to disclose information on the financial risks and opportunities associated with climate change. The framework is organized around four main areas: governance, strategy, risk management, and metrics and targets.
Under the TCFD framework, companies are encouraged to provide disclosures related to their governance structures and processes for managing climate-related risks and opportunities. They are also asked to disclose their strategies for mitigating and adapting to climate change, including how these strategies are integrated into their overall business strategy. Companies are expected to identify and assess the potential financial impacts of climate-related risks and opportunities, and to disclose how they are managing these risks and opportunities. Finally, companies are asked to provide metrics and targets related to their climate-related risks and opportunities, including greenhouse gas emissions and energy use.
By using the TCFD framework, companies can provide more comprehensive and consistent information about their climate-related risks and opportunities, which can help investors and other stakeholders make better-informed decisions. The TCFD also provides guidance on how to report on these disclosures, including recommendations for the format and content of disclosures.
Overall, the TCFD aims to encourage companies to integrate climate-related risks and opportunities into their overall business strategy and decision-making processes, which can help promote a more sustainable and resilient global economy.
