What is the Task Force on Climate Related Financial Disclosures (TCFD)?
Created at the end of 2015 as a response to the Paris Agreement by the G20 and the Financial Stability Board (FSB), the TCFD’s main purpose is to give information to investors about what companies are doing to mitigate the risks of climate change. The set of recommendations was published in 2017, with about 100 organizations participating. As of the end of 2022, that number has grown to over 4,000 companies representing $27 trillion market capitalization supporting TCFD.
Other reporting frameworks have worked to align with the recommendations of the TCFD including SASB, GRI, CDP, and CDSB.
Beyond the initial purpose of providing relevant information to investors, looking deeply at each of the 11 recommendations of the TCFD can help companies make the transition to a net-zero economy and better anticipate any challenges for the future. Climate reporting should no longer be a separate exercise for companies, it should be integral to every process of the organization.
Who participates in the TCFD?
While the TCFD has been broadly adopted by many financial firms and investment groups, the recommendations provided by the TCFD are flexible enough to be helpful to organizations of any size, industry, or geographic area.
The United Kingdom was the first G20 country to require 1,300 of their largest private companies to disclose climate-related data in line with the recommendations of the TCFD.
What are the TCFD recommendations?
There are 11 total recommendations structured around 4categories: Governance, Strategy, Risk Management, and Metrics and Targets. Details of each area are described below.
Governance: understand how the Board of Directors and management team assesses, manages, and oversees climate related risks and opportunities. For these risks and opportunities to have a priority within the organization, it is vital that the highest decision makers are also aligned.
Strategy: identify the climate related risks and opportunities the organization has identified, separated by those in the short, medium, and long term. Describe the impact of those risks and opportunities on the organization’s business, strategy, and financial planning, and the resilience of these strategies across various climate-related scenarios, including a 2 degree or lower scenario. This assures that these strategies are well understood in the context of a world aligned with the ideal pathways of the Paris Agreement.
Risk Management: describe the processes the organization uses for identifying, managing, and assessing climate-related risks and how those processes are integrated into the organization’s overall risk management. Justas an organization should have processes to understand financial or logistical risks, climate-related risks should have a similar importance within the organization.
Metrics and Targets: disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process. Disclose Scope 1, Scope 2, and Scope 3 GHG emissions and those related risks. Describe any targets used by the organization to manage climate-related risks and opportunities and performance against those targets. This section is an opportunity to disclose the qualitative aspects of emissions and how those are performing against set reduction targets over time.
When considering the risks and opportunities as part of the TCFD, the following categories should be included:
Considering each of these points will help ensure that there are no hidden corners within the organization that may be exposed to unknown risks or missing out on undiscovered opportunities.
How should they be reported?
The TCFD outlines seven principles organizations should consider for disclosing effectively. It is important to incorporate these disclosures into ongoing processes, not merely an exercise carried out once a year for reporting purposes. The more specific and complete the inputs, the more useful the findings.
1. Present relevant information
2. Be specific and complete
3. Be clear, balanced, and understandable
4. Be consistent over time
5. Be comparable among organizations within a sector, industry, or portfolio
6. Be reliable, verifiable, and objective
7. Be provided on a timely basis
These findings should provide decision-useful, forward-looking information which can be reported in annual reports or financial filings.
A Growing Consensus in Reporting Frameworks
As a number of climate reporting frameworks have entered the market over the past two decades, a consensus is growing around what should be included in the most successful reports. The 11 recommendations found in the TCFD have become mostly if not completely aligned with nearly all the major reporting frameworks. CDP, for example, overhauled in 2018 to have its climate change questionnaire completely aligned with the TCFD.
While some other reporting frameworks may offer a broader focus around what to do with the information, these frameworks have become very complementary to each other. The timeline for companies in the European Union or non-EU companies with significant operations in the EU to comply with the upcoming Corporate Sustainability Reporting Directive (CSRD) is rapidly approaching as well. This convergence of reporting frameworks makes it easier to prepare to respond to future regulations like the CSRD by starting with the TCFD.
What are the benefits to TCFD reporting?
As investors are able to increase their requirements for climate-related disclosure, alignment with TCFD will provide your organization with a readiness and an advantage to fight for capital in this space.
With other frameworks like CDP aligning with TCFD, understanding each of these recommendations can help improve your score with these reporting indices as well, which may have been requested by those in your supply chain.
Using the TCFD recommendations to inform strategic decision sin your business can help better understand climate risks and how to mitigate against them more successfully before they become more critical for your organization.
As many companies are setting goals to become net-zero by2050, the TCFD recommendations can help strengthen your readiness for these targets by more deeply understanding the risks and opportunities in your roadmap to net-zero. These can also be useful when addressing steps for appropriate climate-related mitigation or adaptation activities. Using the Science Based Targets Initiative (SBTi) as a complementary framework can help ensure these targets have a viable path forward well-aligned with science.
The future of TCFD – the ISSB
The formation of the International Sustainability Standards Board (ISSB) was announced in November 2021 at COP26 in Glasgow, Scotland. The TCFD is one of the organizations that will fold into this new body. The ISSB is working to develop a high-quality comprehensive global baseline of sustainability disclosures focused specifically on the needs of investors and the financial markets.
As we move forward towards the net-zero economy that will be required to ensure a future for generations to come, organizations of all sizes will need to more fully incorporate the risks and opportunities associated with climate change into all their decision making.
