The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board (FSB) to promote international financial stability; to develop consistent climate-related financial disclosures for companies, banks, and investors.
The goal of TCFD is to create consistency amongst organizational climate-related disclosures, incorporating climate-related risks and opportunities into their risk management, strategic planning, and decision-making processes.
TCFDs began as voluntary recommendations but have become increasingly part of the regulatory requirements and reporting frameworks in many jurisdictions across the EU, North America, and Asia as a means of tackling climate change. Roughly 3900+ organizations across the globe currently support TCFDs, and given the regulatory landscape and future reporting requirements, TCFD participation will undoubtedly continue to grow and increase.
Objectives & Focus
The four main objectives for creating this task force were:
- To provide a forum for discussion on these issues.
- To align markets and investors around sustainable practices while remaining transparent about climate-related risks.
- To facilitate the integration of climate-related financial disclosures into existing requirements like sustainability or corporate reporting.
- Ensure that resources are available for companies that need additional help.
The TCFD focuses on three types of climate risks:
- Financial risks related to the impacts of climate change, such as risks from storm surges and sea level rise or global shifts in trade routes, prices, and supply chains, may affect the value of assets
- Companies’ exposure to climate-related legislation (which is expected to increase over time)
- Failure to address future issues related to fossil fuel use
Content of the Disclosure
The four recommendations include specific disclosures that organizations should have in financial filings or other reports to provide insight and guidance to investors and others.
Key Features of Recommendations
- Adoptable by all organizations
- Designed to solicit decision-useful, forward-looking information on financial impacts
- Strong focus on risks and opportunities related to a transition to a lower-carbon economy
- Disclosure under a 2°C or lower scenario. The Strategy Metrics and Targets recommendations in financial filings are subject to a materiality assessment. However, all organizations are encouraged to disclose publicly if practicable.
TCFD disclosure recommendations are based on four thematic areas representing core elements of companies’ operations.
1. Governance: Companies must describe the board’s oversight and the management’s role in assessing and managing climate-related risks and opportunities.
- Describe the board’s oversight of climate-related risks and opportunities.
- Describe management’s role in assessing and managing climate-related risks and opportunities.
2. Strategy: Companies must describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term, as well as the impact of climate-related risks and options on the organization’s business, strategy, and financial planning.
Additionally, considering different climate-related scenarios, the resilience of the organization’s system must be described.
- Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
- Describe the impact of climate-related risks and opportunities on the organization’s business, strategy, and financial planning.
- Describe the resilience of the organization’s strategy, considering different climate-related scenarios, including Disclosure under a 2°C or lower scenario.
3. Risk Management: Companies must describe the organization’s processes for identifying, assessing, and managing climate-related risks and opportunities.
Furthermore, there must be clarification with strategies for identifying, evaluating, and addressing climate-related risks integrated into the organization’s overall risk management.
- Describe the organization’s processes for identifying and assessing climate-related risks.
- Describe the organization’s processes for managing climate-related risks.
- Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
4. Metrics and Targets: Companies must utilize metrics to assess climate-related risks and opportunities in line with their strategy and risk management process.
The targets used by an organization to manage climate-related risks and opportunities and the performance against the targets must be described. Next, Scope 1, 2, and 3 Greenhouse Gas Emissions (GHG) and their related risks must be disclosed.
- 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, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks.
- Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.
These areas are complementary and supported by 11 recommended disclosures that build out the TCFD framework with information that should help investors and others understand how reporting organizations think about and assess climate-related risks and opportunities.
Which Organizations Should Implement the TCFD Recommendations?
TCFD recommends that all organizations with public debt or equity implement its recommendations. The Task Force explicitly highlights asset managers and asset owners (including public/private sector pension plans, endowments, and foundations) as primary supporters of the TCFD recommendations. In turn, this will help clients and beneficiaries better understand their assets’ performance, consider their investments’ risks, and make better and more informed investment choices.
TCFD also provides additional guidance for Financial Sector Industries and non-financial groups.
Financial Sector Industries – The financial sector is organized into four major industries on activities performed.
- Banks –> Lending
- Insurance Companies –> Underwriting
- Asset Managers –> Asset Management
- Asset Owners –> Investing
Non-Financial Groups – This group accounts for the most significant proportion of GHG emissions, energy usage, and water usage.
- Materials & Buildings
- Agriculture, Food
- Forest Products
Benefits of Implementation
- Improved and better access to capital by increasing investors’ confidence that the company’s climate-related risks are appropriately assessed and managed.
- Participation will assist in meeting existing material disclosure and reporting requirements in financial filings.
- Organizations will better understand climate-related risks and opportunities within the company, thus providing improved risk management and better strategic planning opportunities.
- Organizations can better respond to stakeholder expectations for climate-related information in a standardized framework that investors are requesting and are familiar with.
How Can Technology Help Support Organizations Implementing the TCFD Framework?
Utilizing technology to handle these frameworks allows businesses to streamline processes, gather more data, and enhance future decision-making. When looking for a technology partner or platform, it’s important to evaluate the following:
- TCFD-Aligned Reporting Through KPI Identification
- Data Collection – Ease of data collection and organization as well as the ability to identify risks.
- Data Evaluation – Ability for data to be evaluated using integrated analytics, charts, and dashboards.
- Strategic Planning & Decision Making – Ability for the results of the data to be used for strategic planning, e.g., on portfolio performance optimization, risk management, and regulatory reporting.
- Goals & Actions – Targets can be quickly established and action plans can be created to reach defined objectives.
- Stewardship & Engagement – Ability to transfer actions or responsibilities to involved stakeholders.
- Ease of Communication – Easily communicate on progress reports.
While some frameworks help organizations understand their specific climate-related impacts, TCFDs take a forward-looking approach focused on the effects of climate change on organizations and the subsequent financial risks. Furthermore, TCFDs are crucial for organizations to expand their understanding of long-term climate-related risks and opportunities. As increased pressure from regulatory agencies, consumers and investors continue, expect to see TCFDs used as a framework for mandatory legislation and regulation related to climate change initiatives.
Examples of risks