What is the TCFD?

Climate change is a financial risk to the global economy. The Task Force on Climate-Related Disclosures (TCFD) was assembled to address the lack of continuity and the scarcity of data in climate reporting that limits investors’ ability to make informed decisions about climate risk and capital allocation. Chaired by Michael Bloomberg and governed by top executives from world-leading financial institutions, the TCFD takes an investment-driven approach towards climate change-related reporting. The overarching goal of the TCFD is the commitment to market transparency through encouraging corporate disclosure on climate-related topics to provide investors with better information for capital allocation, risk assessment, and understanding of a firm’s strategic planning.

The TCFD was created by the Financial Stability Board (FSB) in 2015 to create a similar structure for climate reporting that financial reporting has across the United States, the European Union, and other areas with listed regulations for publicly-traded companies. The TCFD believes that climate reporting should be included in company’s public disclosures like financial filings, so they created a set of standards that are adoptable by all organizations, provide information on the climate-related governance and strategy of firms, and present a full understanding of the risks and opportunities in transitioning to a net-zero economy.

Through pilot tests, the United Nations Environmental Programme Financial Initiative were able to take a leadership role in developing practices in the financial sector that constitute good climate risk practices. This has led to numerous frameworks, guides and tools that aid institutions and the financial industry in better managing and reporting on their climate actions and risks.

Why is it relevant?

The TCFD is one of the most widely-recognized reporting frameworks in the world, along with the Global Reporting Initiative (GRI), the Value Reporting Foundation (the recently-formed merger of the International Integrated Reporting Council (IIRC)) and the Sustainability Accounting Standards Board (SASB)), the Carbon Disclosure Project (CDP), and a handful of others. All of these projects are attempting to bring a harmonization of data across a variety of industries and sectors and provide a fair and full set of data for outside stakeholders, like investors. The TCFD recommendations are also being adopted by many other reporting frameworks and international governments, and they are already required in New Zealand, Switzerland, China, the UK, and several other countries. It’s also expected to become mandated within all G7 Nations very soon. For publicly-listed companies that are not already disclosing their Scope 1, 2, and 3 emissions, there will be mounting pressure to conform to the TCFD recommendations.

The TCFD recommendations for companies focus on four major components: governance, strategy, risk management, and metrics/targets. The TCFD is not just looking for data dumps; they want to see a full contextualized picture of a firm’s climate strategy and how they are prepared to handle changing environments. They want to see the risks and opportunities associated with physical changes (such as flooding or droughts) and transition changes (consumer demand, regulatory interventions, etc.). Following the TCFD recommendations, investors should get a clearer picture of how well their business model is equipped to handle a changing environment.

Governance

The TCFD recommends providing information on how the board of directors oversees climate-related risks and opportunities. This is an area where you should describe the processes that the board takes to make sure the firm is well-positioned to handle climate change challenges. In this section, you should explain which committee boards or internal teams you have organized for this. You can explain who is involved, what their roles are, how often they meet, and what processes they use for managing and monitoring risk. You can also describe how the board would react to certain scenarios, like new carbon pricing regulations. The TCFD encourages interconnectivity between the four components, so tying governance to strategic decisions is a general best practice. Any examples of CEO leadership would be good to include here as well.

Strategy

This is an area where most organizations provide scenario planning with changing circumstances. The TCFD recommends to list your physical risks and transition risks in short-, medium-, and long-term time frames. A good example of a strategy disclosure would be to include a scenario planning map that lists strategic decisions your business would make given a set of circumstances, such as the IPCC’s Representative Concentration Pathways (e.g. how your firm would react to RCP 2.6, RCP 4.5, RCP 6.0, and RCP 8.5). It’s best to be specific on what actions you would take around changes in climate-related factors as well as changes in consumer demand, employee engagement, regulatory interventions, related to your firm’s actions. Make the link for investors how you are investing to ensure that your business model is resilient to a changing environment.

Risk Management

As TCFD advises a strong interconnectivity between the four components of recommendations, it’s best to draw a direct line from your strategy to what risks are most relevant to your business model and what your specific plans are to address them. Your risk mitigation should follow the same scenario planning model as outlined in your strategy. The TCFD wants to see how you identify, assess, and manage climate specific risks. How do you prioritize risk? Using a probabilistic model shows that you are factoring in a range of scenarios with various degrees of impact. You can break down risks into various levels (i.e. macroeconomic vs transactional risks, acute vs chronic risk, etc.).

Metrics and Targets

This section should be an area where your company clearly discloses its energy consumption and greenhouse gas emissions along with targets for reduction. It’s best to list these data in a table, breaking emissions down into specific divisions (i.e. operations vs investments) and with relative measures of consumption (e.g. total, by revenue, by unit, etc.). Methodologies should be clearly stated, with the GHG Protocol being a global standard to use. Scope 1, Scope 2, and (if appropriate) Scope 3 emissions should be listed both separately and in aggregate. Targets should be clear, meaningful, and achievable, and should be in-line with your stated strategy for emission reduction.

General Best Practices

Look Outside-In and Inside-Out — Since the TCFD is focused on providing quality information for investors, they want to know the risks imposed by climate change on your business along with the impact that you will have on the environment. These should be listed in each component of your disclosure statement.

Report on Factors Material to Your Industry — TCFD has specific guidelines for different industries within financial sectors (i.e. banks, insurance companies, asset owners, and asset managers) and non-financial sectors (i.e. energy companies, transportation companies, materials and buildings, and agriculture, food and forestry companies). Each industry has markedly different impacts on climate change, so follow TCFD best practices for your industry.

It’s Not Just a Data Dump — Providing thorough and accurate data is hugely important, but investors don’t just want raw data. The governance and strategy sections are critically important for helping investors understand how you plan to adapt to change. The required data is rather limited in scope, so going past the minimum requirements will show that you’re taking proactive action for the impacts of climate change.

See What Others Are Doing Well — The Climate Disclosure Standards Board put together a best practice handbook with examples from other companies who have done exemplary work with their disclosures. It can provide a helpful structure and key insights to a decision-useful disclosure.

While the disclosures recommended by the TCFD should provide more harmonization in climate reporting standards and create a better means of understanding different companies abilities to manage climate-related risk, it is also intended to be a general overview of a firm’s approach to climate. The transformative work in emission reduction can be difficult and costly, but proactive investments can pay big dividends for your business and contribute to a shared responsibility for protecting the planet. With aggressive emission reduction targets, risk management tactics, and quality governance and strategy, companies can generate positive value while contributing to a better world.

Need Help?

Eunoic is a technology platform that helps companies become more valuable by improving their environmental, social and governance (ESG) performance and external perception via its AI-infused cloud applications and advisory services. We can provide guidance around corporate sustainability disclosures and help analyze how your firm is seen by its outside stakeholders, such as investors, rating agencies, etc.