When you gather sustainability leaders around the table to discuss commitments, roadmaps, and priority issues related to climate, ESG, Scope, and sustainability, there are several acronyms that enter the conversation. The TCFD is one of those.
What Is The TCFD?
The Taskforce on Climate-Related Financial Disclosures (TCFD) was established in 2015 by the Financial Stability Board (FSB), an international body formed in response to the global financial crisis. The goal of the FSB when established was to strengthen financial systems and help stabilize the global financial markets by coordinating international standard-setting bodies and national monetary authorities.
The TCFD continues to recommend data and information that companies should disclose so that investors, lenders, insurance underwriters and other entities and stakeholders can adequately access, and price, financial impact and current and anticipated risks related to climate change.
Why Is The TCFD Important?
One of the most important functions of the financial markets, according to the TCFD, is to “price risk to support informed, efficient capital-allocation decisions.” Considering this aim, the TCFD views its own role as ensuring investors and others have the right information to avoid incorrectly pricing or valuing assets, which would lead to a misallocation of capital.
As a wicked problem, climate change can have a significant impact on the long-term value of a company, particularly those organizations with significant risks attached to natural resource-intensive supply chains (e.g., heaving reliance on agricultural inputs in areas in areas with increased vulnerability to climate impacts). Allocators of capital need to understand a company’s potential climate-related risks to better understand, and inform, investment risks. In other words, climate change and the financial health of companies are intricately connected.
What Is The Relationship Of The TCFD To ESG, Specifically?
Currently, the TCFD is the preferred framework guiding voluntary climate disclosures and the numerous regulations that have emerges across the US, Europe, and Asia.
Whereas ESG (environmental, social, and governance) is broader and more encompassing, the TCFD limits its focus on climate (the “E” and the “G”) without direct focus or implication son the “S.”
Although climate may be the most urgent and material focus for companies regarding “E” in ESG disclosures (and may be a multiplier of other existing environmental foci), it is not the only one. Companies are also monitoring, documenting, and disclosing information related to water and air quality, pollution, and biodiversity – all central to ESG programs, but fall outside the TCFD.
Why Sustainability Leaders Are Discussing The TCFD
Although the TCFD began as a voluntary set of recommendations intended to guide investor-grade risk disclosures, the momentum for TCFD reporting has emerged as the common thread across international legislation on climate disclosure including at this writing the EU, UK, Switzerland, Hong Kong, Singapore, Japan, New Zealand and the US.
More than 1000 financial institutions support the TCFD across some 90 countries representing nearly all sectors of the economy. It had as of 2021 a combined market cap of $25 trillion.
In 2020, the UK was the first nation to announce mandated disclosure aligned with the TCFD by 2025. The US came shortly thereafter, aligning most of the proposed SEC rule with the framework.
In addition to governments, international standard setter the International Financial Reporting Standards (IFRS) also incorporated TCFD recommendations into the International Sustainability Standards Board (ISSB)’s framework and two proposed standards introduced in March 2022. One sets out general sustainability-related disclosure requirements and the other specifies climate-related disclosure requirements.
At this juncture, it is the TCFD is the clear front-runner in climate-related disclosures and is here for the unforeseeable future.
What Disclosures Does The TCFD Address?
The TCFD’s disclosure recommendations are structured around four thematic areas that represent core elements of how companies operate: governance, strategy, risk management, and metrics and targets.
The four recommendations are interrelated and supported by 11 recommended disclosures that build out the framework with information that should help investors and others understand how reporting organizations think about and assess climate-related risks and opportunities. These four themes include:
GovernanceUnder the first theme of Governance, disclosures demonstrate how deep climate-risk assessment and management should go. More robust oversight from boards and other governing bodies, as well as upper-level management, should convey a sense of “organizational resilience.”
StrategyThese disclosures should address “the real and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where material.” This should include physical risks like drought, flooding, or other extreme weather events, as well as transitional risks like changing customer sentiment or risks to brand reputation, along with detailed disclosure on how the company intends to mitigate or navigate such risks.
Risk ManagementThese disclosures should address how the organization “identifies, assesses, and manages climate-related risks.” These disclosures are not merely about identifying the real and potential impacts, but rather detail well-developed processes that demonstrate how a company has formally integrated climate risk into its risk-management practice.
Metrics and TargetsWe hear a lot about Scope GHG emissions and the need to quantify climate-risks through measurement, monitoring and reporting. This theme of guidance focuses on disclosures of quantitative data to ground climate-related risks and opportunities to measurable performance and targets.
The TCFD further guides companies on a few common-sense decision-making practices it calls “principles for effective disclosure.” These include things like disclosing information that is relevant, specific, complete, understandable, consistent over time, comparable to companies within a shared sector industry or portfolio, verifiable, and on a timely basis.
For large companies and publicly traded companies mandated by emerging climate disclosure laws across the globe, many are adopting the TCFD framework in advance to proactively prepare for future regulations and climate scenarios.Learn More About The TCFD Framework
The TCFD encourages companies to learn more about its framework and disclosure recommendations, including its most recent status report. Visit the TCFD website, and while you are there, explore the many resources including case studies, reports, scenarios, instructional videos and more at the TCFD Knowledge Hub.
The body also invites companies and organizations to share their own case studies that focus on several possible scenarios such as the internal processes organizations need to collect, analyze and disclose climate-related information; stakeholder engagement, either internal or external; or changes in governance and management structures, for example.
Are You Interested In Joining Other Sustainability Leaders In Discussions About TCFD And Other Important Sustainable Impact Topics?
If you are interested in joining sustainability leaders as part of our Sustainable Impact roundtable discussions that center not only reporting, but also challenges and opportunities related to Sustainability, ESG, UNSDGs, Scope and other undertakings, please let us know (below).
We began this series of valuable conversations in 2022 and will continue into 2023, including planned breakout discussions and working groups. We’d be very interested in hearing from you or welcoming you as a participant.