Escalating TCFD on Your Board's ESG Agenda

Kezia Farnham

Amid today's many challenges, it's easy for busy boards to deprioritize Task Force on Climate-Related Financial Disclosures (TCFD)  or overlook them altogether. But it's not recommended.

TCFD reporting gives investors and stakeholders valuable information about a company's climate-related opportunities, risks and responses. But these disclosures are about more than just greenhouse gas emissions. As the world moves to a lower-carbon future, such metrics provide crucial insights into a company's overall health, competitiveness and bottom line. Moreover, TCFD reporting, though optional in many regions right now, is fast becoming an expectation.

Here's a quick primer on TCFD, why these recommendations matter, and how your board can  and should  start weaving TCFD reporting into your ESG activities.  

TCFD 101

As the world increasingly recognizes the multifaceted impacts of our changing climate, we've seen a host of reactions, from new government regulations to technological innovation to shifts in how customers spend their money. We've also seen an evolution in how investors, insurers, and lenders evaluate companies and make decisions.

Which companies are taking a proactive stance toward greenhouse gas emissions, a warming planet, and the world's transition to a lower-carbon economy? Which companies are best prepared  or most at risk? And how can the companies themselves, and their boards, best communicate crucial climate-related information?

In the mid-2010s, the Financial Stability Board, an international organization formed after the 2009 G20 Summit, created a task force to answer these questions. The group consulted with banks, insurers, investors and businesses from a wide range of industries. Its resulting report establishes recommendations for disclosing risks and opportunities presented by climate change.

These recommendations are structured around four thematic areas: governance, strategy, risk management, metrics and targets.

TCFD recommendations are intended to be adoptable by all organizations and to solicit useful, forward-looking information on the financial impacts of climate change and the transition to a lower-carbon economy.  

Why TCFD Should Be a Board Priority

In a sea of ESG metrics and frameworks, TCFD reporting has been gaining widespread acceptance. To date, it's supported by more than 1,700 organizations —  including nearly 60% of the world's 100 largest companies —  in 77 countries.

The World Economic Forum, which has made its own efforts to standardize ESG reporting, writes that: 'The TCFD recommendations are already established as the primary framework for disclosure of information on the management of climate-related risks and opportunities in main annual filings.'

In many industries and regions, TCFD reporting is voluntary —  but this situation is rapidly changing. Companies in many G20 jurisdictions with public debt or equity are already legally obligated to include material climate-related information in their financial filings.

Boards can expect requirements and scrutiny to increase as investors and stakeholders seek greater transparency on climate-related governance, practices, and risk. BlackRock, for example, recently elevated its expectations around the disclosures —  moving from 'asking companies to consider reporting in line with the TCFD framework' to 'explicitly asking companies to report in line with TCFD standards.'  

In our view, the TCFD framework is a valuable tool for enhancing how companies in developing markets can manage and disclose information pertaining to material risks and opportunities from climate change. -BlackRock, 'Our Commitment to Sustainability' Report

How TCFD Dovetails With and Strengthens ESG

Especially for directors with only a passing familiarity with TCFD, it's easy to see these disclosures as a supplemental item, an additional burden on a growing ESG checklist. In actuality, TCFD reporting has the potential to both streamline and strengthen many ESG activities, from immediate stakeholder communications to long-term strategy and planning.

First of all, when your company conducts TCFD reporting, you're collecting and compiling valuable information stakeholders and investors want to see related to environmental, social, and governance issues.  

The Task Force's recommendations aim to be ambitious, but also practical for near-term adoption. -Recommendations of the Task Force on Climate-Related Financial Disclosures, Final Report
In the often nebulous and constantly evolving area of ESG, TCFD reporting can help boards narrow their focus, know what to look for, and take an iterative, incremental approach to move forward. This step-by-step guide by GreenBiz, for example, highlights the following elements in the area of climate-related governance and board oversight:
  • Board member experience on climate change
  • Roles, responsibilities, and ultimate accountability
  • Structures, committees, and decision-making processes
  • Incentives and the methodology behind them

Furthermore, TCFD reporting resources can also provide valuable intelligence on ESG practices worldwide.

For example, TCFD guidelines themselves provide 'context and suggestions for implementing recommended disclosures,' and the TCFD Good Practice Handbook by the Climate Disclosure Standards Board offers examples from many G20 countries on key takeaways and lessons learned. These examples can give companies a view into what their peers are doing about governance, strategy, risk management, metrics, what has  and hasn't  worked, where they stand in comparison, and how to catch up.  

Operationalizing TCFD Insights

What are climate-related risks and opportunities in the short-, medium- and long-term? What's the impact on business, strategy and financial planning? Bottom-line decisions on resource allocation, company valuations and more lie in the balance. TCFD reporting can yield insights with value well beyond the initial disclosures.

For example, one of the recommended TCFD disclosures focuses on resilience, including the relatively new area of using scenarios to assess climate-related issues and their potential implications. These recommendations 'provide a foundation to improve investors' and others' ability to appropriately assess and price climate-related risks and opportunities,' in the words of the Task Force's final report.

For companies and the boards which provide oversight, such a foundation is conducive to overall sustainability. 'An organization's disclosure of how its strategies might change to address potential climate-related risks and opportunities is a key step to better understanding the potential implications of climate change on the organization,' the TCFD Task Force writes.

As the world moves to a more sustainable future, metrics such as those provided by TCFD reporting provide critical insights into a company's ability to endure and thrive. Organizations that prioritize TCFD reporting now will be better positioned if and when disclosures become mandatory.

For more information on operationalizing ESG commitments, visit Diligent's ESG Solutions page.

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Kezia Farnham Diligent
Kezia Farnham
Kezia Farnham, a Senior Manager at Diligent, has spent several years working in the B2B SaaS sector. Her expertise in equipping governance, risk, audit, compliance and ESG professionals with key insights into sustainability, cybersecurity and the regulatory landscape helps them stay ahead of an increasingly challenging business environment.