Amid the sea of environmental, social and governance (ESG) acronyms, one has gained prominence in headlines, corporate proxy statements, stakeholder requests for information and investor decision-making: the Task Force on Climate-Related Financial Disclosures (TCFD).
What does TCFD mean for boards today — and in the future? Why is TCFD important? And finally, what are the TCFD recommendations?
What Is the Task Force on Climate-Related Financial Disclosures (TCFD)?
The Task Force on Climate-Related Financial Disclosures — commonly referred to as TCFD — outlines eleven recommended disclosures based on governance, risk and strategy for companies navigating climate-related issues, reporting requirements and stakeholder requests for information. Metrics and targets are also covered by TCFD, meaning that corporations and their stakeholders have a comprehensive, comparable way to benchmark progress against themselves and their peers.
For investors and stakeholders, it’s a glance into which companies are taking a proactive stance toward greenhouse gas emissions, a warming planet and the world’s transition to a lower-carbon economy. In issues related to climate change, which companies are best prepared — or most at risk?
When Was TCFD Established?
Background information can be helpful for boards at all stages of TCFD implementation.
TCFD was established as an initiative of the Financial Stability Board (FSB), an international body established in 2009 to promote financial stability by coordinating strong regulatory, supervisory and other policies in the financial sector.
The FSB includes representatives from finance ministries, central banks and financial regulators across 25 jurisdictions, as well as representatives from four international financial institutions and six international standard-setting bodies.
The task force is an industry-led effort chaired by Michael Bloomberg, with 32 global expert members from the private sector. Members represent financial and non-financial companies and include executives from organizations like Unilever, AXA and the Singapore Exchange.
In 2015, in response to a request from G20 finance ministers and central bank governors, the FSB asked the task force “to review how the financial sector can take account of climate-related issues.” The TCFD issued draft recommendations in 2016, then its first recommendations were reported in 2017. Yearly status reports have followed since then.
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Goals of the TCFD Framework
The task force’s mission was to develop climate-related financial disclosures that could 'promote more informed investment, credit and insurance underwriting decisions.'
The main goal of the TCFD framework is to help public companies and other organizations use their existing reporting processes to more effectively disclose climate-related risks and opportunities.
Why Is TCFD Important?
TCFD is important because it helps companies evaluate climate-related risks related to operations, suppliers and competitors and strengthen risk assessment. With a sharper view of risks and exposures over the short-, medium- and long-term, TCFD guides strategic planning. And overall, the processes used and knowledge gained in TCFD reporting helps companies make better-informed decisions on where and when to allocate capital.
Below, you’ll find several factors that make TCFD an important part of your overall ESG program:
- The TCFD framework can both streamline and strengthen many ESG activities, from immediate stakeholder communications to long-term strategy and planning.
- It’s critical for collecting and compiling the valuable ESG information that stakeholders and investors want to see.
- TCFD can help companies familiarize themselves with and implement new frameworks and metrics related to climate change. For example, the recommended TCFD disclosure around resilience includes a relatively new area of using scenarios to assess climate-related issues and their potential implications.
- The framework can help boards narrow their focus, know what to look for and take an iterative, incremental approach to move forward on ESG issues.
- Resources used for TCFD reporting can provide valuable intelligence on ESG practices worldwide. What are your peers doing about governance, strategy, risk management and metrics? What has — and hasn’t — worked so far?
- TCFD reporting can help boards and management see climate-related risks and opportunities in the short-, medium- and long-term, and their potential impact on business, strategy and financial planning. It can guide bottom-line decisions on resource allocation, company valuations and more.
“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.
TCFD Supporters and Members
TCFD disclosures have been gaining widespread acceptance. Today, TCFD supporters include more than 1,700 organizations — including nearly 60% of the world’s 100 largest companies — in 77 countries. Supporters range from Barclays to Barrick Gold Corporation, H&M Group to Hitachi Ltd. You can see a complete list here.
The World Economic Forum, which has made its own efforts to standardize ESG reporting, writes: “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.”
“Only two years after the final TCFD recommendations were published, demand for climate-related financial disclosures has skyrocketed, and the supply is responding,” Mark Carney, Governor of the Bank of England, said in early 2020. “The TCFD is helping to bring climate risks and resilience into the heart of financial decision-making, making climate disclosure more comprehensive and comparable and helping investment for a two-degree world go mainstream.”
“Companies and global organizations are accepting that climate risk is financial risk. Today’s announcement also underscores the significant investor demand for information that will help them mitigate potential risks and evaluate opportunities in the transition to the low-carbon economy,” said Mary Schapiro, Head of the TCFD Secretariat.
4 Pillars of the TCFD Framework
Designed to be included in financial filings, Task Force on Climate-Related Financial Disclosures 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.
“The Task Force’s recommendations aim to be ambitious, but also practical for near-term adoption,” states the TCFD final recommendations report.
As boards see increasing pressure from investors, stakeholders and government, TCFD recommendations are shifting from an ESG 'nice to have' to a ‘must have.’ The time for the ‘near-term adoption’ is now.
An introduction to TCFD recommendations follows, focusing on TCFD guidelines and what boards need to know.
TCFD recommendations cover four pillars:
- Governance: around climate-related risks and opportunities
- Strategy: actual or potential impacts of climate-related risks around the organization’s businesses, strategy and reporting
- Risk Management: how the organization identifies, assesses and manages climate-related risk
- Metrics and Targets: used to assess and manage climate-related risk
TCFD Disclosure Recommendations
Implementation for TCFD uses these core elements as the springboard for 11 recommended disclosures:
- The board’s oversight of climate-related risks and opportunities
- Management’s role in identifying and assessing climate-related risks and opportunities
- Climate-related risks and opportunities over the short-, medium- and long-term
- The impact of climate-related risk on the organization’s business, strategy and reporting
- The resilience of the organization’s climate-related strategy under different scenarios
For risk management:
- Processes for identifying and assessing climate-related risks
- Processes for managing climate-related risks
- How processes for identifying, assessing and managing climate-related risks integrate into the organization’s overall risk management
For metrics and targets:
- Metrics to assess climate-related risks in line with strategy and risk management processes (metrics and targets)
- Scope 1, 2 or 3 greenhouse gas emissions and related risks (metrics and targets)
- Targets used to manage climate-related risks and opportunities and performance against these targets (risks)
A Path Forward With TCFD & ESG
Frameworks like TCFD can be difficult to implement and even harder to measure. In fact, a survey conducted by Diligent in partnership with OCEG found that of 500 respondents, 58% were not confident in the maturity of their ESG program.
Making sound ESG decisions now — including choosing the right software platform — will put your organization on a positive path toward employee retention, investment potential, and many other benefits.
In our webinar How to Build Confidence in Your ESG Program: Solving the ESG Data Quandry, you’ll learn from others how software can improve data reporting and accuracy to adhere to the Task Force on Climate-Related Disclosure's guidelines, as well as other popular frameworks to take your ESG program to a whole new level.
Ready for your board to start operationalizing its TCFD and ESG efforts?
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