TCFD reporting: What it is & how technology can boost your effort
Climate change could cost the U.S. $14.5 million in the next 50 years. That’s where TCFD reporting comes in.
TCFD stands for Task Force on Climate-Related Financial Disclosures, a board created by the United Nations in 2015 to help companies provide climate-related financial risk disclosures to their stakeholders. Put simply, TCFD reporting means disclosing an organization’s financial challenges in relation to climate change.
Publicly-traded companies in the UK are already required to file TCFD reports, with other countries likely to follow. Organizations should prepare now by understanding what TCFD reporting is and how ESG reporting solutions can help.
What Is TCFD Reporting?
TCFD reporting guides organizations on how to disclose their climate-related financial risks to investors, lenders, underwriters and other stakeholders. Stakeholders can then use this information to assess and assign costs to all risks to make informed decisions about the company and its environment, social and governance (ESG) opportunities.
Organizations will typically list their disclosures in an annual TCFD report detailing every climate-related risk they may face. These climate-related disclosures should cover the four pillars of TCFD — governance, strategy, risk management and metrics and targets — for every risk.
TCFD Reporting Recommendations
TCFD has 11 reporting recommendations, which organizations are encouraged to cover in their annual reports. These recommendations fall under the four different reporting categories; strategy, governance, risk management, and metrics and targets
A complete list of the four reporting categories, along with their reporting recommendations, can be found here.
Do You Have to Cover All 11 Recommendations in Your Final TCFD Report?
In an ideal world, yes.
The CDB/SASB Good Practice Guide states, “For a company to effectively tell its story of how it is managing climate-related risks and opportunities, it requires disclosures across all four core elements of the TCFD. The eleven disclosures are mutually supportive and, when considered collectively, inform and reinforce one another.”
That being said, “We have not found any one company with full TCFD disclosures, which we note reflects the current stage of understanding and reporting practice,” the Guide continues. “However, companies should be encouraged to make as many of the 11 recommended disclosures as they can to tell their story of how they are effectively managing climate-related risks and opportunities.”
TCFD Reporting Examples
Examples may be helpful for effective TCFD reporting. The Climate Disclosures Board (CDB) and Sustainability Accountability Standards Board (SASB) compiled a Good Practice Guide with case studies on how companies like Unilever, Lloyds Banking Group, and Total tackled disclosures across the various elements and recommendations.
The Good Practice Guide also offers takeaways across these and other examples that can be helpful when preparing a TCFD report:
- Connect the dots. Make sure TCFD metrics, TCFD scorecards and other elements in the final TCFD report connect with other disclosures in the mainstream report and are presented with historical context. In particular, address the interrelationship between strategy and risk and link financial and non-financial information.
- View climate through the correct lens. In the TCFD reports submitted by G20 organizations to date, climate-related financial disclosures have demonstrated the potential for confusion. It's important to remember that when viewed through the intent of the Task Force, a TCFD climate risk report considers the risks and opportunities likely to arise from climate change, not the converse.
- Communicate TCFD impact and materiality. Acknowledging exposure to climate-related risks and detailing mitigation strategies is just the beginning. Clearly connect metrics and targets to risks and opportunities, leaving no uncertainty about what risks are considered material.
- Prioritize resilience. How well-equipped is your company strategy — and company — for withstanding the possible climate states of the future? A TCFD scenario analysis can be a valuable part of these disclosures — but not the sole element. Companies can develop these scenario analyses incrementally: beginning with a specific location, asset class or part of their portfolio and expanding over time.
Is TCFD Reporting Mandatory?
The question of whether or not TCFD reporting is mandatory is in constant flux, as many countries, including the UK, Japan, New Zealand and Switzerland are inching closer and closer to making these disclosures mandatory.
In many industries and regions, TCFD reporting is still 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 — and the drive toward mandatory disclosures is growing.
The UK leads the way in making these disclosures mandatory. Certain companies are required to improve their climate-risk reporting. Additional rules finalized at the end of 2021 apply to more entities and increase mandatory reporting. “Broad, economy-wide, mandatory climate-risk disclosure rules are expected to be in place by 2025. Reporting rules are likely to be aligned with the Task Force on Climate-Related Financial Disclosures' (TCFD) recommendations.”
Other places to watch for TCFD government regulations, laws and compliance requirements include New Zealand, where TCFD reporting could be required by roughly 90% of the nation’s assets under management by 2023. In Switzerland, a bill is bending to make voluntary reporting binding.
It’s essential to recognize that ESG metrics are a work in progress, particularly regarding comparability. In the Good Practices Guide, CDB and SASB recognize that climate-related performance metrics beyond Scope 1 and 2 emissions often differ across companies and industries and are often normalized differently. Organizations should be aware of these limitations in their TCFD disclosures.
TCFD metrics can also differ from organization to organization. Since the climate-related risks a business faces will be unique to them, the metrics should be, too. That’s why it’s crucial to include in annual TCFD reports what the metrics are and what they mean for the business in the short and long term.
Here are some examples of common TCFD metrics that organizations can include in their assessments:
- Total Carbon Emissions: If an organization includes their total carbon emissions, they report on the absolute CO2e of all applicable greenhouse gas (GHG) emissions from their operations. This can be a great choice if investors want to know how much carbon can be attributed to them, where their emission proportion corresponds with their ownership proportion. Total carbon emissions can also help organizations avoid over- or under-counting emissions.
- Scope 1, 2 and (if applicable) 3 GHG Emissions: Reporting in this way allows organizations to attribute which emissions come directly from their activities and which do not. Scope 1 and 2 GHG emissions are a direct product of operations, whereas Scope 3 emissions are related to the organization but are not under their control or ownership.
- Carbon Footprint: This may be one of the better-known TCFD metrics in which organizations measure the carbon cost of their activities, also known as their corporate footprint. This will usually appear as CO2e/$M invested. Investors may also want to expand on this by evaluating the average revenue per ton CO2e.
- Average Revenue per Ton CO2e: This metric expands on an organization’s carbon footprint, providing particularly useful insights to investors. The average revenue per ton of CO2e illustrates the carbon footprint as a possible negative return; the higher the footprint, the greater the loss to the organization. This can help investors and stakeholders prioritize more sustainable operations as a path toward greater revenue.
- Revenue From the Low Carbon Economy: Organizations can use this metric to define how much of their business involves products and/or services related to the low carbon economy. Stakeholders can then use this information to make decisions about how the future of the business can be more sustainable.
TCFD Reporting Solution
When organizations follow the TCFD reporting recommendations, they submit an annual report that details every climate-related financial risk they face, as well as the eleven recommendations related to that risk. The more risks an organization faces, the more opportunities and metrics they’ll have to stay on top of.
While manually compiling an annual PDF report will suffice, TCFD reporting solutions like Diligent ESG can help organizations simplify their data collection, benchmarking and reporting.
Look for the following features in effective technology for ESG reporting:
- Establish Roles & Responsibilities: Organizations that effectively create TCFD and other ESG reports clearly define roles and responsibilities. Reporting solutions can help define what needs doing and when so that no role or responsibility is left uncovered. This includes every step from defining what ESG means to the organization to analyzing the organization’s complete ESG data.
- Define Value Drivers: An effective ESG strategy can bring value to every organization, but what that value is may differ from company to company. ESG technology can help call out different value drivers that teams can use to make the case to their boards, whether providing assurances or reporting on opportunity costs.
- Reporting for Multiple ESG Frameworks: TCFD reporting is one of many ways organizations create transparency around their ESG initiatives. Organizations can use a TCFD reporting solution to continuously gather data, then wrap that data into different frameworks. This means organizations are always ready to report, whether that’s to regulators, investors or internal teams.
- Consolidate ESG Data From Across the Organization: Accurately and efficiently collecting data is one of the most challenging parts of TCFD reporting. The larger the organization—and the longer the supply chain—the more data they’ll need to collect. Diligent ESG and other TCFD reporting solutions can pull data from across the organization and consolidate it into one-click reports and easy-to-read dashboards.
- Measure Scope 1, 2 and 3 Emissions for the Value Chain: Scope 1 and 2 GHG emissions are challenging to measure. Scope 3 emissions are even harder. And that’s before organizations evaluate their full value chain. ESG teams can measure these types of emissions and more through TCFD reporting technology, leaving them free to analyze the data for signs of success.
- Streamline Reporting: TCFD reports can be hundreds of pages long. The larger the organization, the longer the report will likely be. But even a 30-page report can be time-consuming to put together and often even more daunting to read. TCFD solutions should not only do the heavy lifting of compiling the report, but they can also make it easier for stakeholders to access. Report options include one-click reports and streamlined dashboards.
- Create Metrics for Measuring Success: Proving whether or not ESG efforts have been effective is one of the most difficult things organizations must do. TCFD reporting solutions can track the business’s ESG activities and those of competitors to create accurate benchmarks that make it easier to see wins as they happen.
Boost Sustainability With TCFD Reporting & Technology
It may be tempting to see TCFD reporting as an additional burden on a growing ESG checklist. But TCFD dovetails with — and can streamline and strengthen — many ESG activities.
First, when companies conduct TCFD reporting, they collect and compile valuable information that stakeholders and investors want to see related to environmental, social and governance issues. Moreover, the right tools can help.
With ESG software and analytics support, boards can streamline their TCFD reporting and incorporate climate-related issues into their overall operations and strategy for reduced risk, increased investment and greater long-term sustainability.