The Task Force on Climate-Related Financial Disclosures Guide (TCFD)

The Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015 with the objective of expanding and improving climate-related financial disclosures. The Task Force's recommendations are establishing new standards for financial reporting.

This guide provides them with all the information they need to understand the TCFD requirements, their history, evolution, and future plans, as well as how to comply with them, as ESG and TCFD reporting becomes increasingly important for all levels of management.

What Does TCFD Stand For?

When informed that TCFD reporting should be a priority for senior management, the first question that may arise is, "What is TCFD?"

The acronym TCFD stands for Task Force on Climate-related Financial Disclosures. The TCFD was established by the Financial Stability Board in 2015. Its mission, as stated in its mission statement, is to "develop recommendations for more effective climate-related disclosures."

In today's business environment, environmental, social, and governance concerns are becoming increasingly important to investors, shareholders, and stakeholders. Environmental, social, and governance (ESG) considerations are increasingly being incorporated into corporate brands. According to the company, these disclosures are intended to "promote more informed investment, credit, and insurance underwriting decisions." Additionally, the disclosures assist stakeholders in comprehending "carbon-related assets in the financial sector" and the financial system's vulnerability to climate-related risks.

As a result, the disclosure requirements should help management focus on climate imperatives. Businesses that successfully implement the TCFD requirements will be better equipped to account for climate-related risks and opportunities, developing informed strategies that minimise risks and maximise opportunities. Additionally, their stakeholders should have a clearer picture of the company's climate performance.

What is TCFD's Background?

The TCFD was formed in response to a Financial Stability Board (FSB) review of how the financial sector could address climate-related issues. The study, conducted in April 2015 at the request of the G20 finance ministers and central bank governors, identified a need for improved data to support informed investment, lending, and insurance underwriting decisions, as well as to enhance understanding and analysis of climate-related risks.

The Task Force issued its initial recommendations in June 2017 and has since released three status reports on how companies are implementing those recommendations. In 2019, it hosted the inaugural TCFD Summit in Tokyo.

The TCFD now has 31 members from all G20 member countries. It is backed by the Network for Greening the Financial System (NGFS), a coalition of 72 central banks and supervisors, and has garnered support from over 1700 individuals and organisations in 77 countries.

What Are the Benefits of TCFD?

A clear and consistent framework for reporting on climate change.

Identifying the appropriate reporting framework is one of the most significant ESG challenges facing boards. The TCFD reporting requirements simplify this process by providing organisations with a "single vocabulary of climate risks and opportunities" and "harmonising the climate reporting landscape," as greenbiz.com puts it.‍

Climate-related reporting will be more visible.

Apart from the necessity imposed by the TCFD reporting requirements, their existence contributes to the public awareness of climate-related issues. As a result, other legislators and regulators will place a greater emphasis on climate-related reporting.

The TCFD reporting requirements have already influenced the UK financial regulator, the Financial Conduct Authority, to expand its own reporting requirements, requiring commercial companies with premium London Stock Exchange listings to include a statement in their annual financial report indicating whether their disclosures comply with the TCFD recommendation.

It aids businesses in developing climate-friendly solutions.

Climate change issues are becoming increasingly urgent. As a result of compliance with the TCFD's requirements, the TCFD believes that improved data will "allow businesses to incorporate climate-related risks and opportunities into their risk management and strategic planning processes...empowering markets to channel investment toward sustainable and resilient solutions, opportunities, and business models.”

It assists businesses in meeting the ESG expectations of investors.

As a result, businesses will be better positioned to meet investor demand for climate-related data and solutions. Shareholder pressure on companies that appear to fall short on climate and ESG issues has increased in recent years; the requirements will expedite their adoption by facilitating the development of the "sustainable and resilient solutions" mentioned in the TCFD.‍

Capital access has improved.

Businesses benefit from increased or easier access to capital as investors and lenders gain confidence in their climate-related risk assessment and management.

Is TCFD a legal requirement?

Despite the FCA's mandate, TCFD recommendations are currently voluntary; the "comply or explain" approach allows businesses to choose whether or not to include TCFD-aligned disclosures in their annual reports and financial statements.

In November 2020, UK Chancellor Rishi Sunak announced that the UK would become the first country in the world to fully mandate TCFD-aligned disclosures across the economy. By 2025, mandatory disclosures will be implemented in a wide variety of industries, including the following:

• Listed commercial companies
• Large private companies
• Banks,
• Building Societies,
• Insurance Companies
• accredited asset managers
• life insurers
• regulated pension schemes
• workplace pension plans

Some of these industries will be required to report beginning in 2023.

Canada is considering mandating TCFD, and the Securities and Exchange Commission recently approved a proposal for mandatory climate reporting centred on TCFD.

Recommendations and Guidelines from the TCFD

The Task Force on Climate-related Financial Decisions' (TCFD) recommendations are intended to be pragmatic and simple to implement, as they are "widely adoptable and applicable to organisations across sectors and jurisdictions," the report states. They are intended to provide "decision-useful, forward-looking information," with a strong emphasis on the risks and opportunities inherent in the transition to a lower-carbon economy.

The TCFD "recommends" that any organisation with public debt or equity implement the recommendations of the TCFD and "encourages" all other organisations to do so.

How to Put TCFD Recommendations into Practice

The recommendations report from the Task Force includes helpful TCFD guidelines for implementing the recommendations.

The TCFD's recommendations are divided into four categories:

• Governance: The organization's governance around climate-related risks and opportunities
• Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization's businesses, strategy, and financial planning
• Risk management: The processes used by the organisation to identify, assess, and manage climate-related risks
• Metrics and targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities

The entire set of recommendations is 74 pages long. These can be found on the TCFD website. The document contains specific advice and guidance on how companies should approach the required disclosures.

The requirements and TCFD guidelines for implementation are summarised here.

Governance Recommendation

Describe the organization's climate-related risks and opportunities governance.

The Task Force recommends that companies make the following disclosures:

1) Explain how the board monitors climate-related threats and opportunities.

2) Explain how management evaluates and manages climate-related risks and opportunities.

Strategy Recommendation

Where such information is material, disclose the actual and potential impacts of climate-related risks and opportunities on the organization's business, strategy, and financial planning.

It is recommended that firms' disclosures include the following:

1) Describe the organization's climate-related risks and opportunities in the short, medium, and long term.

2) Explain how climate-related risks and opportunities affect the company's operations, strategy, and financial planning.

3) Describe the organization's strategy's resilience in light of various climate-related scenarios, including a 2°C or lower scenario.

Risk Management Recommendations

Describe how the company identifies, evaluates, and manages climate-related risks.

Company risk management disclosures should include the following:

1) Explain how the organisation goes about identifying and assessing climate-related risks.

2) Describe the organization's climate-related risk management strategy.

3) Explain how methods for identifying, assessing, and managing climate-related risks are incorporated into the organization's overall risk management strategy.

Metrics and Targets Recommendation

Where such information is relevant, disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Company disclosures should include the following:

1) Identify the metrics that the organisation employs to evaluate climate-related risks and opportunities in accordance with its strategy and risk management process.

2) [Scope 1, Scope 2, and, if applicable, Scope 3] should be disclosed. GHG emissions (https://www.carbontrust.com/resources/briefing-what-are-scope-3-emissions) and the risks associated with them (https://www.carbontrust.com/resources/briefing-what-are-scope-3-emissions)

3) Describe the organization's targets for managing climate-related risks and opportunities, as well as its performance against those targets.

Additional Sector-Specific Guidance

In addition to the above recommendations and guidance, the TCFD has created supplemental guidance for two areas: the financial sector and non-financial industries, which account for the majority of GHG emissions, energy consumption, and water consumption.

The Task Force believes that the financial sector deserves special attention because "financial sector disclosures could foster early assessment of climate-related risks and opportunities, improve pricing of climate-related risks, and lead to more informed capital allocation decisions," according to the Task Force.

The financial sector is divided into four major industries by the TCFD:

• Financial institutions (lending)
• Insurance businesses (underwriting)
• Asset management firms (asset management)
• Asset owners, such as pension plans, endowments, and foundations in the public and private sectors (investing)

The non-financial industries identified are also divided into four groups:

• Energy (including oil and gas, coal and electric utilities)
• Buildings and Materials (including metals and mining, chemicals, construction materials, capital goods and real estate)
• Transportation (passenger and freight air transportation, maritime and rail transportation, trucking services, and automobile and component manufacturing)
• Agriculture, Food, and Forest Products (Agriculture, Food, and Forest Products) (including beverages, agriculture, packaged foods and meats, and paper and forest products)

Outside of these industries, the TCFD notes that "organisations in other industries with comparable business activities may wish to review and consider the issues and topics addressed in the supplemental guidance" – in other words, similar organisations are strongly encouraged to adopt a similar proactive approach to climate-related risks.

Reporting on the TCFD

The TCFD requirements provide excellent guidance on how businesses should approach reporting, including disclosure location, materiality, and recommended TCFD reporting approaches for specific industries.

Disclosures' Location

According to the Task Force, climate-related financial disclosures should be included in companies' mainstream (i.e. public) annual financial filings.

The TCFD reporting requirements will overlap with and, in some cases, replicate existing requirements in many jurisdictions for companies to disclose material climate-related financial information in their financial filings. As a result, adhering to the TCFD's disclosure requirements will "assist organisations in more effectively meeting their current disclosure obligations."

Where the two diverge, the Task Force emphasises that its recommendations should not supersede or be construed as superseding any national disclosure requirements.

Assume that certain recommendations of the TCFD are incompatible with national financial disclosure regulations. The Task Force recommends that companies include their TCFD report in "other official company reports that are issued at least annually, widely distributed and accessible to investors and others, and subject to internal governance processes that are similar to or identical to those used for financial reporting."

In other words, the inability to incorporate the TCFD disclosures into your financial filings should not be used as an excuse to avoid disclosing at all.

Materiality

The TCFD believes that its recommended disclosures assist in contextualising a great deal of the information contained in financial filings. Numerous investors, for example, are interested in the governance and risk management framework within which a company operates, including climate risk management.

According to the Task Force, businesses can satisfy this desire for context by reporting in accordance with their governance and risk management requirements.

The Task Force recommends that businesses include disclosures about strategy, metrics, and targets in their annual financial reports when the information is deemed material.

Even if the information is deemed non-material and thus not included in financial filings, the TCFD believes that certain organisations – those in the four non-financial groups with annual revenue of more than £USD1 billion equivalent – should consider disclosing it in other reports. Investors are particularly interested in the evolution of these organisations' strategies. Because they are more likely than others to experience long-term financial consequences of climate-related risks, the Task Force believes. Include the TCFD metrics in any required financial reporting and you will meet shareholder expectations.

Owners and Asset Managers

The guidance focuses on the reporting requirements for asset managers and owners, who typically submit financial reports in a format distinct from that of corporations. As a result, asset managers and owners may need to modify their strategy slightly to comply with the TCFD's requirements.

The Task Force recommends that asset managers and owners use their existing financial reporting systems to make TCFD disclosures, while also taking materiality into account.

Internal Controls

In many ways, the data governance that will be required for TCFD reporting should be similar to current processes and checks. Numerous documents in which your TCFD climate risk report is included have already been reviewed by the chief financial officer and audit committee, ensuring that your TCFD report has passed all necessary governance checks.

The Task Force recommends that organisations use the same or very similar internal governance processes as those used for financial reporting when disclosing some or all of their climate-related information in a manner other than annual financial filings – for example, when they are not required to file public financial reports.

Effective Disclosure Principles

Reviewing and following the Task Force's seven principles for effective disclosure, which provide a useful framework for companies planning their reporting, will be beneficial to those responsible for TCFD disclosures.

These are detailed in Appendix 3 of the Recommendations Report; in summary, they propose:

1) Information that is relevant to the disclosure should be included.

2) Specific and comprehensive disclosures are required.

3) Clear, balanced, and understandable disclosures are required.

4) Over time, disclosures should be consistent.

5) Companies within a sector, industry, or portfolio should have comparable disclosures.

6) Reliable, verifiable, and objective disclosures are required.

7) Disclosures should be made as soon as possible.

Clarity, conciseness, and consistency are watchwords when publishing climate-related disclosures to meet TCFD expectations, as evidenced by this shortlist. Your reporting should provide investors and other stakeholders with a clear picture of your current approach by providing a user-friendly snapshot of your climate-related performance – a TCFD scorecard, if you will.

TCFD Scenario Analysis

Due to the long-term nature of climate change, it can be challenging to accurately identify and quantify the potential impact of climate risk on your business.

The Task Force has suggested that scenario analysis be used to address this issue. Scenario analysis is a well-known technique for developing flexible strategic plans that allow for the implementation of ESG principles. The TCFD has discovered, however, that few businesses go the extra mile and include the results of their climate-related risk scenario analysis in their sustainability reports or financial filings.

In a detailed section of its scenario analysis recommendations, TCFD reiterates its belief that businesses should select a set of scenarios (including a '2°C or less' scenario) in addition to two or three other scenarios relevant to their industry's specific circumstances. The Task Force is unambiguous in its preference for transparency, consistency, and comprehensiveness when conducting TCFD scenario analysis, just as it is in the TCFD report itself.

Signatories to the TCFD

There are over 1700 TCFD supporters or signatories, in addition to the Task Force's 31 members, who include both data providers and users of financial disclosure data, as well as a number of other experts. The following is a list of companies that have publicly expressed their support for the Task Force and its recommendations. As a result of their actions, they "demonstrate that they are taking action to build a more resilient financial system through climate-related disclosure."

Any organisation is welcome to join the Task Force, but those with public debt or equity, as well as asset managers and owners – those who prepare and use financial disclosures – are particularly encouraged to actively support and implement the recommendations. Other supporters of the TCFD include industry associations, central banks, governments, and regulators.

Any organisation interested in becoming a TCFD signatory may complete the Support Form on the Task Force's website.

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