The Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015 to increase and improve climate-related financial information reporting. Today, the Task Force’s recommendations are essential for financial reporting.
As ESG overall, and TCFD reporting, significantly grow in importance for boards, this guide provides board directors with everything they need to know about the TCFD requirements, history, evolution, and plans and how to comply with them.
What Does TCFD Mean?
When being told that TCFD reporting should be a priority for boards, the first question directors might ask is, ‘What is TCFD?’
TCFD stands for Task Force on Climate-related Financial Disclosures. The TCFD was established in 2015 by the Financial Stability Board. Its objective, set out in its mission statement, is to “develop recommendations for more effective climate-related disclosures”.
Within the current business landscape, environmental, social and governance considerations are becoming ever-more valued by investors, shareholders and stakeholders. ESG considerations are increasingly central to corporate brands. As such, these disclosures are intended to “promote more informed investment, credit and insurance underwriting decisions.” Additionally, the disclosures enable stakeholders to understand better concentrations of “carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”.
Therefore, the disclosure requirements should hep focus boards’ minds on climate imperatives. If they successfully implement the TCFD requirements, businesses should better account for climate-related risks and opportunities, devising informed strategies that minimise the risks and maximise the opportunities. And their stakeholders should have a clearer view of the organisation’s climate-related performance.
What’s the History of TCFD?
The TCFD was established following a review by the Financial Stability Board (FSB) into how the financial sector could take account of climate-related issues. The study, carried out in April 2015 at the request of the finance ministers and central bank governors of the G20, identified a need for better information to support informed investment, lending and insurance underwriting decisions and improve the understanding and analysis of climate-related risks.
The Task Force made its first recommendations in June 2017, and since then, it has published three status reports detailing the progress companies are making in implementing those recommendations. In 2019 it hosted the first TCFD Summit, held in Tokyo.
Today, the TCFD consists of 31 members drawn from across the G20 nations. It has over 1700 supporters headquartered in 77 countries and is also supported by the Network for Greening the Financial System (NGFS), a group of 72 central banks and supervisors.
What Are the Advantages of TCFD?
1) A clear and consistent framework for climate-related reporting.
Finding the right framework for reporting is recognised as one of the main ESG challenges facing boards. The TCFD reporting requirements facilitate this reporting process by providing organisations with, as greenbiz.com puts it, “a single vocabulary of climate risks and opportunities” and “harmonising the landscape of climate reporting”.
2) Increased visibility of climate-related reporting.
In addition to the imperative brought about by the TCFD reporting requirements, their existence helps shine a spotlight on climate-related issues. It increases the importance placed on climate-related reporting by other legislators and regulators.
The TCFD reporting requirements have already influenced the UK financial regulator, the Financial Conduct Authority, to expand its own reporting requirements, compelling commercial companies with premium listings on the London Stock Exchange to include a statement in their annual financial report setting out whether their disclosures are consistent with TCFD recommendations and adding an explanation if they are not.
3) It supports companies in developing climate-focused solutions.
The need to tackle climate issues is becoming increasingly apparent. The TCFD believes that the improved information delivered via compliance with its requirements will “allow companies to incorporate climate-related risks and opportunities into their risk management and strategic planning processes…empowering the markets to channel investment to sustainable and resilient solutions, opportunities, and business models”.
4) It helps businesses to meet investors’ ESG expectations.
Consequently, companies will be better able to meet investor demand for climate-related information and solutions that address climate challenges. Recent years have seen increasing shareholder pressure on organisations that appear to fall short on climate and ESG matters; by facilitating the development of the “sustainable and resilient solutions” the TCFD alludes to, the requirements will precipitate their adoption.
5) Access to capital is improved.
Companies benefit from easier or better access to capital, as investors and lenders gain confidence that their climate-related risks are assessed and managed effectively.
Is TCFD Mandatory in the UK?
Notwithstanding the FCA requirement outlined above, compliance with the TCFD recommendations is currently voluntary; the “comply or explain” approach allows organisations to choose whether to include TCFD-aligned disclosures in their annual reports and financial statements.
In November 2020, however, the UK Chancellor, Rishi Sunak, announced that the UK would become the first country in the world to make TCFD-aligned disclosures fully mandatory across the economy. By 2025, mandatory disclosures will come into effect across a significant number of sectors, including:
- Listed commercial companies
- UK-registered large private companies
- Building societies
- Insurance companies
- UK-authorised asset managers
- Life insurers
- FCA-regulated pension schemes
- Occupational pension schemes
Some of these sectors will be subject to mandatory reporting from 2023.
TCFD Recommendations and Guidelines
It’s intended that the Task Force on Climate-related Financial Decisions (TCFD) recommendations are pragmatic and easily adopted, describing them as “widely adoptable and applicable to organisations across sectors and jurisdictions”. They are intended to enable “decision-useful, forward-looking information” and designed to have a strong focus on the risks and opportunities presented by the shift to a lower-carbon economy.
The TCFD “recommends” that the TCFD recommendations are implemented by any organisation with public debt or equity and “encourages” all other organisations to do so.
How To Implement TCFD Recommendations
The Task Force’s recommendations report includes useful TCFD guidelines for implementing the recommendations.
The TCFD recommendations are structured around four thematic areas:
- Governance: The organisation’s governance around climate-related risks and opportunities
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organisation’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 full recommendations run to 74 pages. You can find these on the TCFD website. The document includes details of the advice and guidance around how companies might approach the disclosures required.
Here, we summarise the requirements and the TCFD guidelines around implementation.
Disclose the organisation’s governance around climate-related risks and opportunities.
Here, the Task Force recommends that companies’ disclosures:
1) Describe the board’s oversight of climate-related risks and opportunities
2) Describe management’s role in assessing and managing climate-related risks and opportunities
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning where such information is material.
Here, it is recommended that firms’ disclosures:
1) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
2) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning
3) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario
Risk Management Recommendation
Disclose how the organisation identifies, assesses and manages climate-related risks.
Companies’ disclosures around risk management should:
1) Describe the organisation’s processes for identifying and assessing climate-related risks
2) Describe the organisation’s strategy for managing climate-related risks
3) Describe how methods for identifying, evaluating, and managing climate-related risks are integrated into the organisation’s overall risk management
Metrics and Targets Recommendation
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Here, companies’ disclosures should:
1) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
2) Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks
3) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets
Supplemental Guidance for Specific Sectors
In addition to the recommendations and guidance above, the TCFD has developed supplemental guidance for two areas – the financial sector and non-financial industries that account for the largest proportion of GHG emissions, energy usage, and water usage.
The Task Force believes that the financial sector deserves specific attention as “disclosures by the financial sector could foster an early assessment of climate-related risks and opportunities, improve pricing of climate-related risks, and lead to more informed capital allocation decisions”.
The TCFD splits the financial sector into four major industries:
- Banks (lending)
- Insurance companies (underwriting)
- Asset managers (asset management)
- Asset owners, including public and private sector pension plans, endowments, and foundations (investing)
The identified non-financial industries are also organised into four groups:
- Energy (including oil and gas, coal and electric utilities)
- Materials and Buildings (including metals and mining, chemicals, construction materials, capital goods and real estate)
- Transportation (including passenger and freight air transportation, maritime and rail transportation, trucking services and car/component industries)
- Agriculture, Food, and Forest Products (including beverages, agriculture, packaged foods and meats, and paper and forest products)
For industries outside of these sectors, it’s worth noting the TCFD’s comment that “organisations in other industries with similar business activities may wish to review and consider the issues and topics contained in the supplemental guidance” – in other words, there is strong encouragement for similar organisations to proactively approach climate-related risks in a similar way.
The TCFD requirements include some excellent guidance on how companies should approach their reporting, covering issues like the location of disclosures, materiality and recommended approaches to TCFD reporting for specific sectors.
Location of Disclosures
The Task Force recommends that climate-related financial disclosures are included as part of companies’ mainstream (i.e. public) annual financial filings.
In many jurisdictions, the TCFD reporting requirements will overlay and, in some cases mirror, existing obligations around disclosing material climate-related financial information in companies’ financial filings. Consequently, complying with the TCFD’s disclosures will “help organisations meet existing disclosure obligations more effectively”.
The Task Force points out that its recommendations should not take precedence over, or be seen as superseding, any national disclosure requirements, where the two differ.
Suppose certain elements of the TCFD recommendations are not compatible with national disclosure requirements for financial filings. In that case, the Task Force encourages organisations to include their TCFD report in “other official company reports that are issued at least annually, widely distributed and available to investors and others, and subject to internal governance processes that are the same or substantially similar to those used for financial reporting.”
In other words, not being able to include the TCFD disclosures in your financial filings should not be seen as a reason or an excuse for failing to disclose altogether.
The TCFD believes that its recommended disclosures provide useful context for much of the information included in companies’ financial filings. For instance, many investors want information on the governance and risk management context – including climate risk management – in which companies’ results are achieved.
The Task Force believes that companies can address this desire for context by reporting to meet its governance and risk management requirements.
When it comes to the strategy and metrics and targets disclosures, the Task Force recommends that organisations include them in annual financial filings when the information is considered material.
Even if the information is not considered material and therefore included in financial filings, the TCFD believes that specific organisations – those in the four non-financial groups with over £USD1bn equivalent in annual revenue – should consider disclosing it in other reports. Investors are particularly interested in monitoring the evolution of these organisations’ strategies. The Task Force believes because they are more likely than others to see a financial impact over time from climate-related risks. Including the TCFD metrics in whatever financial reporting, you are obliged to provide will deliver on shareholder expectations.
Asset Managers and Owners
The guidance specifically addresses the reporting requirements for asset managers and asset owners, where reporting tends to follow a different format to corporate financial reporting. As a result, asset managers and owners may need to take a slightly different approach to comply with the TCFD requirements.
Here, the Task Force suggests that asset managers and owners use their existing means of financial reporting as a vehicle for their TCFD disclosures and consider materiality in this context.
In many ways, the governance you need to carry out for the data included in TCFD reporting shouldn’t differ too much from existing processes and checks. Many of the documents in which you contain your TCFD climate risk report will already be subject to review by the chief financial officer and audit committee, therefore delivering assurance that your TCFD report has been through the requisite governance checks.
Where organisations provide some or all of their climate-related disclosures via reporting other than annual financial filings – for instance, where they are not required to issue public financial reports – the Task Force suggests that organisations follow the same, or very similar, internal governance processes to those used for financial reporting.
Principles for Effective Disclosures
Those responsible for TCFD disclosures will also find it helpful to review and follow the Task Force’s seven principles for effective disclosure, which provide a useful framework for companies planning their reporting.
These are described in full in Appendix 3 of the Recommendations Report; in short, they suggest that:
1) Disclosures should represent relevant information
2) Disclosures should be specific and complete
3) Disclosures should be clear, balanced and understandable
4) Disclosures should be consistent over time
5) Disclosures should be comparable among companies within a sector, industry or portfolio
6) Disclosures should be reliable, verifiable and objective
7) Disclosures should be provided on a timely basis
It’s clear from this shortlist that clarity, conciseness and consistency are watchwords when publishing climate-related disclosures to meet TCFD expectations. Your reporting should deliver a user-friendly snapshot of your climate-related performance – a TCFD scorecard if you like – that gives investors and other stakeholders a clear picture of your current approach.
TCFD Scenario Analysis
The long-term nature of climate-related change means that it can be difficult to accurately identify and quantify the potential impact of climate risk on your business.
The Task Force recommends scenario analysis as one way to tackle this challenge. Scenario analysis is a well-established way of creating strategic plans that can be flexed to a range of future scenarios, helping organisations to operationalise their ESG principles. However, in its work, the TCFD has identified that few companies take the next step and disclose the findings of their scenario analysis around climate-related risk in their sustainability reports or financial filings.
In a detailed section in its recommendations on scenario analysis, TCFD confirms its belief that businesses should select a set of scenarios (including a ‘2°C or lower’ scenario) in addition to two or three other scenarios relevant to their industry’s specific circumstances. As with the TCFD report itself, the Task Force is clear on its preference for transparency, consistency and comprehensiveness when carrying out TCFD scenario analysis.
In addition to the Task Force’s 31 members, which comprise both preparers and users of data for financial disclosures, along with a number of other experts, there are over 1700 TCFD supporters or TCFD signatories. These are companies that have publicly declared their support for the Task Force and its recommendations. In doing so, they “demonstrate that they are taking action to build a more resilient financial system through climate-related disclosure”.
Any organisation can become a TCFD supporter, although the Task Force particularly encourages those with public debt or equity and asset managers and owners ─ the preparers and users of financial disclosures – to actively support and implement the recommendations. Other TCFD supporters include industry associations, central banks, governments and regulators.
Any organisation wanting to become a TCFD signatory can complete the Support Form on the Task Force’s website.
How Boards Can Ensure Compliance With TCFD Requirements
Any board seeking to implement best practice around ESG reporting should look to the Task Force on Climate-related Financial Disclosures as a critical source of guidance and recommendations.
The TCFD guidelines provide a useful framework for any organisation that needs to raise its game around climate-related reporting. With boards increasingly under pressure to prioritise compliance with the TCFD framework, the TCFD Recommendations Report is an invaluable reference document.
Being able to clearly define your ESG goals and measure and monitor progress against them is essential but has historically been a stumbling block for many organisations aspiring for better climate-related reporting. Diligent’s ESG solutions help organisations comply with ESG standards and regulations, including TCFD disclosures, evaluate risk controls, benchmark governance practices and educate leadership on new frameworks and developments. You can find out more on our website.