Task Force on Climate-related Financial Disclosures (TCFD): A reporting standard for climate-related disclosures

Environmental deterioration caused by greenhouse gas emissions, usage of plastic, deforestation, etc. contributes to natural calamities, impacting every corner of the world. Despite the awareness of the staggering effects, most companies overlook the pressing issue of the century – climate change. As the effects of climate change are unpredictable, companies consider the implications to be in the far future and fail to prioritise the climate change risks. With the increased penetration of Electric Vehicles (EVs), closure of coal-fired power plants in the US, an environmental crackdown on manufacturing units in China, carbon neutrality targets set by companies, increased contribution from green energy, switch towards eco-friendly packing options, etc., the world is shifting towards a low-carbon economy.

Why TCFD?

A shift towards a low-carbon economy could cause drastic changes across industries and sectors. New environmental regulations could lower the value of certain assets of a company, causing financial implications for its shareholders. For instance, the US’ decision to focus on renewable power generation and the ceasing of coal-based power generation rendered the assets in coal plants to become obsolete.

Companies that continue to invest in outmoded and irrelevant activities could be less resilient to operate in a low-carbon economy, which could lower the returns for shareholders. Hence, the shareholders and investors need to obtain more information regarding a company’s preparedness to operate in a low-carbon economy.

To solve this issue of lack of information, the Task Force on Climate-related Financial Disclosures (TCFD) was developed by the Financial Stability Board (FSB) in 2015.

What is TCFD?

The TCFD will develop guidelines and recommendations for companies to disclose their climate-related financial risks to assist investors, shareholders, financial analysts, insurers and lending companies to identify material risks that help in making informed investment decisions. Currently, the TCFD comprises 32 members from various large banks, credit rating companies, consulting firms and insurance companies to formulate these voluntary guidelines.

TCFD unveiled its first set of recommendations in June 2017 for use by all financial companies, banks, insurance firms, asset managers and owners in G20 countries. Since then, the TCFD has gained momentum as more and more companies understand the financial impacts of climate change and incorporate climate change risks into their financial risk assessment.

Currently, TCFD is supported by 12 governments, G7 and G20 finance ministers and central banks, the Financial Stability Board, International Financial Reporting Standards Foundation, International Organization of Securities Commissions, The Alliance and the European Commission. Also, TCFD’s supporters from over 89 countries have increased by 410% from 513 in 2018 to 2,616 in 2021. Further, countries including Brazil, Hong Kong, Japan, New Zealand, Singapore, the United Kingdom and the EU nations have finalised regulations that mandate disclosures aligned with the TCFD guidelines.

The TCFD recommendations are structured around four areas:

  • Governance
  • Strategy
  • Risk management
  • Metrics and targets

Governance: The company’s oversight and management of climate-related risks and opportunities are included

Strategy: Impacts of the climate change risks and opportunities on the company’s business strategy and financial planning are included

Risk management: Steps taken by the Company to identify, assess and manage the climate risks and opportunities are disclosed

Metrics and targets: Metrics and targets in place to assess and manage the climate risks and opportunities are included

Based on the information provided by the companies on the 4 key areas, stakeholders can access and understand how a company evaluates its climate-related financial risks.

Features of TCFD

The TCFD-developed global framework aims to help companies report climate-related financial risks and opportunities in their regular financial reporting. It can be incorporated by all organisations. Also, it provides useful information to estimate the financial impacts. TCFD also majorly focuses on the risks and opportunities from transition risks such as risks from switching to a low-carbon economy.

Impact of TCFD

TCFD transforms the sustainability-related reporting landscape in three ways:

  • It analyses risks and opportunities from a financial standpoint in addition to looking at them from a sustainability lens
  • It widens the perspective to include impacts of climate change on the company by identifying physical risks such as wildfires, storms, floods, etc. and transition risks from policy changes that aim to transition towards a fossil fuel-free economy
  • It encourages companies to regard their climate-related disclosures as important as their financial reporting by requiring the same level of stringent regulatory process from governments

However, TCFD’s success depends on its large-scale adoption by companies across the world. It is expected that by incorporating the recommendations, the evaluation of climate change-based risks will become an inherent part of a company’s risk management process in the long run. Recommendations by TCFD can be incorporated into companies’ existing reporting processes. If you would like to discuss your corporate reporting requirement, reach out to Report Yak and we would be happy to draft a perfect report for maximum impact!