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TCFD standards: everything you need to know
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Climate change can significantly impact financial stability, which is why understanding and implementing TCFD (Task Force on Climate-related Financial Disclosures) standards has become essential for businesses. These standards guide companies in clearly reporting climate-related financial risks and aligning environmental responsibility with financial transparency.
With the Financial Stability Board's announcement of TCFD's integration into the International Sustainability Standards Board's (ISSB) framework, the landscape of climate reporting is set for a significant shift. This move towards ISSB standards marks a new chapter in corporate climate responsibility, streamlining the process for companies and investors alike in navigating the complexities of sustainability reporting in a changing world.
👉 In this article we’ll explore what the TCFD Standards are, the benefits they bring, and how the ISSB has incorporated these recommendations into its own standards.
What is the TCFD?
What does TCFD stand for?
TCFD stands for the Task Force on Climate-related Financial Disclosures (TCFD). It was established by the Financial Stability Board (FSB) in 2015, the TCFD was formed as a strategic response to the increasing recognition of climate change as a critical financial risk. It aims to provide a structured framework for companies and financial institutions to disclose climate-related financial information transparently.
What is the purpose of the TCFD?
The aims of the TCFD are twofold: to inform investors and stakeholders about the climate-related risks companies face and to help foster a more sustainable, low-carbon global economy through informed investment decisions. This initiative recognises the profound impact that climate change can have on economic stability and seeks to address the gap in reliable climate-related financial information.
“ The objective of the TCFD was to facilitate consistent climate-related financial disclosures that could be used by companies, banks, and investors to provide information to stakeholders. ”
Has the TCFD been successful?
The task force issued its 'Final Report' in 2017, laying out 11 voluntary recommendations, known as the TCFD framework. These recommendations quickly gained global attention and support, reflecting the urgent need for transparency in climate risk reporting.
👉 Since the creation of the TCFD’s recommendations, 4,900 organisations across 103 jurisdictions have shown support for the TCFD. This underscores the increasing global consensus on the importance of climate-related disclosures in financial decision-making.
💡 The TCFD's influence extends beyond voluntary compliance. Many jurisdictions, including the European Union, Singapore, Japan, New Zealand, and the United Kingdom, are progressively mandating climate risk disclosures. This marks a transition from voluntary guidelines to mandatory regulatory frameworks, reflecting a global commitment to climate accountability in the financial sector.
👉 Discover how the Task Force on Nature-related Disclosures complements the TCFD’s framework in our article.
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What are the TCFD Standards?
The core elements of the TCFD Standards
The TCFD Standards consist of four core areas designed to provide a comprehensive framework for climate-related financial disclosures: Governance, Strategy, Risk Management, and Metrics and targets. Each of these areas plays an important role in ensuring that a company's approach to climate-related risks and opportunities is transparent, consistent, and informative.
Let’s take a closer look at the four core areas that overarch the 11 TCFD recommendations:
Governance
Governance relates to a company's leadership and organisational structure regarding climate-related risks and opportunities. Recommended disclosures under the banner of governance include:
- Describe the board’s oversight of climate-related risks and opportunities
- Describe the management’s role in assessing climate-related risks and opportunities
Governance disclosures involve providing information on how the board and management monitor and manage climate-related risks and opportunities. For example, a multinational corporation might choose to manage such risks by establishing a dedicated sustainability committee within its board to oversee the company's environmental policies, ensuring alignment with broader climate goals and shareholder interests. Such transparency in governance helps to assure investors and stakeholders of the company's commitment to addressing climate-related issues.
Strategy
Strategy focuses on the actual and potential impacts of climate-related risks and opportunities on the company's businesses, strategy, and financial planning. This includes the resilience of the company's strategy under different climate-related scenarios. The TCFD’s recommended disclosures under strategy include:
- Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term
- Describe the impact of climate-related risks and opportunities on the organisation’s business, strategy, and financial planning
- Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
An example of what this looks like in the real world could include an energy company reporting on how shifting towards renewable energy sources impacts its business model and financial targets, demonstrating adaptability to a low-carbon economy.
💡By outlining strategic responses to climate change, companies can show investors their ability to thrive in changing environmental conditions.
Risk management
Risk Management involves how a company identifies, assesses, and manages climate-related risks. Recommended disclosures are:
- Describe the organisation’s process for identifying and assessing climate-related risks
- Describe the organisation’s process for managing climate-related risks
- Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management
A practical example is a global logistics company incorporating climate risk into its overall risk management strategy. This could involve assessing the impact of various climate scenarios on its supply chains to determine vulnerability to extreme weather events, and then taking steps to mitigate these risks by diversifying suppliers or investing in more resilient infrastructure. Effective risk management disclosure helps stakeholders understand a company's preparedness and resilience against climate-related disruptions.
Metrics and targets
Finally, Metrics and Targets deal with the metrics and targets a company uses to assess and manage relevant climate-related risks and opportunities. Recommended disclosures include:
- Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
- Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks
- Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets
For example, a manufacturing company might disclose its carbon footprint (Scope 1 and 2 GHG emissions) and set clear targets for reduction, including strategies for achieving these goals. This might be complemented by disclosing Scope 3 emissions, encompassing indirect emissions from the company's value chain. Such disclosures not only track progress but also provide clear benchmarks for investors to assess a company's environmental performance.
“ The importance of these climate-related financial disclosures cannot be overstated. Together, they provide a holistic view of how a company approaches climate change - from top-level governance to strategic planning, risk management, and concrete metrics. This comprehensive approach is essential for investors and stakeholders who increasingly demand transparency and accountability in how companies are navigating the complex and evolving landscape of climate risks and opportunities. By adhering to these standards, companies not only enhance their own sustainability profiles but also contribute to the broader goal of steering the global economy toward a more sustainable and environmentally conscious future. ”
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How does the Task Force on Climate-related Financial Disclosures define climate risk and opportunity?
The TCFD's primary goal is to demonstrate the conversion of climate change impacts into financial risks and opportunities. To facilitate mutual understanding between companies and investors, the task force has developed a detailed taxonomy of climate risks and opportunities, enabling investors to benchmark these factors across organisations.
Climate-related risks
Climate risks are categorised into two types:
- Transition risks, associated with the shift towards a low carbon economy, encompassing policy, legal, technological, and market changes
- Physical risks, directly resulting from climate change, such as severe weather events, rising sea levels, and higher seasonal temperatures.
Organisations adhering to TCFD guidelines must reference these categories in their climate-related financial disclosures.
Climate-related opportunities
Climate opportunities encompass activities that contribute to mitigating or adapting to global warming, while also producing financial benefits for the organisation. While specific opportunities vary by organisation, market, and sector, the TCFD highlights three primary areas:
- Resource efficiency initiatives
- Transition to low-emission energy sources
- Development and distribution of climate-friendly products and services
Organisations should provide potential financial impact insights, this will help them to better understand how climate change might affect their revenues, cash flows, and balance sheets.
❗ Defining climate-related risks and opportunities remains challenging due to the uncertain scope and scale of global warming's consequences. Consequently, sustainability strategies, financial impacts, and scenario analyses are subject to ongoing revisions. Therefore, the task force strongly advises companies to stay informed through both historical and forward-looking scenario analyses.
The benefits of adopting the TCFD Standards
Adopting the Task Force on Climate-related Financial Disclosures (TCFD) standards brings several key benefits to organisations, encompassing improved risk management, enhanced investor confidence, and a significant contribution to global climate change mitigation efforts.
Improved risk management and strategic planning
Implementing TCFD standards empowers organisations to improve their risk management processes and strategic planning by integrating climate-related risks and opportunities into their core business strategies.
For example, a company that identifies potential risks associated with rising sea levels can proactively invest in more resilient infrastructure or diversify its operations geographically. This proactive approach not only mitigates immediate risks but also aligns long-term business strategies with the evolving realities of a changing climate.
By embedding climate considerations into their strategic planning, companies can pivot more effectively in response to environmental changes, ensuring long-term business continuity and resilience.
Enhanced investor confidence and stakeholder relations
Transparency and accountability in climate-related disclosures as advocated by TCFD standards significantly boost investor confidence. Investors and shareholders are increasingly conscious of environmental risks and their potential financial impacts. Companies that provide clear and comprehensive climate-related financial information are more likely to attract and retain investors who prioritise sustainability and responsible corporate behaviour.
Additionally, this transparency builds trust and strengthens relations with a broader range of stakeholders, including customers, employees, and regulatory bodies, who are increasingly weighing environmental considerations in their decision-making processes.
💡Financial organisations employ TCFD reports to assess climate-related financial risks in companies, integrating this data into their risk management and mitigation strategies. These insights aid investor engagement by highlighting projects that reduce climate risks and enhance opportunities.
Contribution to global efforts against climate change
Adhering to TCFD standards contributes to the larger global effort to combat climate change. By disclosing climate-related financial information, companies not only acknowledge their role in this global challenge but also contribute to the collective understanding of climate risks and opportunities. This collective action is vital for driving systemic change and transitioning towards a low-carbon, sustainable economy.
Companies that adopt TCFD standards are not just protecting their interests; they are participating in a crucial movement toward a more sustainable future for all.
How to implement TCFD Standards
Adopting the Task Force on Climate-related Financial Disclosures (TCFD) standards can be a strategic move for businesses aiming to enhance their sustainability practices and financial transparency. We’ve provided a step-by-step guide on how to adopt and integrate TCFD recommendations, along with tools and resources to facilitate the process and tips for ensuring continuous improvement and compliance.
Step 1: Commit
- Senior management buy-in - Begin by securing a commitment from top management. Understanding the importance of TCFD recommendations and their relevance to your business is crucial.
- Educational workshops - Conduct workshops or training sessions for key staff and decision-makers to familiarise them with TCFD objectives and frameworks.
Step 2: Assess current practices
- Baseline assessment - Evaluate current practices against TCFD recommendations. Identify gaps in your existing climate-related financial disclosures.
- Risk and opportunity analysis - Conduct a thorough analysis of how climate change could affect your business operations, both in terms of risks and opportunities.
Step 3: Develop a climate strategy
- Integrating into business strategy - Incorporate climate-related considerations into your overall business strategy.
- Setting targets - Establish clear, measurable goals related to climate risks and opportunities, such as reducing greenhouse gas emissions or investing in sustainable technologies.
Step 4: Implement governance structures
- Board oversight - Ensure that the board or a designated committee is responsible for overseeing climate-related issues.
- Roles and responsibilities - Define clear roles and responsibilities for managing climate-related risks and opportunities.
Step 5: Risk management integration
- Process integration 0 Embed climate-related risk assessment into your existing risk management processes.
- Scenario analysis - Use scenario analysis to understand the potential impact of different climate-related risks under various future scenarios.
Step 6: Establish metrics and targets
- Identifying key metrics - Determine which metrics best represent your company's climate impact (e.g., Scope 1, 2, and 3 emissions).
- Tracking progress - Set up systems to regularly track and report on these metrics.
Step 7: Reporting and disclosure
- Annual reporting - Include climate-related financial disclosures in annual financial reports or sustainability reports.
- Stakeholder communication - Communicate progress and challenges to stakeholders transparently.
Tools and Resources
- TCFD Knowledge Hub - Utilise the TCFD Knowledge Hub for guidelines, tools, and case studies.
- Carbon Disclosure Project (CDP) - Leverage CDP’s frameworks for reporting environmental impact.
- Climate-related scenario analysis tools - Employ tools for scenario analysis from financial institutions or sustainability organisations.
Tips for Continuous Improvement and Compliance
- Regular review and update - Regularly review and update your climate-related financial disclosures to reflect new information or changes in your business.
- Stakeholder engagement - Engage with investors, customers, and other stakeholders to understand their expectations and insights.
- Benchmarking and best practices - Look to industry benchmarks and best practices for continual improvement.
👉 Learn more about the Carbon Disclosure Project’s framework in our dedicated article.
“ Implementing TCFD standards is a journey that involves ongoing effort and commitment. By following these steps, businesses can effectively integrate TCFD recommendations, enhance their sustainability profile, and contribute meaningfully to global climate change mitigation efforts. ”
What is an effective TCFD report?
An effective TCFD report is a cornerstone for transparently communicating climate-related financial information. It seamlessly integrates this information within an organisation's mainstream financial filings. This integration ensures that climate-related data is presented alongside other essential financial and accounting data, offering a comprehensive view of the company's performance and risks.
The TCFD recommends that such reports should extend beyond mere regulatory compliance. They should also cater to potential investors and clients, providing them with a clear understanding of climate-related impacts and strategies. Public accessibility is key; this is why disclosing this information on the organisation's website is an excellent practice, enhancing transparency and stakeholder engagement.
The TCFD outlines fundamental principles for effective disclosure. These principles are designed to ensure that climate-related financial disclosures are not only informative but also practical and user-friendly. They guide organisations to:
- Present relevant information - Ensure that the information provided is pertinent and directly applicable to stakeholders' decision-making processes, focusing on aspects that significantly impact the organisation's climate-related risks and opportunities.
- Specific and complete - Offer detailed, comprehensive data and insights, covering all necessary aspects to avoid ambiguity and provide a thorough understanding of climate-related disclosures.
- Clear, balanced, and understandable - Communicate in a straightforward, impartial, and easily comprehensible manner, maintaining transparency and simplicity to aid stakeholders in grasping the full scope of the information.
- Consistent over time - Maintain disclosure practices across reporting periods, enabling stakeholders to track progress and changes effectively over time.
- Comparable - Structure information in a way that allows for comparison with other organisations, facilitating benchmarking and assessment of performance in a broader industry context.
- Reliable, verifiable, and objective - Ensure that all disclosed information is dependable, capable of being substantiated, and based on objective data and analysis, enhancing credibility and trustworthiness.
- Adhere to timeliness - Provide up-to-date information in a timely manner, reflecting the most current understanding of climate-related risks and opportunities, to ensure relevance and usefulness for decision-making.
“ An effective TCFD report is more than a regulatory requirement, it is a tool for strategic communication and engagement with all stakeholders. It provides a clear, comprehensive, and reliable picture of how an organisation is navigating the challenges and opportunities presented by climate change, thereby contributing to a more sustainable and resilient business model. ”
The future of TCFD and climate reporting
On November 3rd, 2021, the IFRS Foundation made a significant stride in the realm of sustainable business practices by announcing the formation of the International Sustainability Standards Board (ISSB). This new entity is an important consolidation in the sustainability reporting landscape, integrating the Climate Disclosure Standards Board and the Value Reporting Foundation (VRF).
Central to the ISSB's mission is the incorporation of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, signifying a unified, global approach to sustainability reporting and underscoring the growing importance of climate-related financial information in corporate governance and strategy.
👉 Learn more about the ISSB and its goals in our article.
Transitioning to ISSB Standards
The evolution of climate reporting is entering a new era, marked by the Financial Stability Board's announcement that the Task Force on Climate-related Financial Disclosures (TCFD) has completed its mission. This milestone is encapsulated in the adoption of the International Sustainability Standards Board (ISSB) Standards, which are seen as the culmination of TCFD's pioneering work.
Transition to ISSB Standards
Companies adhering to the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and the IFRS S2 Climate-related Disclosures will inherently align with the TCFD recommendations. This alignment is because the ISSB's Standards have fully incorporated the TCFD's framework, signifying a seamless transition for businesses already complying with TCFD guidelines.
Continued relevance of TCFD Recommendations
While the TCFD's formal role concludes, its recommendations remain relevant and useful. Companies can choose to continue using the TCFD framework as a robust entry point into more comprehensive sustainability reporting. Particularly for organisations just embarking on this journey, the TCFD recommendations provide a solid foundation before fully adopting the ISSB's Standards.
Enhanced reporting requirements
The ISSB's Standards, especially IFRS S2, not only align with the TCFD’s core recommendations and eleven disclosures but also extend beyond them. Key additions include the mandate for companies to report industry-specific metrics, detail their use of carbon credits in achieving net-zero targets, and provide more in-depth information on financed emissions. These expanded requirements reflect a growing demand for more detailed and sector-specific climate-related financial information.
Simplification of disclosure processes
One significant benefit of integrating the TCFD recommendations into the ISSB's Standards is the simplification of the disclosure process. This integration addresses the complexity previously faced by companies and investors due to the wide variety of disclosure initiatives. The ISSB's approach streamlines these processes, making it easier for companies to report and for investors to assess climate-related financial risks and opportunities.
Legacy and impact of the TCFD
The TCFD's influence in enhancing the practice and quality of climate-related disclosures is undeniable. As the ISSB builds upon this legacy, the future of climate reporting is set to be more standardised, comprehensive, and impactful. This evolution reflects a growing global consensus on the importance of transparent, reliable, and comparable sustainability reporting, which is crucial for steering the global economy towards environmental sustainability and resilience against climate risks.
“ The transition from TCFD to ISSB Standards means that the landscape of climate reporting is set to become more unified and effective, benefiting companies, investors, and the broader global community in the collective effort to address climate change. ”
What about Greenly?
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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