A Closer Look at the Task Force on Climate-Related Financial Disclosures (TCFD)

How Does a Company Assess Risks Associated with Climate Change? 

Companies engaged in ESG reporting often disclose their operational greenhouse gas emissions and measures they are taking to reduce those emissions. While emissions represent one type of climate-related risk, there are other angles that companies, including many of our clients, are beginning to examine.

Acknowledgement of the potential impacts of climate change on business gave rise to the Task Force on Climate-Related Financial Disclosures (TCFD). In 2017, the Financial Stability Board (FSB) formed the TCFD as a means of standardizing disclosures among companies affected by climate change. The Task Force’s mission is to “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.” In other words, the Task Force wrestled this notoriously uncertain phenomenon into rigorous, concrete metrics comparable to financial disclosures. 

The Four Key Components of TCFD

TCFD’s recommended disclosures fall into four categories: Governance, Strategy, Risk Management and Metrics/Targets, outlined further in the chart below.

Within these four areas, TCFD provides eleven recommended disclosures that apply to all sectors as well as supplemental guidance that applies to specific sectors. If you are curious to learn more about the current recommendations, you can dive into the details here

Why Have I Been Hearing More About This Lately?

The initiative received a key boost in January 2020 when Larry Fink, CEO of BlackRock, called it a “valuable framework” for reporting on climate risk in his influential annual letter. Other business luminaries have also elevated public awareness of TCFD, and we have seen an increase in TCFD reporting activity among SustainabilityNext clients. Michael Bloomberg, who chairs the Task Force, believes passionately in its vision.

A 2019 survey of US companies (Mahony and Gargiulo, 2019) found that fewer than 20% had made initial disclosures of climate risk that year (see chart) and more than one third either intend to do no assessment of climate risk or have determined that they have no climate risk. However, given investor pressure and the trillions of dollars in damage to the US economy from climate change and related floods, fires and heat in 2020 alone, we expect the number of companies reporting against TCFD will rise significantly in the next few years. 

How is TCFD Different From Other ESG Reporting Frameworks?

TCFD differs from most other ESG frameworks in several ways:

  • Scenario Analysis: The Task Force considers scenario analysis the best tool available for understanding a company’s resilience to climate change. Companies can choose from many existing climate scenarios (or develop their own), but it is recommended they at least consider the business impacts of a 2°C temperature change in Earth’s climate. 

  • Pros and Cons: TCFD focuses on both risks and opportunities associated with climate change

  • Going Mainstream: While ESG reporting originated in the sustainability community, TCFD originated in the business community and intends to become a mainstream component of risk disclosure. 

  • The COVID Connection: Looking at all of the implications climate change can have on ecological and economic systems may help companies prepare better for large-scale disruptions, such as a global pandemic or civil disorder.

How Can Your Company Get Started?

  • Ensure your company has an up to date materiality analysis that has considered whether, or more likely how, climate change is a key issue for your company.

  • If your company already reports on ESG/CSR issues publically, use the TCFD guidelines to enhance your company’s disclosures on climate risk. TCFD recommendations can be implemented in conjunction with other frameworks. 

  • Consider how to incorporate climate change into your company’s risk assessment and management processes. As companies dive in, they may realize that various departments (finance, procurement, legal, etc.) are already thinking about climate change as part of enterprise risk management. 

  • Visit the TCFD Knowledge Hub, a resource run by the Climate Disclosure Standards Board for companies to learn more about reporting climate risks.

To Sum Up…

Climate risk is in a special category of risk in that it is intergenerational, global and highly uncertain. Its very magnitude and unpredictability make it too easy to ignore – and all the more important not to. TCFD is an evolving tool to help companies internalize those risks into their strategic planning and investment decisions.  SustainabilityNext can help you navigate how and when to consider enhanced climate disclosures using TCFD as a guide.

Sources:

https://www.fsb-tcfd.org/about/#

https://www.fsb-tcfd.org/wp-content/uploads/2020/03/TCFD_Booklet_FNL_Digital_March-2020.pdf

https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf

https://www.investopedia.com/what-is-the-tcfd-task-force-on-climate-related-financial-disclosures-4771379

https://www.irmagazine.com/esg/two-thirds-ftse-100-mention-tcfd-reporting-finds-research

Mahony, Richard and Gargiulo, Diane. 2019. “The State of Climate Risk Disclosure: A Survey of US Companies” 

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