3.3 Task Force on Climate-related Financial Disclosures (TCFD)
6 min read•july 30, 2024
The (TCFD) helps companies report their climate risks and opportunities. It's a key part of global sustainability reporting, giving investors and stakeholders crucial info on how climate change impacts businesses financially.
cover , , , and metrics/targets. Companies use this framework to assess climate impacts, develop resilient strategies, and disclose their approach to stakeholders. It's becoming a standard for climate reporting worldwide.
Climate-Related Financial Disclosures
Importance of Climate-Related Financial Disclosures
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Climate change presents (severe weather events, rising sea levels) and (policy changes, legal issues, technology shifts, market changes, reputational impacts) that can have significant financial implications for organizations across industries
Investors, lenders, insurers and other stakeholders are increasingly demanding transparency around climate-related risks and opportunities to inform financial decision-making
Insufficient information can lead to mispricing of assets and misallocation of capital (stranded assets, undervalued opportunities)
enable stakeholders to better understand an organization's exposure to and management of climate risks and opportunities
Supports more efficient capital allocation and smooth market transitions (orderly low-carbon transition)
Effective disclosures can provide a competitive advantage by demonstrating strategic resilience and enabling more favorable financing terms
Inadequate disclosures may damage reputation and credibility with stakeholders (investors, customers, employees)
Financial Implications and Stakeholder Demands
Physical risks can disrupt operations, supply chains, and markets, leading to increased costs, reduced revenues, and asset impairment (damaged facilities, business interruptions, higher insurance premiums)
Transition risks can result in stranded assets, increased expenditures, and reduced demand for products and services (carbon taxes, renewable energy mandates, changing consumer preferences, divestment campaigns)
Stakeholders are using climate-related information to assess investment risks and opportunities, make lending and insurance underwriting decisions, and hold organizations accountable
Initiatives like the Climate Action 100+ engage with high-emitting companies to drive climate action and disclosure
Insufficient or misleading disclosures can result in shareholder resolutions, litigation, and exclusion from sustainability indices and green funds
The Network for Greening the Financial System (NGFS) is developing climate scenarios and promoting disclosures for central banks and supervisors
TCFD Recommendations for Disclosures
TCFD Framework and Core Elements
The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for more effective, comparable and decision-useful climate-related financial disclosures
Developed by the Financial Stability Board (FSB) in response to G20 request
The recommendations are structured around four thematic areas: governance, strategy, risk management, and
Applicable to organizations across sectors and jurisdictions
Governance recommendations focus on an organization's governance around climate-related risks and opportunities
Disclose board oversight of climate-related issues, including processes and frequency of discussions
Describe management's role in assessing and managing climate-related risks and opportunities
Strategy recommendations involve disclosing actual and potential impacts of climate-related risks and opportunities on the organization's businesses, strategy, and financial planning
Describe climate-related risks and opportunities identified over the short, medium, and long term
Disclose impact of risks and opportunities on the organization's businesses, strategy, and financial planning
Describe resilience of the organization's strategy under different climate-related scenarios, including a 2°C or lower scenario
Risk Management and Metrics and Targets
Risk management recommendations include describing the organization's processes for identifying, assessing, and managing climate-related risks
Disclose how processes for identifying, assessing, and managing climate-related risks are integrated into the organization's overall risk management
Metrics and targets recommendations involve disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities
Disclose metrics used by the organization 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 targets used by the organization to manage climate-related risks and opportunities and performance against targets
The TCFD recommends that climate-related financial disclosures be provided in mainstream (i.e., public) annual financial filings
Fosters shareholder engagement and broader use of climate-related financial disclosures
Disclosures should be specific, complete, clear, balanced, and understandable
Avoid generic, boilerplate language and provide company-specific context
Climate Risk and Opportunity Management
Implementing TCFD Recommendations
Implementing the TCFD recommendations starts with securing support and engagement from the board and senior management
Integrate climate considerations into governance processes (board committees, executive oversight)
Organizations should assess the of climate-related risks and opportunities and define the scope of disclosures
Materiality assessments evaluate the magnitude of financial impact and the probability and timing of occurrence
Consider input from stakeholders and evolving disclosure requirements and expectations
Scenario analysis is a key tool recommended by the TCFD to assess strategic resilience under different plausible future states
Scenarios should consider a 2°C or lower scenario and a higher emissions scenario based on current trends
Inform strategic planning, capital allocation, and risk management processes
Develop metrics and targets to measure, monitor, and manage climate-related risks and opportunities
Align with strategy and risk management processes
Set science-based emissions reduction targets to demonstrate credibility (SBTi criteria)
Embed climate-related risks and opportunities into existing risk management and strategic planning processes
Update enterprise risk management frameworks, capital allocation decisions, and executive remuneration policies
Engage across functions (sustainability, finance, risk, strategy, operations)
Data Collection and Quality
Collecting quality data is essential for credible disclosures
Establish processes and controls to gather complete, accurate, and reliable climate-related data
Address data availability, quality, and consistency challenges across the value chain (Scope 3 emissions)
Leverage existing and emerging data sources and estimation methodologies
Disclose data gaps, limitations, and assumptions to provide transparency
Continuously improve data quality and expand disclosure scope over time
Obtain third-party assurance to enhance credibility and reliability of disclosures
Align with relevant assurance standards (ISAE 3410, AA1000AS)
TCFD Alignment for Company Disclosures
Governance and Strategy
Disclosures should be assessed against the 11 recommended disclosures under the governance, strategy, risk management, and metrics and targets core elements
Effective disclosures are specific and complete in addressing the different aspects of each recommendation
Governance disclosures should clearly describe the board's oversight of climate-related risks and opportunities
Processes and frequency by which the board and/or committees are informed about climate-related issues
How the board monitors and oversees progress against goals and targets for addressing climate-related issues
Management's role in assessing and managing climate-related issues should be discussed
Assign climate-related responsibilities to management-level positions or committees
Describe relevant organizational structures and processes
Strategy disclosures should provide specific details on the climate-related risks and opportunities the organization has identified over the short, medium, and long term
Describe the impact on the organization's businesses, strategy, and financial planning
How climate-related issues serve as an input to financial planning process and time period(s) used
How capital deployment and funding decisions are influenced
Disclose the resilience of the organization's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario
Reveal key input parameters, assumptions, analytical choices, and time horizons
Risk Management, Metrics, and Targets
Risk management disclosures should detail the organization's processes for identifying, assessing, and managing climate risks
How processes are integrated into overall risk management
How relative significance of climate-related risks is determined in relation to other risks
How risks are prioritized and what risk classification frameworks are used
Metrics and targets disclosures should provide the specific metrics used to assess climate-related risks and opportunities in line with strategy and risk management processes
Industry-specific metrics as defined by TCFD implementation guidance
GHG emissions metrics should be provided for Scope 1, Scope 2, and if appropriate Scope 3
Related risks such as emissions from fossil fuel reserves and purchased energy
Targets should be clearly defined in terms of timeline, base year, and key performance indicators
Absolute and/or intensity-based targets, as well as ranges or directional targets
Performance against targets should be discussed
Disclosures should be balanced and objective in addressing challenges and areas for improvement in addition to positive developments
Provide specific context relevant to the company
Avoid generic, boilerplate language and overly technical terminology
Key Terms to Review (20)
Accountability: Accountability is the obligation of an organization or individual to report, explain, and be answerable for the results of their actions. It emphasizes transparency and responsibility, making it crucial for building trust among stakeholders and ensuring that sustainability initiatives align with ethical practices and regulatory frameworks.
Carbon footprint: A carbon footprint measures the total greenhouse gas emissions caused directly and indirectly by an individual, organization, event, or product, typically expressed in equivalent tons of carbon dioxide (CO2e). This concept connects to various aspects of sustainability, including energy consumption, resource management, and corporate social responsibility, emphasizing the need for transparent reporting and effective strategies to mitigate climate change impacts.
Climate risk assessments: Climate risk assessments are systematic evaluations aimed at identifying and analyzing potential climate-related risks that may impact an organization or entity's operations, finances, and overall sustainability. These assessments help organizations understand their vulnerabilities to climate change, including physical risks from extreme weather events and transition risks related to the shift toward a low-carbon economy.
Climate-related financial disclosures: Climate-related financial disclosures refer to the reporting of a company's exposure to climate risks and opportunities, along with how these factors may impact its financial performance. These disclosures provide investors and stakeholders with valuable information on how a company is preparing for and addressing climate change-related challenges, which is increasingly important for assessing business sustainability and long-term value.
EU Taxonomy: The EU Taxonomy is a classification system established by the European Union to provide businesses and investors with a clear framework for identifying environmentally sustainable economic activities. It aims to guide investment towards projects that contribute to the EU's environmental objectives, including climate change mitigation and adaptation. This taxonomy serves as a key tool for implementing the EU Green Deal and achieving climate neutrality by 2050.
Global Reporting Initiative: The Global Reporting Initiative (GRI) is an international framework for sustainability reporting that provides organizations with guidelines to disclose their economic, environmental, and social impacts. It encourages transparency and accountability in corporate practices, promoting stakeholder engagement and fostering trust through consistent reporting standards.
Governance: Governance refers to the systems, processes, and practices through which organizations are directed and controlled. It encompasses decision-making, accountability, and stakeholder engagement, ensuring that the organization operates ethically and transparently while achieving its objectives. In the context of financial disclosures, particularly regarding climate-related risks and opportunities, effective governance plays a crucial role in integrating sustainability into core business strategies.
Greenhouse gas emissions: Greenhouse gas emissions refer to the release of gases such as carbon dioxide, methane, and nitrous oxide into the atmosphere, which trap heat and contribute to global warming and climate change. These emissions primarily result from human activities like fossil fuel combustion, industrial processes, and agricultural practices. Monitoring and reporting these emissions is essential for understanding environmental impacts and formulating strategies for mitigation.
Materiality: Materiality refers to the principle of determining which sustainability issues are significant enough to influence the decision-making processes of stakeholders, including investors, customers, and regulators. It helps organizations identify and prioritize the environmental, social, and governance (ESG) factors that are most relevant to their operations and stakeholder expectations.
Metrics and targets: Metrics and targets are quantifiable measures used to assess performance against specific goals or objectives within an organization. Metrics provide the data needed to evaluate progress, while targets define the desired outcomes that organizations aim to achieve. Together, they help in setting benchmarks, tracking improvements, and driving accountability in corporate sustainability efforts.
Physical Risks: Physical risks refer to the potential negative impacts on organizations and economies arising from climate-related events and environmental changes. These risks can be categorized into acute risks, which are immediate and often severe, like hurricanes and floods, and chronic risks that develop over time, such as rising sea levels and increasing temperatures. Understanding these risks is essential for effective risk management and strategic planning in the context of climate change.
Risk management: Risk management is the process of identifying, assessing, and prioritizing risks followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events. In a corporate sustainability context, effective risk management helps organizations anticipate environmental, social, and governance (ESG) challenges, leading to better decision-making and strategic planning.
SEC Guidance on Climate Disclosures: SEC Guidance on Climate Disclosures refers to the recommendations and rules provided by the U.S. Securities and Exchange Commission (SEC) to public companies on how to disclose information regarding climate-related risks and their potential impact on financial performance. This guidance aims to promote transparency and consistency in reporting, aligning with frameworks like the Task Force on Climate-related Financial Disclosures (TCFD), which emphasizes the importance of understanding and communicating climate risks to investors and stakeholders.
Stakeholder inclusiveness: Stakeholder inclusiveness is the principle that organizations should consider the interests and perspectives of all stakeholders, including those directly affected by their operations, when making decisions and reporting on their sustainability practices. This approach fosters transparency and accountability, ensuring that diverse voices are heard and valued in the decision-making process. By engaging stakeholders, organizations can better understand their expectations and needs, leading to more effective sustainability strategies.
Strategy: Strategy refers to a plan of action designed to achieve a long-term or overall aim, often involving the allocation of resources and careful consideration of various factors. In the context of managing climate-related risks and opportunities, strategy becomes crucial as organizations align their goals with sustainability principles and the demands for transparent reporting on climate impacts and resilience efforts.
Sustainability Accounting Standards Board: The Sustainability Accounting Standards Board (SASB) is an independent organization that develops and maintains sustainability accounting standards aimed at guiding the disclosure of financially material sustainability information by companies to investors. SASB's standards help companies communicate their sustainability performance in a way that is consistent, comparable, and reliable, which is increasingly important for stakeholders looking to understand the impact of environmental, social, and governance (ESG) factors on financial performance.
Sustainability context: Sustainability context refers to the broader environmental, social, and economic conditions that influence and shape an organization's sustainability performance and reporting. It emphasizes understanding how an organization impacts and is impacted by the systems in which it operates, including the challenges and opportunities related to sustainability. This concept helps organizations identify relevant sustainability issues, measure their contributions to sustainable development, and communicate effectively about their performance.
Task Force on Climate-related Financial Disclosures: The Task Force on Climate-related Financial Disclosures (TCFD) is an organization that develops voluntary climate-related financial disclosure guidelines for companies, aiming to provide investors and other stakeholders with consistent and comparable information about the financial risks and opportunities posed by climate change. TCFD's framework encourages organizations to disclose their governance, strategy, risk management, and metrics related to climate impacts, enabling better-informed investment decisions and fostering a sustainable financial system.
TCFD Recommendations: The TCFD Recommendations refer to the guidelines set forth by the Task Force on Climate-related Financial Disclosures to help companies disclose climate-related risks and opportunities in a consistent and comparable manner. These recommendations emphasize the importance of transparency regarding the impact of climate change on financial performance and the potential effects on investments, thereby aiding investors, stakeholders, and companies in understanding climate-related financial risks and opportunities.
Transition risks: Transition risks refer to the potential financial and operational impacts that organizations may face as they adapt to a low-carbon economy. These risks arise from changes in policies, technologies, and consumer behavior aimed at mitigating climate change. They can affect companies in various ways, including increased costs, stranded assets, and shifts in market demand, making it essential for organizations to assess and disclose these risks as part of their sustainability reporting efforts.