TCFD explained
What is TCFD?
TCFD, which is short for Task Force on Climate-Related Financial Disclosures, was established in Basel, Switzerland in 2015 by the Financial Stability Board FSB. In 2017 the task force published its first climate-related disclosure recommendations, which, endorsed by both G7 and G20, have become the global standard for corporate climate reporting.
The task force is composed of senior financial, sustainability, and research professionals and directors from large international banks, investment companies, auditing companies, large corporations, and other relevant organizations. The task force, which is chaired by Mr. Michael R. Bloomberg, has over 3000 supporter organizations from 92 countries, with a total market capitalization of 27,2 trillion US dollars.
What is the aim of TCFD?
The aim of TCFD is to enable companies to make accurate, comparable, and timely disclosures related to the financial implications of climate-related impacts on their business. By increasing transparency around climate-related corporate risks and opportunities, it is possible for investors, lenders, and insurance companies, to more accurately assess and price financial risks created by climate change. As a result, the widespread adoption of the TCFD standards is expected to support society in transitioning to a lower carbon economy by enabling efficient allocation of capital.
What types of disclosures does TCFD have?
TCFD consists of 11 disclosures that have been divided into four headers: governance, strategy, risk management and metric, and targets. All the categories and disclosures support each other in providing investors, lenders, and insurers insight into how the reporting organization views, assesses and manages climate-related risks and opportunities.
Governance disclosure recommendations are used for disclosing the organization’s climate-related risks and opportunities.
Strategy-related disclosure recommendations are used for disclosing the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning, where such information is material.
Risk management disclosure recommendations are designed to disclose how the organization identifies, assesses, and manages climate-related risks.
Metrics and targets disclosure recommendations have been created for disclosing the metrics and targets that are used to assess and manage the relevant climate-related risks and opportunities where such information is material.
Principles for effective disclosure
TCFD has drafted 7 principles of effective disclosure, in order to ensure consistency, accuracy, and materiality of disclosed data across industries and organizations over the years.
The 7 principles of effective disclosure are as follows:
- Disclosure should represent relevant information
- Disclosure should be specific and complete
- Disclosure should be clear, balanced, and understandable
- Disclosure should be consistent over time
- Disclosure should be comparable among companies within a sector industry or portfolio
- Disclosure should be reliable, verifiable, and objective
- Disclosure should be provided on a timely basis
Scenario analysis as a part of TCFD reporting
The Task Force recommends companies to share their analysis of different climate-change-related scenarios and how those scenarios impact the organization, where material. In practice scenario analysis means, for example, describing the impacts of 1°C global warming, 2°C global warming, and 4°C global warming on the organization’s workings.
Scenario analysis is described by the task force as follows: “process for identifying and assessing the potential implications of a range of plausible future states under conditions of uncertainty. Scenarios are hypothetical and not designed to deliver precise outcomes or forecasts. Instead, scenarios provide a way for organizations to consider how the future might look if certain trends continue or certain conditions are met.”
“Increasing transparency makes markets more efficient and economies more stable and resilient.”
–Michael R. Bloomberg, Chairman, TCFD
Countries where TCFD reporting is required
Canada
Canada requires federally regulated financial institutions, essentially banks and insurance companies, to start reporting on climate-related financial information starting from 2024. The reporting has been recommended already since 2022, but it is being made mandatory using a phased approach, and by 2024 all federally regulated banks and insurers are expected to comply with the mandatory TCFD climate disclosures.
European Union
European Sustainability Reporting Standards are partially based on TCFD disclosures and become applicable from the beginning of 2024 with the implementation of CSRD.
European Union is currently in the process of tightening its sustainability reporting requirements, by implementing the Corporate Sustainability Reporting directive, CSRD (click to read our in-depth article about CSRD) starting from January 2024. For a report to be CSRD compliant, it will need to follow the European Sustainability Reporting Standard, ESRS, which is partially based on TCFD disclosures. In order to comply with the upcoming legal requirements, the easiest solution for an organization is to already start reporting in accordance with TCFD, GRI, and CDP on which the upcoming ESRS is based.
Japan
Companies listed on Tokyo Stock Exchange ´Prime´ market are required to report their climate-related risks and opportunities in accordance with TCFD. It has also been presented, that by the fiscal year 2023, the Japanese Financial Services Agency, FSA, would expand the reporting requirement to cover all businesses that are currently required to submit annual securities reports, so essentially, to all companies that have been listed in Japan.
New Zealand
New Zealand is considered to be the first country to pass a law for mandatory climate reporting for certain types of organizations. The New Zealand government chose to have its disclosure requirements in line with TCFD, and the reporting mandate will concern large listed companies, banks, insurance companies, investment managers, and non-bank deposit takers. The organizations impacted by the legislation are required to start publishing climate-related financial disclosures starting from the financial year 2023.
Singapore
In December 2021 Singapore Stock Exchange published its upcoming financial climate-related disclosure requirements, which are aligned with Task Force on Climate-Related Financial Disclosures (TCFD).
Making financial disclosures on climate-related topics in accordance with the standard will start applying in phases, initially starting from the financial year 2023 listed companies in the industries of finance, agriculture, food, and forest products, and energy are expected to start reporting and starting from the financial year 2024, materials and buildings, as well as transportation industries, are required to follow suite.
Switzerland
Switzerland as a country has officially been a supporter of TCFD since December 2021, and the country is currently encouraging all its organizations to undertake voluntary reporting. In line with Switzerland’s policy on sustainable finance, it is currently in the process of drafting the required legislation in order to make the TCFD reporting recommendation binding by law. Based on public sources, in September 2022 the drafting work is still ongoing.
United Kingdom
United Kingdom is the first G20 country that has made it mandatory for large companies to disclose their climate-related risks and opportunities in line with the TCFD. Starting from April 2022, 1300 largest UK registered companies have been required to make public disclosures in alignment with TCFD. The United Kingdom government has announced publicly its plan to make TCFD-aligned climate reporting mandatory across the whole economy by 2025.
United States
In the United States, TCFD disclosures have been the de facto standard for making corporate climate-related risk and opportunity disclosures for quite some time now. In the US, the Climate Disclosure Proposal of March 2022, would significantly expand the emissions reporting requirement from the current one, which only concerns organizations that have been classified as heavy emitters.
The March 2022 Climate Disclosure Proposal is aligned with TCFD, and the process of approval and implementation is still ongoing. However, if the current global trend continues, it is merely a matter of time, in the US too there will be a stricter mandatory climate reporting requirement. And, based on the knowledge available in the autumn of 2022, it will be based on TCFD.
What are the benefits of TCFD reporting?
Consistency and comparability
The benefits of climate-related financial disclosures include the new standard’s ability to facilitate consistent disclosures across companies and over time. The widespread adoption of the standard has quickly turned TCFD into a selection for best practice in climate risk management, in addition to standardizing climate disclosures.
Improved data quality
TCFD provides depth, granularity, and nuance to climate-related data sharing. In addition to a higher quality of disclosures, and consistency, TCFD offers a valuable tool for corporate transparency and thus enables corporates to share reliable information in a way that is useful for the organization’s stakeholders.
Improved decision-making tool for the green transition
Having accurate and comparable information available will enable better decision-making both inside and outside the company, and awareness of climate-related risks and opportunities will strengthen the stability of the existing financial system. Additionally, the correct pricing of climate-related risks and opportunities is a great tool for making the transition towards a greener and more sustainable economy easier and more practical for organizations.
