TCFD: Understanding the financial transparency framework

The Task Force on Climate-related Financial Disclosures (TCFD) is a global initiative that seeks to increase transparency in the reporting of financial information regarding climate.

This task force plays a vital role in the world of finance and business, as it enables organisations to identify and manage risks and opportunities linked to climate change, and investors to make more informed and sustainable decisions.

Keep reading to gain a deeper understanding of this regulation and what the reporting and disclosure process entails.

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The TCFD framework

If we ask ourselves what the TCFD is, we quickly see that we are dealing with a framework that not only encourages corporate responsibility, but also contributes to sustainable development and the global fight against climate change. Let’s take a more in-depth look at it.

What is the TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) was set up by the Financial Stability Board (FSB) in 2015 in order to establish a coherent and clear set of recommendations for companies when disclosing climate-related financial information.

These recommendations help investors, insurers and other market players evaluate and manage the risks and opportunities faced by organisations in terms of climate change.

The TCFD framework centres around four key areas:

Governance: This refers to senior management and the board of directors’ involvement and commitment to overseeing and managing climate-related risks and opportunities.
Strategy: This area calls for companies to identify and evaluate how these climate-related risks and opportunities can impact their operations, business strategies and financial planning in the short, medium and long term.
Risk management: Organisations must incorporate climate risks in their general risk management processes, including identifying, assessing and managing these risks.
Metrics and targets: Companies also have to disclose the metrics and objectives used to assess and manage the risks and opportunities regarding climate, including greenhouse gas emissions and their goals for reducing these emissions.

By adopting the TCFD framework, organisations can enhance the transparency and quality of their climate-related financial information, thus enabling them to make better decisions and promote responsible and sustainable investment.

TCFD recommendations

The TCFD recommendations provide a structured framework for improving the disclosure of climate-related financial information and helping companies manage the risks and opportunities associated with climate change.

Below are some of the main recommendations of the TCFD for each area:

Governance:

Describe the board’s oversight of climate-related risks and opportunities.
Describe management’s role in assessing and managing climate-related risks and opportunities.

Strategy:

Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning.
Explain how the different climate-related scenarios could affect the organisation in terms of risks and opportunities.

Risk management:

Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management.
Explain how the organisation assesses the magnitude and probability of the climatic risk it has identified and how these risks are managed and mitigated.

Metrics and targets:

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 in accordance with the GHG Protocol, and the related risks.
Describe the targets used by the organisation to measure its climate performance.
Disclose the organisation’s performance against these targets.

By following these recommendations, companies can provide relevant information when reporting and disclosing their climate-related financial information.

TCFD report

A TCFD report is a document that can be prepared by organisations to disclose information on how they manage climate-related risks and opportunities in line with the recommendations detailed above.

Let’s have a look at the process of preparing and disclosing a report:

Internal commitment: Organisations need to be fully committed to adopting the TCFD framework and ensuring that senior management and the board of directors are involved in the process.
Identifying and assessing risks and opportunities: Companies must identify and assess climate-related risks and opportunities in their business, strategies and financial planning.
Incorporating it in risk management: These risks and opportunities need to be incorporated in the company’s overall risk management process, including identifying, assessing and managing these risks.
Setting metrics and targets: Organisations must set clear metrics and targets for assessing and managing the climate-related risks and opportunities.
Preparing the report: Companies have to gather and analyse the data required to create a report that faithfully reflects their performance regarding climate-related risks and opportunities, following the TCFD recommendations.
Disclosure and communication: Finally, organisations need to disclose their TCFD report to investors, insurers and other market players, effectively communicating their achievements and challenges when managing climate-related risks and opportunities.

There are plenty of benefits to preparing a TCFD report, which we will discover below.

Benefits and challenges of adopting the TCFD recommendations

Some of the main benefits of adopting the TCFD are:

Greater transparency and access to relevant information for making investment decisions.
Proactive identification and management of climate-related risks and opportunities.
Improved reputation and trust among investors and other stakeholders.
Opportunity to access sustainable financing and attract responsible investors.
Contribution towards meeting global sustainability objectives and the fight against climate change.

The challenges we have to face regarding their implementation are:

Difficulty identifying and assessing climate-related risks and opportunities, particularly in the long term.
The need to collect and analyse specific and comparable data on greenhouse gas emissions and other environmental metrics.
Incorporating climate-related risks and opportunities in current risk management and strategic planning processes.
The need to keep up to date regarding best practices and stakeholder expectations in terms of climate-related financial disclosures.

As you can see, the pros of applying the TCFD to your organisation greatly outweigh the cons. If you are still unsure, continue reading.

Frequently asked questions about the TCFD

Is it mandatory to publish a TCFD report?

No, the TCFD report is not mandatory on a global level. However, a number of countries and organisations have either begun voluntarily adopting these recommendations or are considering including TCFD-related requirements in their legislation.

In October 2021, the United Kingdom became the first G20 country to enshrine in law mandatory TCFD-aligned requirements for climate-related financial disclosures. From 6 April 2022, 1300 of the country’s largest companies are now obliged to disclose this information in accordance with these recommendations.

What’s more, Rishi Sunak, the current prime minister and former chancellor, declared that disclosures in line with the TCFD recommendations would be compulsory for the whole economy by 2025, and that most of the measures would come into effect in 2023.

What’s the differences between the TCFD and ESG?

As we have seen, the TCFD is a series of specific recommendations for improving the disclosure of climate-related financial information, whereas ESG refers to the environmental, social and governance factors used to evaluate a company’s sustainability performance.

The TCFD focuses exclusively on the risks and opportunities associated with climate change; meanwhile, ESG deals with a much broader spectrum of sustainability issues.

What’s the difference between the EU taxonomy and the TCFD?

The EU taxonomy for sustainable activities is a regulatory framework drawn up by the European Union to classify economic activities that can be considered sustainable from an environmental perspective.

While the EU taxonomy has a regional and regulatory approach, the TCFD, on the other hand, aims to promote transparency and the voluntary disclosure of climate information worldwide.

What’s the difference between the EU SFDR and the TCFD?

The SFDR (Sustainable Finance Disclosure Regulation) is a regulation passed by the EU which outlines requirements for disclosing sustainability information for financial entities in the European Union, including information on how they include ESG risks and opportunities in their investment processes.
Unlike the EU SFDR, which centres on financial entities and their investment products, the TCFD is aimed at all companies that wish to increase the transparency of their disclosures of climate-related information.

Conclusion

The TCFD recommendations play a crucial role in promoting financial transparency and sustainable development.

Adopting and applying the TCFD recommendations enables companies to effectively identify, assess and manage climate-related risks and opportunities. In turn, this allows investors to make more informed and sustainable decisions, which drives sustainable economic growth and offsets the effects of climate change on the global economy.

The challenges of adopting the TCFD are heavily outnumbered by the potential benefits, and we can also use technology to overcome any possible issues. If you want to know more about how our ESG data collection and management software can help you, request a demo.

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