Overview of the TCFD
The Task Force for Climate-related Financial Disclosures (TCFD) was established in 2015 by the Financial Stability Board (FSB) to promote more informed investment, credit and insurance underwriting decisions with regard to climate-related financial information. The task force is made up of 31 members from across the G20 who represent a number of different industries enabling a fair-minded and equal approach in developing the framework. To this end, the TCFD has developed recommendations for companies to disclose impactful climate-related information which will enable stakeholders to better understand the concentration of carbon-related assets and the exposure to climate-related risks within the financial sector. In January 2022 it had support from over 3,000 organisations worldwide with a combined market capitalisation of $27.2 trillion, demonstrating the growing popularity and positive influence exerted by this framework across the world.
The TCFD’s recommendations are organised around 4 core thematic areas of governance, strategy, risk management, and metrics and targets. These have been designed to reflect how a company operates and to provide an effective measure of exposure to climate-related risks. Below is a summary of each of the 4 areas and what companies will need to cover in their reporting:
Under Governance, companies must:
- Demonstrate the board’s oversight of climate-related risks and opportunities
- Describe how these risks and opportunities are being assessed and managed
Under Strategy, they must:
- Identify climate-related risks and opportunities over the short, medium and long term and describe their impact on the company’s business strategy and financial planning
- Demonstrate the company’s strategic resilience in relation to certain climate-related scenarios
Under Risk Management, they must:
- Demonstrate the company’s process for identifying, assessing and managing climate-related risks
- Demonstrate the integration of identifying, assessing and managing climate-related risks into the company’s overall risk management strategy
Under Metrics and Targets, they must:
- Disclose the metrics the company uses to assess climate-related risks and opportunities in line with the strategy and risk management processes
- Disclose scopes 1, 2, and if relevant, scope 3 greenhouse emissions ( as per GHG Protocol) and the relevant associated risks
- Describe the targets the company uses to benchmark its climate-related performance
- Disclose how the company is performing against these targets
TCFD in the UK
In October 2021 the UK became the first country in the G20 to enshrine mandatory TCFD-aligned climate disclosures in law. From 6th April 2022 it has become mandatory for 1,300 of the UK’s largest companies to disclose their climate-related information in line with the recommendations. This includes many of the largest traded companies in the UK, banks, insurers and private companies with more than 500 employees and £500 million in annual revenue. This is one of the first steps in the UK’s wider Net Zero Strategy where it aims to decarbonise its economy by 2050. The former treasurer of the UK Government, Rishi Sunak, announced that disclosures in line with the TCFD recommendations would be mandatory across the economy by 2025 with most of the measures in place by 2023.
Why is the TCFD important?
The TCFD framework is one of the most widely accepted in global markets and was expressly welcomed by G20 Finance ministers and Central Banker Governors during their meeting in July 2021. The G20 member states have stated their support for the implementation of the TCFD across their economies. In his statement Michael R. Bloomberg, Chair of the TCFD, states that “In less than six years since we created the task force, climate risk disclosure has gone from attracting little public notice to being endorsed by economies representing more than 80% of global GDP.” This is a testament to the recent pace of engagement with ESG issues, although there is still a long way to go.
The FSB’s Final Report in 2017 highlighted some alarming figures relating to the potential financial implications related to climate change. It suggested that the cost of climate-intensified natural disasters between 2017-2021 was $1.28 trillion. Further, it estimated that potential value at risk for manageable assets could reach up to $43 trillion by 2100 by the Economist Intelligence Unit. By way of scale, that is roughly equivalent to the combined current market capitalisation of the NYSE and Nasdaq. It is therefore vitally important that company’s take action to mitigate these financial risks and limit the impact of climate change on the global economy.
Key Challenges facing the implementation of the TCFD recommendations
The lack of historical data poses a challenge to understanding and modelling the potential financial implications of climate change, especially over the medium to long term. While this is still an issue in the short term, the restricted climate forecasting or risk modelling capacity will make it harder for companies to identify and assess certain longer term climate-related risks and opportunities. However, as climate-related financial data becomes more readily available over the next few years, companies will be able to develop strategies that are more resilient and efficient at managing such risks and opportunities.
As with the introduction of any new system, the implementation of the TCFD will be an iterative process. Once the framework is being actively used by companies and regulators they will need to take time to learn and understand it, and it is likely to need small changes and adaptations along the way.
Overall, the TCFD recommendations for climate-related disclosures are among the most comprehensive and effective available to the market. They will drastically improve transparency on this notoriously sticky issue by providing a clear, intuitive framework designed specifically for the finance-oriented disclosures. Moreover, companies and their stakeholders will themselves be able to better understand their exposure to climate-related risks and how effectively they manage them. Widespread adoption of the TCFD will also build up a bank of historical standardised data which is one of the most significant challenges facing the growth of sustainable finance and ESG investing.
Data measurement and analysis has the potential to improve our world, as it is a way to show evidence of business impact. Getting that data can be a challenge if you don’t have the right tools, but at APlanet we have developed ESG data management software to help you in this process.
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