An Introduction to the TCFD
- TCFD recommendations are an essential tool when it comes to an organisation’s climate-related disclosures
As countries like the UK and New Zealand start to integrate them into their legislation, they’re becoming more relevant than ever
But what are they, how are they used, and who needs to follow them? This beginner’s guide to the TCFD breaks it all down
What is the TCFD?
The TCFD, or Task Force on Climate-related Financial Disclosures, was founded in 2015 by the Financial Stability Board. Based in Basel and chaired by Michael Bloomberg, it was created to help companies make their climate-related disclosures more consistent and comparable.The task force currently comprises 31 members from some of the most important financial institutions around the globe.
In 2017, the TCFD published their official guidelines. These consist of a framework of recommendations intended to help organisations disclose the risks and opportunities they face as a result of climate change. These recommendations are being used, in part, to guide the development of proposed standards from the International Sustainability Standards Board (ISSB).
Who does the TCFD framework apply to?
TCFD guidelines are applicable to organisations across all sectors and jurisdictions. While primarily aimed at large, publicly-listed firms, they can be adopted by any company looking to improve the way they assess and disclose climate-related risk.
Though originally created as a voluntary framework, many jurisdictions around the world are now starting to incorporate it into official guidelines or legislations.
Why is the TCFD needed?
In amongst the ‘alphabet soup’ of ESG standards and regulations, knowing how and what to disclose in your annual report can be a challenge. As a result, many organisations fall into the trap of sharing too much vague or irrelevant information.
The TCFD addresses this issue by providing companies with a clear guide they can follow to ensure their climate-related disclosures are consistent and of a high standard. Most notably, the framework helps organisations share information that is pertinent to investors.
While some companies are legally obliged to follow the framework, many also find value in its ability to enable a more robust climate-related risk assessment and strategy. It can also help establish competitive advantage by showcasing an organisation’s future proof strategies.
What does the TCFD focus on?
Unlike other ESG regulations, the TCFD doesn’t focus as much on how your business activities impact climate change, but on how climate change is likely to affect your business.
As well as exploring climate change-related risks and challenges, organisations are encouraged to outline potential opportunities and advantages held by the business in the face of climate change.
While regulations like the EU taxonomy take a quantitative stance to climate-related disclosure, the TCFD’s approach is more descriptive and forward-looking, giving business leaders the opportunity to outline their KPIs and defend the future of their organisation in an in-depth, structured way.
How is the TCFD structured?
The TCFD framework is made up of 11 core recommendations, grouped under four main categories, or ‘pillars’: Governance, Strategy, Risk Management and Metrics.
For each recommendation, guidelines are provided on best practices for effective disclosure. Companies are encouraged to examine a range of potential climate-related scenarios and describe how their strategy would change according to each one.
What are the 11 TCFD recommendations?
TCFD recommendations guide companies on how to thoroughly answer the following questions, in light of their business’ approach to climate change:
- How much oversight do your board members have?
- What role does management play?
- What risks and opportunities have you identified?
- What is the projected impact on the organisation?
- What strategy do you have in place?
- How do you identify and assess the risks?
- What is your process for managing these risks?
- How does this process tie in with your organisation’s overall risk management?
- What metrics do you use?
- What are your organisation’s greenhouse gas emissions (scope 1, 2, and, if appropriate)?
- What targets do you currently have in place?
What are the TCFD principles?
Underpinning these recommendations are seven key principles that organisations are encouraged to follow. A high-quality disclosure is:
- Consistent over time
- Comparable to other disclosures within the sector
What’s the difference between TCFD and SASB?
The Sustainability Accounting Standards Board (SASB) has also published a set of guidelines for climate-related disclosures.
Like the TCFD, they focus on information that is relevant to investors. But while TCFD guidelines look at the impact of climate change on an organisation with a focus on future strategy, the SASB is concerned with the organisation’s past and current impact on climate change.
In this way, TCFD and SASB guidelines complement one another, as companies can use both frameworks to assess and communicate their double materiality (how the business both contributes to, and is affected by, climate change).
Is the TCFD mandatory?
Although TCFD recommendations started off as a voluntary guide for companies to follow, many countries are starting to embed them into their regulatory framework.
New Zealand and the UK are the first two countries to have made TCFD aligned disclosure mandatory for large companies, with more following suit. The framework has been endorsed by over 100 governments around the world, and many of these are working towards mandating it—notably, the G7 countries have all made a commitment to do so.
Aside from governments, leading financial institutions across the globe strongly endorse TCFD alignment, including the Bank of Canada and BlackRock.
What are the challenges of TCFD disclosure?
TCFD disclosures rely on climate forecasting, which is imperfect. Factors such as severity and timings of events can be tricky to estimate—key details when it comes to assessing their potential impact on a business.
We also have a lack of historical data to model the long-term impact of climate change on businesses. Both in terms of the risks and how they should be managed, we are venturing into uncharted territory.
For large, multi-entity companies around the globe, assessing these risks can be particularly complex, as each outcome can rely on a multitude of interconnected factors. This is especially the case for companies with complex global supply chains, who may need to take multiple location-specific risks into account.
What else should I know?
Beyond the recommendations themselves, the TCFD has also published a guide to provide additional help to companies implementing their recommendations. Their website also contains a hub of TCFD-specific resources.
In 2021, they released supplementary guidance for a number of sectors, including banks, insurance companies, asset owners, asset managers, and non-financial groups.
Engage with your board members: Discussion about climate-related risks and opportunities should be encouraged at every level, but particularly at the top. Board members should remain actively involved for full transparency.
Build a cross-functional team: Analysis, planning and action should remain a team effort involving multiple functions across your business. As TCFD disclosures are heavily focused on risk and opportunity, be sure to involve your risk management team to assess, document and put controls in place.
Take stock of what you already have: It’s likely that you already have more relevant information than you think. Sit down and assess what you can share today, what you need to make your disclosures more thorough, and what information you’re missing.
Know your audience: Remember that your audience will be diverse, spanning investors and partners to customers and employees. Importantly, most of these are unlikely to be scientists or climate experts. While all your disclosures should be specific, meet industry standards and include examples and evidence, don’t overwhelm with information. Use easily comprehensible language, providing links to more detailed or technical information.