Introduction to the TCFD and Climate Risk Reporting
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The Task Force on Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) was established by the G20’s Financial Stability Board (FSB) in 2015 to develop recommendations for consistent, climate-related financial disclosures, that could be used by companies, banks and investors to make informed decisions.
In 2017, the TCFD published a set of voluntary, consistent disclosure recommendations for use by companies to provide information to investors, lenders, and insurance underwriters about their climate-related financial risks. The recommendations received unambiguous support from the investor community and have been made a priority by government bodies, financial regulators, central banks, and stock exchanges alike.
Core elements of the TCFD and climate risk reporting
Overview of the core elements of the TCFD recommendations. Source: TCFD Final Recommendations Report (2017)
Climate-related disclosures are recommended across four key areas – governance, strategy, risk management and metrics/targets
Strategy
The strategy element is considered the central and most substantive portion of the disclosures. It covers the risks and opportunities identified as being material to the organisation, financial plans and strategies in place to address them, impacts they may have, and the resilience embedded into the organisation’s strategy by incorporating different scenarios.
Governance
Companies must disclose the organisation’s governance in relation to climate-related risks and opportunities. This must include the board’s oversight and management’s role in assessing and managing risk.
Risk Management
Detail how the organisation identifies and assesses climate risk, processes to manage risk and how these elements are incorporated into the overarching business strategy and risk management.
Metrics and Targets
The metrics used to assess risks and opportunities must be transparently shared, include scope 1, 2 and potentially scope 3 emissions, and there must be detail on the targets and analysis of how the organisation is performing against these targets.
Understanding physical risk and transition risk
The TCFD framework categorises climate-related risks and opportunities into physical and transition:
- Physical: Risks and opportunities associated with rising aggregate global temperatures and the associated physical impacts.
These physical risks can be event-driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption.
For example, the increasing intensity and frequency of extreme weather events or gradual changes such as rising sea levels may cause direct damage to buildings and infrastructure. - Transition: Risks and opportunities associated with the transition to a low carbon economy.
These include policy, legal, technology, market or reputational changes that may (or may not) occur in the process of adjusting to a decarbonised economy.
An example of a transition risk is carbon pricing imposed by regulatory authorities, which increases operating costs of emissions-intensive assets or lowers the demand for high-carbon products
Drivers of reporting to the TCFD and climate risk reporting
While disclosure of climate-related risks is currently not mandatory in Australia, there is a trend towards increased voluntary disclosure by Australian public companies. Guidance and recommendations for climate-related disclosures have been provided by both the Australian Securities Exchange (ASX) and Australian Securities and Investments Commission (ASIC) and the latter ‘recommends listed companies with material exposure to climate risk consider reporting under the TCFD framework.’
Additionally, an increasing number of jurisdictions are mandating climate-related disclosures, including the United Kingdom, New Zealand, Singapore and potentially the United States, which may further influence Australian regulators to do so in the future.
Image: Drivers for organisations to address climate risks in public disclosures
Voluntary disclosures in line with the TCFD framework from private companies have also been increasing in response to the growing awareness that climate change will impact businesses of all sizes and across all sectors.
Businesses are realising that in order to continue operating profitably well into the future, climate change and the resulting risks and opportunities need to be integrated into business models, short and long-term strategies, and business continuity planning.
Examples of good practices in TCFD reporting
The Climate Disclosure Standards Board and the We Mean Business Coalition have published two editions of their TCFD Good Practice Handbook, which highlights examples of good practice disclosures made by various companies which align with the TCFD framework’s recommendations.
Some key points they recommend include:
- Timescales are applied
- Key assumptions are defined and transparent
- Climate related scenario analysis for short-, medium- and long term with outcomes and implications listed
- Current and future performance targets are included
- Clearly outlining responsibilities at both board and management level and giving clarity on the roles different functions play in providing oversight on climate risks and opportunities and their accountability
- Detailing disclosure on the assessment of strategic resilience using climate scenarios with a clear presentation structure for both scenarios
- Using graphs, matrices, tables, organisational charts and infographics where relevant, to make data more visual and easier to communicate
Embarking on your TCFD and climate risk reporting journey
It has become clear that climate change poses real risks to businesses around the world, while also presenting opportunities in the transition to a low-carbon economy. Now is the ideal time for organisations to be assessing the risks and opportunities relevant and material to them and integrating these into their business planning.
Considering recommendations by the TCFD and climate risk reporting and disclosures, also sends a strong signal to stakeholders and customers that your business is prepared for the future.
3 steps businesses embarking on their TCFD reporting journey should take now
- Benchmark your current practices against the recommendations of the TCFD
- Identify gaps and areas where practices can be improved
- Engage with key stakeholders to develop an action plan for enhancing climate risk reporting