Understanding the Recommendations of the Task Force on Climate-Related Financial Disclosures

January 21, 2020 | Insights

“The recommendations require organisations to clearly set out how they have embedded consideration of climate change into the board’s and wider management’s roles and responsibilities and the organisation’s overall strategy and systems.”

What is TCFD?

TCFD stands for Task Force on Climate-Related Financial Disclosures. It is the first international initiative to examine climate change in the context of financial stability and was formed after a review by the G20’s Financial Stability Board into how the financial sector can best take account of climate-related issues.

The TCFD’s aim is to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders.

The TCFD has considered the physical, liability and transition risks to an organisation and its assets associated with climate change and what constitutes effective financial disclosures across industries. It aims to help companies understand what financial markets want from disclosure in order to measure and respond to climate change risks, and to encourage firms to align their disclosures with investors’ needs.

Crucially, the TCFD recommends that the climate-related disclosures are presented within an organisation’s main financial filings (reports) and that it presents both the risks and opportunities that climate change could pose to it. The disclosures should then detail the management framework in place to monitor and mitigate the risks and the potential for maximising the opportunities afforded by the transition to the low carbon economy.

Given its underlying aim of allowing disclosure to investors, the TCFD was particularly recommended for asset owners and managers and organisations with public debt or equity.

Although a voluntary initiative, the TCFD mirrors a general trend for governments and central banks to increasingly require the disclosure of specific climate and wider sustainability related metrics and information.

Reporting in line with some of the TCFD’s recommendations is also now a mandatory requirement for signatories of the UN Principles of Responsible Investment (PRI) with reporting due by the end of March 2020.

TCFD Report Recommendations

In July 2017, the task force released its Recommendations report. The recommendations were in the four areas of governance, strategy, risk management and metrics and targets. Taken together, the recommendations require organisations to clearly set out how they have embedded consideration of climate change into the board’s and wider management’s roles and responsibilities and the organisation’s overall strategy and systems.

The TCFD also asks the organisation to set out the climate related risks and opportunities that it anticipates could arise over the short, medium and long term. Having identified these, it then asks the organisation to set out what metrics it will use to monitor them and the targets it has put in place to measure that management performance.

The two most notable requirements are:

  • With due regard to likely materiality, it requires assessment of the resilience of the organisation’s strategy in the context of different climate-related scenarios, including an increase in global mean temperature of 2oC or lower, and typically a higher increase scenario, such as 4oC or higher. This is known as the scenario analysis.
  • The disclosure of the organisation’s Scope 1, Scope 2, and, if appropriate Scope 3 greenhouse gas (GHG) emissions.

Additional guidance was produced for financial industries, which were subcategorised into banks, insurance companies, asset managers and asset owners. Guidance was further produced for four non-financial industrial sectors that were determined to be the four largest energy and water users and GHG emitters; namely energy, transportation, materials and buildings, and agriculture, food and forest products.

The TCFD has in its work considered and sought to align its recommendations with the existing sustainability reporting frameworks such as the CDP (formerly the Carbon Disclosure Project) and the Global Reporting Initiative (GRI).

 

Time to Act on Climate Risks

Understanding climate-related risks and building them into financial reporting is undoubtedly challenging. But the methods and tools that enable organisations to do so are maturing rapidly, as are the expectations of investors and regulators for better information. Companies that fail to grasp this agenda now face a range of risks and uncertainties.

Anthesis believes that by investing in and implementing the right governance, risk management and strategic planning processes, companies can become more resilient to the risks associated with climate change and potentially also the opportunities posed. Through effective reporting, they will be in a strong position to make better decisions for their future business, as well as fully informing those stakeholders who have an interest in their activities.

We believe now is the time to act and we are well positioned to support clients with implementing the TCFD and their wider climate change strategies via:

  • Assistance with developing the wider climate change awareness and management frameworks within an organisation, often as part of a wider environmental, social and governance (ESG) program.
  • Assistance with evaluating the climate-related risks and opportunities associated with an organisation and its strategy, including completing the scenario analysis on its material issues.
  • Assistance with developing climate risk mitigation strategies and programmes.
  • Assistance with data identification, collection, analysis and reporting, including the calculation of an organisation’s Scope 1, 2 and 3 GHG emissions.

Key Contacts

Fiona Place
Director, UK
Fiona leads the Anthesis ESG and Climate risk management practice. She has over ten years of expertise in ESG and supply chain risk management working with Fortune 500 & FTSE 100 firms and has a demonstrable track record in leading multi-disciplinary teams on a range of complex projects.
Don Reed
Executive Director, North America
An Executive Director in the Anthesis Group’s North American business, Don has 18+ years of experience helping operating companies, asset managers, and financial institutions develop and implement sustainability strategies that create business value by growing revenue, enhancing brands, improving operating efficiency, and managing risks.

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