What is the TCFD? Everything you need to know
Only two days before the COP26 climate summit, the UK government made it official: from April 2022, it will be mandatory for large companies to disclose information in alignment with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). This means that the UK will be the first of G20 to legally bind to the otherwise voluntary TCFD-framework. And the TCFD framework is not only gaining traction within the UK – countries all around the world are examining how to incorporate the TCFD recommendations into their own ESG policy and regulations. One thing is clear: the TCFD framework is rapidly shifting from being voluntary to becoming a regulatory policy response to climate risks for many more countries to come.
But, what exactly is the TCFD and why does it matter? In this blog, we will cover everything you need to know about the important framework. What countries are planning to make it mandatory? What are the TCFD requirements? And how will it affect your business? Let’s break it down!
What is the TCFD?
What does the TCFD do?
The TCFD framework is not about how to disclose, rather, what to disclose against. So, instead of adding additional reporting burden on companies, the TCFD recommendations have been mapped against already existing disclosure frameworks and act as a guide for a more effective reporting process. In the end, this will support companies with their reporting and investors, lenders and insurance underwriters in their understanding of the material risks.
What are the TCFD recommendations?
In 2017, the final report on Recommendations of the Task Force on Climate-related Financial Disclosures along with the Implementing Annex was published. The TCFD consists of three key parts:
- Core recommendations
- Principles for effective disclosure
- Scenario analysis
The recommendations are formed to create decision-useful, forward-looking information that should be included in the organization’s mainstream financial filings, such as annual reports.
The disclosure recommendations are centered around four themes that represent organizations’ core operation elements:
- Governance: Disclose the organization’s governance around climate-related risks and opportunities:
- 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: Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning:
- Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
- Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
- Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
- Risk management: Disclose how the organization identifies, assesses, and manages climate-related risks:
- Describe the organization’s processes for identifying and assessing climate-related risks.
- Describe the organization’s processes for managing climate-related risks.
- Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
- Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material:
- Disclose the metrics used by the organization 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 and the related risks.
- Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.
Principles for effective disclosure
In addition to the recommendations on what and how to disclose information, the TCFD also recommend organizations to consider seven principles for effective and high-quality disclosure:
- Disclosure should represent relevant information
- Disclosure should be specific and complete
- Disclosure should be clear, balanced, and understandable
- Disclosure should be consistent over time
- Disclosure should be comparable among companies within a sector industry or portfolio
- Disclosure should be reliable, verifiable, and objective
- Disclosure should be provided on a timely basis
Lastly, since climate-related financial risks are so unpredictable, organizations are recommended to take into consideration different climate-related scenarios – to enhance the resilience of their strategy. The scenario analysis will help businesses to identify and assess potential implications of plausible outcomes and most importantly – start getting prepared for any possible outcomes and minimize the risk for unwanted surprises!
Why is the TCFD needed right now?
Today, the question is not whether climate-related risks and the transition to a low-carbon economy will affect most economic industries and sectors, but rather the severity and exact timing of the effects – and that is much more difficult to estimate. Anyone involved in economic decision-making processes knows that the long-term and large-scale nature of the problems poses significant challenges in analyzing financial risks and returns. That is why it’s crucial that accurate information on relevant disclosure is being considered and communicated. As Michael R. Bloomberg, Chair of the TCFD, puts it:
“When companies disclose clear, consistent and accurate information on the risks they face from climate change, investors and business leaders can make more informed and sustainable financial decisions. That strengthens our global economy, improves health, and helps address the climate crisis”.
Ultimately, in most G20 jurisdictions, public companies are obligated to disclose material information in their public annual financial filings, which includes material climate-related information. By implementing the TCFD recommendations, businesses will enhance their transparency related to climate risks to investors, lenders and insurance underwriters – and better channel resilience to possible outcomes of climate change.
Who is affected by the TCFD?
The TCFD recommendations are voluntary by nature and are applicable to organizations across sectors and jurisdictions. However, as more governments are introducing TCFD-aligned legislation – more companies are becoming obligated by law to comply. Today, more than eight countries are already in the process of making TCFD aligned disclosure mandatory, and it’s been endorsed by more than 100 governments globally. New Zealand was the first country to introduce mandatory TCFD aligned climate-related disclosure in 2021, and after the UK’s announced its commitments to the TCFD framework, they have taken the leading position next to New Zealand on making climate risk disclosures mandatory.
Will more countries join the UK in making the TCFD mandatory?
Whilst the UK and New Zealand have made ambitious progress in their commitments to the TCFD framework – they are not the only ones. Governments all across the globe are examining how to incorporate the TCFD recommendations and principles into their own policy response to climate change and mitigation. Take Switzerland for instance, they’re expected to introduce mandatory TCFD requirements in the nearest future, and Hong Kong is in full swing to make mandatory TCFD-aligned disclosures for financial institutions and listed companies by 2025.
Get TCFD ready with Worldfavor
With Worldfavor, you will be able to align and follow up on your information according to the TCFD recommendation. The best part? The platform automates the entire process for you – from collecting the data to analyzing climate risk assessments. The easiest solution to get TCFD ready in no time! Get in contact with one of our platform experts to tell you more
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