The Task Force on Climate-Related Financial Disclosures (TCFD)

The Task Force on Climate-related Financial Disclosures (TCFD) is a framework released in 2017 by the Financial Stability Board (FSB), an international organization that promotes financial stability. The TCFD, chaired by Micheal Bloomberg, the founder and owner of Bloomberg LP, was established at the request of G20 Finance Ministers and Mark Carney, chair of FSB and the former governor of the Banks of England and Canada, under the premise of providing common principles for companies and other organizations to disclose information on the risks and opportunities associated with climate change.

In recent years, there has been an increased awareness of the financial risks posed by climate change and a growing demand from investors for more transparency from companies about their climate-related activities. Previously voluntary, TCFD reporting requirements are now in the process of becoming mandatory in several jurisdictions as a result of the rising demand for sustainability disclosures.

For example, 18 months ago, the UK’s Financial Conduct Authority (FCA), which regulates the financial services industry in the UK, brought out rules that made it mandatory for listed companies, regulated asset managers, banks, and insurers to report on the TCFD explicitly. This change shows that the momentum towards mandatory TCFD reporting is gaining speed and will likely continue.

The 4 Pillars of TCFD: A Guide for Organizations to Build a Sustainable Future.

The TCFD has developed a framework of four pillars to help organizations disclose climate-related information. These pillars are:

Governance: The entity must disclose its board’s oversight and management’s role in assessing and managing climate-related risks and opportunities.

Strategy: How the entity integrates climate-related risks and opportunities into its long-term and near-term strategy and planning. In addition, it must disclose its contingency plan facing challenging climate scenarios.

Risk Management: The entity must disclose its processes for identifying, assessing, and managing climate-related risks and how they are integrated into its overall risk management processes and strategy.

Metrics and Targets: The entity must disclose the metrics and targets it uses to measure success in countering climate-related risks and seizing climate-related opportunities. The company must also disclose its transition plan, including actions and activities enabling net-zero emissions by 2050.

These pillars help organizations improve their transparency and accountability on climate-related risks and opportunities. By disclosing this information, organizations can help investors and stakeholders make better-informed investment decisions.

The TCFD: A Framework for Managing Climate-related Risks and Opportunities.

It is essential for organizations to disclose climate-related information because it can help them identify and assess climate-related risks and opportunities. Climate change is a significant threat to many businesses, but it can also create opportunities for those that are prepared. By disclosing climate-related information, organizations can identify the risks and opportunities, mitigate the risks, and capitalize on the opportunities.

Moreover, companies can improve their transparency and accountability. By disclosing climate-related information, organizations can demonstrate to their stakeholders that they are taking climate change seriously and managing its risks and opportunities. This builds stakeholder trust, improves the organization’s image, and attracts investors. Additionally, a growing number of jurisdictions are requiring organizations to disclose climate-related information. By disclosing this information, organizations can avoid fines and penalties and demonstrate compliance with the law.

The TCFD framework divides a company’s climate-related risks into two categories:

Physical risks are related to the physical impacts of climate change. These risks can be acute, such as hurricanes, flooding, and wildfires, or chronic, such as rising sea levels and longer and more frequent heat waves. Physical risks can have a sudden and significant financial impact on a company if they affect its operations, transportation, supply chains, or employee or customer safety.

Transitional risks are risks inherent in the transition to a low-carbon economy. These risks include changes in climate-related policies, regulations, and disclosure requirements, such as those related to greenhouse gas emissions, net-zero carbon emission initiatives, carbon tax policies, energy and fuel costs, and national or global energy policies. Transitional risks can have an ongoing direct financial impact on a company and damage its reputation.

The transition to net zero is a classic illustration of the financial consequences of risk and opportunity. An essential regulatory change that will significantly impact the automotive sector is the transition to net zero by 2050. For instance, the UK and EU have set goals for banning the sale of new gasoline and diesel vehicles by 2030 and 2035, respectively. As a result, automakers must shift their focus to electric vehicles (EVs) to remain competitive.

This change comes with opportunities as well as risks. On the one hand, the market for EVs is expanding, and automakers who can design and build competitive EVs could make large profits. On the other hand, car makers who need to catch up to the transition, risk falling behind.

Overall, the transition to net zero constitutes a tremendous challenge for different industries but also represents an enormous opportunity. Enterprises that can adapt to the shift will be well-positioned to succeed in the coming years.

The TCFD and Scenario Planning: A Key to Success in the Low-Carbon Economy.

The Intergovernmental Panel on Climate Change predicted that the world will likely warm up by 2°C by 2050. This would have a devastating impact on the planet, and organizations need to be prepared for the risks and opportunities that this presents.

Scenario Planning is a tool that can help organizations prepare for and understand the potential impacts of climate change on their business. It involves developing different scenarios of how the future might unfold and then assessing the implications of these scenarios for the organization.

The TCFD recommends that organizations use Scenario Planning in their climate risk management process. The TCFD framework does not explicitly require organizations to use quantitative scenario planning, but it does encourage them to use “robust frameworks for scenario analysis.”

While quantitative scenario planning is a valuable tool for understanding the potential impacts of climate change, it is also the most poorly adopted element of the TCFD reporting framework. Quantitative scenario analysis can be more complex and time-consuming to develop and implement than qualitative scenario planning. Additionally, quantitative scenario planning requires access to a large amount of data, which can be challenging to obtain, particularly for investment funds.

Investment funds face additional challenges in quantitative reporting because they may have stakes in multiple sectors and firms, each requiring scenario planning. This is a significant undertaking, and investment funds will likely need to develop specific tools and resources to enable quantitative scenario planning. As a result, qualitative scenario planning is now the most common approach to scenario analysis. This involves creating qualitative descriptions of different events without using numerical data. Moreover, the FCA now requires organizations to quantify their activities’ value at risk (VaR).

Scenario Planning Under Strategy and Risk Management

Scenario Planning can assist both the strategy and risk management pillars of the TCFD framework. Scenario Planning in the strategy pillar can help firms identify and assess potential risks and opportunities linked with climate change. This information can then guide the organization’s long-term strategy and planning.

On the other hand, Scenario Planning can be utilized in the risk management pillar to assist organizations in identifying and assessing the possibility and effect of climate-related issues. This data can subsequently be used to build mitigation measures as well as to monitor and manage climate risks.

Scenario Planning can be used to assess the potential impact of climate change on an organization’s supply chain, customer base, and regulatory environment. For example, an organization could develop a scenario where extreme weather events disrupt its supply chain or where customers are more likely to switch to sustainable products. Organizations can better manage their risks and seize opportunities by understanding the potential risks and opportunities climate change presents.

Who Are the Stakeholders of the TCFD Framework?

The TCFD recommendations are voluntary and apply to organizations from all sectors and jurisdictions. However, as more governments pass TCFD-aligned laws, more businesses will be required by law to comply.

In the UK, the following organizations are required to adopt the TCFD framework:

– Listed companies: Listed companies are traded on the stock exchange.

– Regulated banks or insurers: Regulated banks or insurers are financial institutions regulated by the FCA.

– Regulated investment managers: Regulated investment managers are companies that manage or advise on investments on behalf of others. They must adopt the TCFD framework if they manage assets of more than 5 billion GBP.

ISSB Takes the Lead on Climate Disclosure: Transforming TCFD Framework into ISSB Mandatory Standards.

The International Sustainability Standards Board (ISSB) has taken over the Task Force on Climate-related Financial Disclosures (TCFD) as the global standard-setter for climate-related disclosures. The change, which goes into effect in July 2024, is a crucial step toward building a consistent and comparable framework for corporations to report on climate-related risks and opportunities.

The ISSB is a relatively young organization, founded in 2021 by the International Financial Reporting Standards Foundation (IFRS) at COP26 in Glasgow in response to substantial market demand. The mandate of the ISSB is to provide a comprehensive set of sustainability disclosure standards that will meet the interests of investors and other stakeholders. So far, the ISSB has issued two standards, the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and the Requirements for Climate-related Disclosures (IFRS S2).

The ISSB’s decision to take over the TCFD is an important step forward in climate disclosure. It demonstrates that the financial world is serious about climate change and is dedicated to ensuring that corporations disclose the risks and opportunities posed by climate change.

Therefore, the standards developed by the ISSB are more extensive and detailed than the framework created by the TCFD. The ISSB’s standards are also likely to become mandatory for companies listed on stock markets in many jurisdictions.

The financial community’s commitment to addressing climate change is evident in the widespread support for the ISSB. The ISSB has been endorsed by the G7, the G20, the International Organization of Securities Commissions, the Financial Stability Board (FSB), Finance Ministers, and Central Bank Governors from more than 40 jurisdictions.

Furthermore, the Financial Conduct Authority (FCA), the UK’s financial services regulator, has commended the ISSB’s first sustainability-related reporting standards.

The FCA adds that it has been an outspoken supporter of creating international corporate reporting standards on sustainability and that the ISSB requirements meet a clear market demand for comprehensive, uniform, comparable, and credible corporate sustainability disclosures.

The FCA’s decision to back the ISSB is a step in the right direction for the UK. It will aid in ensuring that UK companies adhere to the highest standards of sustainability disclosure, as well as in promoting the UK as a leading destination for sustainable investment.

The Future of ESG Disclosure: Summation of the ISSB and the TCFD Framework

Ultimately, the TCFD framework is valuable for organizations committed to managing climate-related risks and opportunities. By adopting the TCFD framework, organizations can improve their transparency and accountability, manage risks, and build a more sustainable future. The TCFD framework is becoming increasingly adopted by organizations worldwide, and it is expected to play a significant role in the fight against climate change.

The ISSB’s takeover of the TCFD framework is expected to have a substantial impact. Due to mandatory disclosure obligations, organizations face increased pressure to manage their ESG risks and opportunities. A greater scope will guarantee that firms provide information on all ESG variables material to their company and will make it easier for investors and stakeholders to compare the sustainability performance of different businesses.

Although the work of the ISSB is still in its early phases, it has the potential to significantly contribute to the battle against climate change and other ESG concerns. In the near future, TCFD reporters should expect to be reporting under the ISSB standards.