As governments make a concerted effort to adapt to the impact of climate change and limit further increases in average global temperatures to below 2°C above pre-industrial levels, economic decision-makers are under increasing pressure to produce climate-related information disclosures.
Though it began as guidance adoptable on a voluntary basis, the TCFD’s disclosure recommendations have become increasingly embedded in the regulatory framework of multiple jurisdictions, impacting thousands of organizations participating in global financial markets.

In the article below, we provide comprehensive guidance on the TCFD’s recommended climate-related disclosures and what they mean for you.

What is TCFD?

In the aftermath of the Paris Agreement, the Financial Stability Board created The Task Force on Climate-related Disclosures (TCFD) to develop guidance regarding the types of information that companies should include in financial disclosures to support participants in financial markets (e.g. investors, lenders, insurers underwriters, banks) in appropriately evaluating and pricing risks related to climate change. The Taskforce includes 31 members from across the G20 and represents both preparers and reviewers of financial disclosures.

In 2017, with the aim of improving and increasing reporting of climate-related information, the Taskforce released a series of recommendations designed to help companies create more meaningful disclosures that support informed capital allocation. The recommendations are grouped into four thematic areas that represent the core elements of how companies operate: governance, strategy, risk management, and metrics and targets.

The four themes are interrelated and are supported by a total of eleven disclosures that build out the framework with information that should enable investors to understand how the reporting organization considers and assesses climate-related risks and opportunities. Each recommendation is intended to be widely applicable and easily adoptable across various sectors and jurisdictions, and is designed to solicit forward-looking, actionable business intelligence that can be incorporated into existing mainstream financial filings.

Following the release of the recommendations, there has been a five-fold increase in adoption of the TCFD framework on both a voluntary and mandatory basis, and the recommendations now have more than 3000 supporters globally.

Why are the recommendations important?

Following the Paris Agreement in December 2015, more than 200 governments agreed to strengthen the global response to the dangers posed by climate change by holding the increase in average global temperature to below 2°C above pre-industrial levels, and to strive as far as possible to limit the increase in average temperature to 1.5°C above pre-industrial level.

These commitments, and the large scale and long-term nature of the crisis we face, have profound implications for economic decision makers in both the public and private sectors. Furthermore, there is currently only a nascent understanding within the financial system of the financial risks posed by climate change.

Within this context, there is growing demand for clear, actionable, consistent, and reliable climate-related risk information from companies, investors, and creditors. Investors and creditors in particular are becoming increasingly vocal in their demands for credible risk disclosures from their investees and debtors as they seek to understand their exposure to financial risks and opportunities associated with the physical impact of climate change and the transition to a low carbon economy.

While so little is understood about the nature of climate-related risk in the financial system, this paucity of information might well lead to mispricing of assets and misallocation of capital with disastrous consequences for the stability of markets.

However, as more entities adopt TCFD-aligned reporting practices, the quality and quantity of climate-related risk information will increase across the board, providing more useful insights for decision makers.

Where is TCFD reporting mandatory?

A number of jurisdictions already require organizations with certain characteristics to complete mandatory TCFD-aligned climate disclosures:

• The UK: The United Kingdom was the first G20 country to introduce mandatory TCFD-aligned disclosures across its economy. Since 6th April 2022, certain large public and private companies, and LLPs incorporated in the UK, have been required to make annual disclosures. Though the initial regulatory framework is limited in scope, the government hopes that more companies will adopt voluntary disclosures, and it is highly likely that scope of the regulations will be expanded in due course.

• New Zealand: TCFD-aligned climate disclosures will be mandatory for around 200 entities as of 2023. These entities include large listed companies, banks, insurers, and asset managers.

• Japan: New mandatory disclosure rules came into effect in Japan in 2022 shortly after the UK requirements were rolled out. Under the new rules around 4000 large companies, including those listed on the Tokyo Stock Exchange, are required to report their GHG emissions and make additional disclosures in accordance with the TCFD framework. The requirements are due to be extended further in 2023 to include all companies that submit annual securities reports.

• Canada: Disclosures will be mandatory for Crown corporations that hold more than $1bn in assets in 2023. Crown corporations holding less than $1bn will have to provide annual disclosures as of 2024, with federally regulated banks and insurance companies to follow in 2025.

TCFD-aligned reporting is also common practice among organizations in jurisdictions where there is not yet any regulatory requirement to do so. More than 13,000 companies in the US submit annual climate disclosures on a voluntary basis through the CDP system, which is aligned with the TCFD framework. Organizations often undertake voluntary disclosures to gain a competitive advantage with investors, tackle their exposure to climate risks, and identify new climate-related opportunities.

It is also beneficial for organizations to adopt robust reporting practices now ahead of a regulatory landscape that is shifting towards mandatory reporting requirements. In the US, the SEC released proposals in March 2022 to enhance and standardize climate risk reporting for investors. If adopted, these regulations will impose requirements more expansive in scope than those of the TCFD framework.

Similarly, the EU is adopting the Sustainable Finance Disclosure Regulation (SFDR), which imposes new mandatory disclosure requirements on financial market participants and financial advisors in the EU, FMPs with EU shareholders, and those marketing themselves in the EU. The first deadline for mandatory disclosures passes in January 2023 and, while the two frameworks share many similarities, the SFDR has a broader remit than TCFD recommendations and covers all ESG risks in addition to climate change.

Finally, there have been moves across the G7 to mandate disclosures in alignment with TCFD recommendations, with ‘historic steps’ having been agreed in June 2021.

What are the benefits of adopting TCFD recommendations?

Organizations that adopt TCFD-aligned reporting practices receive several benefits. Firstly, producing higher quality disclosures in line with the 11 recommendations yields meaningful business intelligence that can support decision making across a range of corporate and financial activities:

Risk management

Measure and evaluate climate-related risks more effectively across your company’s physical locations, supply chain, customers, and competitors. With a clear view of where vulnerabilities exist, the relevant stakeholders can undertake meaningful contingency planning. This might involve undertaking higher CapEx in the short term to reduce future increases in OpEx related to physical climate risks, e.g. investing in decentralised renewable energy to ensure production lines can continue during chronic risks such as drought and following extreme weather such as cyclones.

Capital allocation

Make well-informed decisions about where and when to allocate your capital. For example, investors might wish to tilt an equity or fixed income fund away from investments exposed to significant physical climate risk (such as a supply chain highly exposed to the impact of natural disasters) or transition risk (i.e. carbon-intensive industries).

Strategic planning

With a comprehensive analysis of risks and exposures over the short, medium and long term, investors, directors and other stakeholders can place sustainability and risk management at the heart of their corporate and investment strategies.

To learn more about the above, read our case study explaining how a leading plastics manufacturer uses Sust Global’s data to produce detailed and accurate climate risk TCFD disclosures that inform their corporate sustainability strategy and risk mitigation activities.

In addition to the benefits that companies stand to gain from access to meaningful business intelligence and strategic insights, those who adopt robust reporting practices can gain a competitive advantage with investors. In general, investors are incredibly supportive of the Taskforce’s recommendations, and are increasingly inclined to take an activist approach to investing when it comes to climate issues.

A recent survey of institutional investors based in the US revealed that though there is a large consensus that companies that perform well in ESG matters merit a premium, 86% of investors believe that companies overstate or exaggerate their progress when disclosing results. By producing clear and accurate climate-related disclosures, companies can make it easier to raise capital by building trust with investors (who are themselves facing an enhanced regulatory landscape).

What are the recommended disclosures?

As explained above, the framework is organized into four related thematic groups with eleven supporting disclosures. Broadly speaking, the recommendations prompt the reporting entity to either describe an activity or disclose a material risk or mitigation strategy. Outlined below are the four themes and the recommendations grouped within each category.

Governance

Reports should disclose the organization’s governance around climate-related risks and opportunities. This includes:

• Describing the board’s oversight of climate-related risks and opportunities.

• Describing the role of management in assessing and managing these risks and opportunities.

Strategy

Organizations should disclose the actual and potential impacts of climate-related risks and opportunities on their businesses, strategy, and financial planning. Reports should:

• Describe what these material risks and opportunities are.

• Describe the impact of the above on their business, strategy, and financial planning.

• Describe the resilience of their organization’s strategy to climate risk, taking into consideration different climate-related scenarios, including a scenario where temperatures rise to 2°C or lower above pre-industrial levels.

Risk management

Organizations should disclose how they identify, evaluate, and manage climate-related risks. Reports should:

• Describe processes for identifying and assessing these risks.

• Describe processes for managing climate-related risks.

• Describe how processes for identifying, assessing and managing risks are integrated into the organization’s overall risk management strategy.

Metrics and targets

Organizations should disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities across their portfolio and/or operations. This includes:

• Disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

• Disclose Scope 1, 2 and, if applicable, Scope 3 greenhouse gas emissions scenarios and related risks.

• Describe the targets used by the organization to manage climate-related risks and opportunities and performance against these targets.

There are various acceptable metrics under the framework and selection of metrics and targets that organizations select to measure their exposure to risk and climate impact will depend on the nature of their operations. Metrics typically fall under two categories: process metrics that reflect governance processes for managing exposure to climate risk and outcome metrics that measure the climate risks and impacts linked to their operations and/or investments.

For example:

• One process metric is the share of a portfolio held at year end for which climate-related metrics of an acceptable quality have been obtained. This is a good indicator of the extent to which information on climate risks and opportunities is integrated into asset manager decision-making.

• A common and obvious outcome metric is carbon footprint - a typical carbon intensity measure that assesses how many tonnes of CO2e emissions are generated by an organization's activities or investments.

More information on metrics and targets is available in the TCFD’s sector-specific guidance.

How are climate risks defined under the framework?

The TCFD divides climate-related risks into two categories:

Physical risks

Physical risks caused by the changing climate can either be acute or chronic in nature. Acute risks are largely event-driven, such as exposure to damages caused by increasingly extreme weather events, such as floods and wildfires. Chronic risks to businesses posed by long-term shifts in climate patterns, like sustained higher temperatures that lead to rising sea levels and frequent, intense heat waves.

For example, there has been a substantial increase in weather-related insurance claims over the past decade, driving up the amount insurers have to pay out to their customers to cover damages. Without an adequate understanding of physical climate risk and the exposure of insurable assets in a given geography, it is difficult for insurers to assess their financial liabilities and accurately price the premiums on their products.

Transition risks

These are financial risks that emerge as the world shifts to a lower-carbon economy. This transition entails extensive policy, legal, technological, and market changes to address the need to adapt to and mitigate climate change. For example, carbon-pricing initiatives introduced by governments to reduce GHG emissions use market mechanisms to pass the cost of emissions on to the emitter. This represents a substantial financial risk for organizations engaged or investing in carbon intensive activities.

Companies are also at increasing risk of litigation as the value of losses and damages caused by climate change increases. In recent years, various actors including property owners, public interest groups, shareholders, governments and more have brought claims to court to hold organizations accountable for their failure to mitigate the impact of climate change. One such example is the case of Luciano Lliuya v. RWE AG.

An indigenous Peruvian farmer, Saúl Luciano Lliuya, is suing the German energy company RWE AG for the costs of preventing the glacial Lake Palcacocha from flooding his hometown of Huaraz. Lliuya is seeking $18,239 in damages, which would be equivalent to 0.47% of the cost of flood prevention, on the basis that RWE AG is responsible for 0.47% of the total sum of global post-industrial carbon emissions. If the courts decide to grant Lliuya this settlement, this would set a groundbreaking precedent that corporations can be held legally liable for their contributions to climate change, laying the foundation for much larger suits against heavy industrial polluters.

Further financial risks arise for certain organizations due to technological advances that support the transition to a lower-carbon, energy-efficient global economy. The development of emerging technologies such as renewable energy, carbon capture and storage, and battery storage will impact the competitiveness of organizations in certain industries, their production and distribution costs, and consumer demand for their products and services.

How are climate opportunities defined under the framework?

Many opportunities emerge through the process of ‘creative destruction’ that takes place during the disruption of economic systems and the emergence of new technologies intended to help us mitigate and adapt to the impact of climate change.

Climate-related opportunities vary according to the region, market, and industry in which an organization operates, the TCFD identified several areas of opportunities that cut across a variety of domains. These include cost savings through resource efficiency, the opportunity to develop or invest in products and services that bring new resilience or climate adaptation solutions to the marketplace, and with it access to new markets, and also improved resilience across an organization’s own supply and value chains.

For example, companies and investors that engage proactively with new markets or asset types will find opportunities to diversify their portfolio and ensure they are well positioned for the transition to a lower carbon economy. Harvest Fund Management, an asset manager based in China, generated an x100 ROI for clients while also contributing to a sustainable future by investing in a solar photovoltaic company in 2013 that subsequently grew to become the largest global producer of photovoltaic wafers and modules.

How do I implement the recommendations into my existing reporting and risk management practices

TCFD recommendations are not a one-size-fits-all model and best practice will depend on the specific nature of an organization. In practice, the first step in completing a TCFD-aligned disclosure is normally to complete an initial climate risk assessment via your existing governance and risk management arrangements. You can build out this initial assessment with further, more specific insights regarding exposure to physical risks (including potential damage to assets and disruption to operations) and transition risks posed by policy and legal changes throughout your value and supply chains.

To measure and assess physical and transition risks, organizations need access to reliable, robustly validated climate risk and impact data analytics. This includes data on your carbon emissions, and the climate risk datasets and analytics required to run effective scenario analysis that pinpoint the exposure of your physical assets to climate hazards including wildfires, water stress, sea level rise, and more. It will also be necessary to map exposure to risk under different climate scenarios, including low, moderate, and high emissions models.

TCFD disclosures are typically included in an organization’s annual mandatory mainstream financial disclosures, usually in a specific climate risk section in a strategy report. This is a straightforward way to integrate climate-related risk disclosures into your annual report, and you should make explicit reference to the eleven recommendations as part of the write up.

At Sust Global, our sophisticated climate analytics simplify the process of producing TCFD-aligned climate disclosures. Through either our intuitive geospatial intelligence platform or our developer-friendly API, we can provide:

• Instant analysis of operational or supply chain risks for assets anywhere on earth.

• Hazard-specific analysis of physical risks posed by wildfires, flooding, heatwaves, sea level rise, cyclones, and droughts.

• Physical risk data across multiple TCFD-aligned climate scenarios up to the year 2100, as defined by the IPCC.

If you would like to learn more about how we can help your organization implement scalable and compliant physical risk assessments, and produce credible and transparent disclosures, fill out the form below to speak with a member of our team.