The Task Force on Climate-related Financial Disclosures (TCFD) officially went "live" on April 6, 2022, requiring many of the largest UK-registered businesses to disclose climate-related financial and process information. Below is a summary of the key aspects of the TCFD recommendations and some reflections on their importance.
What is TCFD?
TCFD aims to improve company and investor engagement and focuses on providing decision-useful information surrounding material climate topics. The information covers short-, medium- and long-term time horizons as well as across future climate scenarios. Scenarios are aligned to degrees of global warming above pre-industrial levels and, at a minimum, a less than 2°C scenario should be included which would highlight the exposure a business faces as we adjust our global economy toward a greener future.
The foundation for this is recommendations across four thematic areas – Governance, Strategy, Risk Management, Metrics & Targets and 11 underlying disclosures. Each of these areas provides a picture related to how an organization identifies, manages and oversees risks and opportunities stemming from climate change. The disclosures outline how climate change considerations are embedded into the business-as-usual functioning of the company and offer insight into management's approach to incorporating this transverse risk within the organization's operations.
Why is this important?
Aside from TCFD being a legal requirement for businesses and an additional layer of regulatory oversight, it is also an opportunity to gain competitive advantage. Knowing more about the impact of the global environment (climate and economic) will only help support your future business strategy and resilience. Reframing your internal analysis process can help your company better understand the challenges and opportunities climate change creates. The incorporation of scenario analysis based upon global temperature rise futures, including the Paris Agreement-aligned 1.5°C and 2°C, encourages businesses to assess their end-to-end operations (value chain) against a measurable and standardized framework, furthering the capability for overall greenhouse gas (GHG) reductions.
This also helps to level the playing field across sectors. For investors, knowing the likely impacts of different climate scenarios across certain sectors allows for more informed investment decisions and perhaps, growth in stakeholder capitalism to push businesses to take greater steps in reducing climate impacts. For businesses, it provides valuable information with which to inform future business and operational strategy and provides the onus to make changes now to minimize potentially negative future impacts.
Who has to report?
The requirement captures over 1,300 of the largest UK-registered companies and financial institutions. Private companies will also need to report if they have over 500 employees or £500m or more in turnover.
What needs to be reported?
There are 11 supporting recommendations across the four themes covering the following disclosures:
- A description of the board's oversight of climate-related risks and opportunities
- A description of management's role in assessing and managing climate-related risks and opportunities
- A description of the climate-related risks and opportunities the organization has identified over the short-, medium- and long-term
- A description of the impact of climate-related risks and opportunities on the organization's business, strategy and financial planning
- A description of the resilience of the organization's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario
- A description of the organization's processes for identifying and assessing climate-related risks
- A description of the organization's processes for managing climate-related risks
- A description of how processes for identifying, assessing and managing climate-related risks are integrated into the organization's overall risk management
Metrics & Targets:
- A description of the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process
- Disclosure of Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions, and the related risks
- A description of the targets used by the organization to manage climate-related risks and opportunities and performance against targets
These recommendations and supporting recommended disclosures provide a relatively standardized, consistent and comparable suite of information to key stakeholders for decision-making. Furthermore, with the Intergovernmental Panel on Climate Change (IPCC) reiterating the necessity to reduce fossil fuel emissions, the TCFD's recommendations may create the impetus for a shift in capital to low-carbon technologies and better natural capital management.
Is there industry-specific guidance?
There is supplemental guidance dependent on the industry. This guidance is based on those industries with a higher likelihood of climate-related financial impacts. For example, financial services companies have additional guidance aiming to improve climate-risk pricing and capital allocation. Likewise, energy, transport, materials and building industries have guidance to account for the largest proportion of GHG emissions, energy and water usage.
How does TCFD align to Net Zero?
As you can see from this Visual Capitalist infographic, Net Zero targets have been set by more than 70 countries, covering 76 percent of global emissions. There are 192 countries signed up to the Paris Agreement, and the TCFD's recommendations can help organizations contribute to governmental commitments by meeting their own commitments.
With the U.S. SEC indicating they will soon enact TCFD-aligned disclosures, it is looking likely that a global alignment of disclosures to push climate action towards Net Zero is on the horizon.
Where should a company start with implementing a TCFD reporting strategy?
First and foremost, buy-in across an organization is essential. This is both a top-down and bottom-up exercise that will require support from business leaders and subject matter experts across an organization. Secondly, identify your data and data owners to establish who is going to be involved and where your data sits. This will provide a view of likely challenges to overcome and where heavy lifting is going to be required.
Speak with FORVIS about how we can help implement your TCFD strategy and provide ongoing sustainable performance opportunities.