Climate change presents a serious financial risk to the global economy. That’s why environmental disclosures have become an increasingly common part of reporting to investors.
One popular framework for these disclosures is the Task Force on Climate-Related Financial Disclosures, or TCFD. Formed by the Financial Stability Board (FSB) in 2017, its purpose is to examine the risks and impacts of climate change on businesses in a financial stability context, on an international level.
To date, the TCFD has been a trailblazer in improving the quality of climate-related financial reporting, but with the TCFD being disbanded in 2023, you might be wondering what that means for your ESG reporting program.
Whether you already publish a TCFD report, or you’re currently considering which frameworks to adopt, this article aims to explain the value of this pivotal framework and how to ensure that your ESG disclosure efforts are maximized.
What Is TCFD?
Originally set up by the Financial Stability Board, the Task Force on Climate-Related Financial Disclosures was established to develop recommendations around climate-related financial reporting. Essentially, it enables companies to provide consistent climate-related financial risk reports so investors can make sustainable decisions about which organizations they support.
Although in the past ESG reporting has been a relatively DIY process, the key benefit of standards such as TCFD is that they ensure data is presented in a way that is meaningful to investors and consistent across businesses.
Thankfully, the TCFD has made great progress on this front and, having fulfilled its purpose by creating a widely utilised climate reporting framework, it has been disbanded.
As such, in 2023, the IFRS Foundation took over the monitoring of companies’ progress on climate related disclosures from the TCFD. The IFRS International Sustainability Standards board (ISSB) has now developed two new frameworks which incorporate the TCFD recommendations.
Known as IFRS S1 and S2, these new frameworks cover sustainability-related financial disclosures and climate-related disclosures respectively. This means organisations that comply with the requirements of IFRS S1 and S2 will also be meeting the requirements of TCFD.
Furthermore, although the work of the TCFD is complete, the original TCFD recommendations remain available for companies to use should they choose to, and TCFD reports will be compliant with mandatory ISSB reporting, meaning organizations who already implemented TCFD ESG programs will not need to start all over again.
What is TCFD Reporting?
The TCFD’s recommendations and standards aim to provide guidance to all businesses, with sector-specific support for two main groups including financial sector industries and non-financial industries.
The non-financial sectors, which include areas such as energy, transportation, materials and buildings, agriculture, food, and forest products, have been specifically identified as accounting for the largest proportion of global GHG emissions, energy usage, and water usage.
Within this format, the TCFD recommend disclosure in four key areas:
- Governance
- Strategy
- Risk Management
- Metrics & Targets
Governance
While ESG reporting standards all include a governance portion, the TCFD’s framework has two specific recommended disclosures. Reporting companies are asked to describe both board oversight of and management’s role in assessment and management of climate-related risks and opportunities.
Strategy
The TCFD aims to provide future-focused disclosures. A simple “state-of-the-environment” report is not sufficient. As a result, under the Strategy pillar, the recommended disclosures ask companies to describe:
- Identified climate-related risks and opportunities over the short, medium, and long term
- Potential impacts of climate-related risks and opportunities for business, strategy, and financial planning
- The overall resilience of their business strategy to a number of different climate scenarios, including limiting global warming to 2°C or lower
Risk Management
This pillar is heavily focused on processes, and in particular how a reporting organization identifies, assesses and manages climate-related risks. The disclosure also asks businesses to describe how these processes are integrated into the organization’s overall risk management, highlighting how ESG reporting and climate-related financial disclosures cannot exist in a silo within the company.
Metrics & Targets
Many organizations, when they think of climate or ESG reporting, jump straight to metrics and targets, rather than providing a more holistic picture. While the TCFD’s recommendations aim to remedy that, the final pillar does require numerical disclosures, including:
- The metrics used to assess climate risks and opportunities, and how those are in line with the organization’s strategies and risk management processes
- Scopes 1, 2, and (as needed) 3 greenhouse gas emissions and related risks
- The targets used to manage climate risks and opportunities, as well as performance against these documented targets
Preparing Your TCFD Report: Getting Started
Before you begin preparing your TCFD report, it’s a good idea to review the TCFD reporting examples available on the organization’s website. Bear in mind that your report can be prepared as a standalone document, or refer to existing documents like a larger corporate sustainability report, as long as the relevant disclosures are addressed and the TCFD’s principles for effective disclosures adhered to.
When compiling your report, it’s worth remembering that it will involve more than box ticking or form filling under appropriate headings. First, you’ll need to set time and geographic boundaries. Next, you need to look at the disclosure requirements in the context of materiality. Not every organization will need to complete the same disclosures or to the same level of detail. You’ll therefore need to asses which of the disclosures are relevant – or material – to your business within the boundaries of your report?
Sometimes a disclosure may seem less important to the way your organization makes decisions, but can be critical to how a potential investor weighs ESG performance from one company to the next. This means both internal and external considerations need to be incorporated into your materiality assessment.
What’s Included in a TCFD Report?
TCFD reports are meant to be narrative in order to provide a complete picture of your organization’s operations, ESG goals and performance in achieving these goals. It’s more than just a number crunching exercise.
The typical format of a TCFD-compliant report follows the four core pillars and eleven disclosures such that the typical contents might look like this:
- Executive Summary
- Overview of the company
- Key highlights from the report
- Commitment to TCFD recommendations
- Introduction
- Company’s motivation for TCFD reporting
- Definition of boundaries and materiality assessment
- Description of the company’s annual performance, either by revenue, workforce, production rates or other metric of intensity that can be compared year over year
- Governance
- Governance structure for climate-related issues
- Board oversight and involvement
- Policies and processes for climate risk management, including a clear statement of leadership roles and responsibilities
- Disclosure on executive compensation tied to ESG performance
- How climate risks and progress toward ESG goals are communicated to the board or other leadership committees
- Strategy
- Company’s strategic approach to climate-related risks and opportunities
- Integration of climate considerations into the overall business strategy, and how this integration will impact:
- Products and services
- Supply chain and/or value chain
- Adaptation and mitigation activities
- Investment in research and development
- Operations (including types of operations and location of facilities)
- Acquisitions or divestments
- Access to capital
- Key performance indicators related to climate goals in the short, medium and long terms and how these time periods are determined
- Financial performance related to climate risks and opportunities, as well as costs and revenue associated with transitioning to Net Zero operations
- Assessment of each/all strategy’s resilience in different climate-related scenarios based on incremental temperature increases
- Risk Management
- Processes for identification and assessment of climate-related risks, including an assessment of significance
- Defining organization-specific risks related to the follow categories
- Transition risks
- Physical risks
- Resource efficiency
- Energy source
- Products and services
- Markets
- Resilience
- Risk mitigation strategies and actions taken. This includes how mitigation is prioritized for each risk type
- Contingency plans for severe climate events
- Description of how climate-related risk management is integrated with larger corporate risk management processes
- Additional risk management reporting specific to different sectors including banks, insurance companies, asset owners, and asset managers
- Metrics and Targets
- Disclosure of greenhouse gas emissions data (Scope 1, 2, and 3)
- Explanation of methodology for emissions calculation
- Targets for emissions reduction and timeline including for each of the risk categories described in the risk management section above
- Progress towards previous emissions reduction targets
- How progress is incorporated into remuneration policies
- Historical data for performance metrics and targets so that year-over-year trends can be assessed
The following sections could exist on their own, or may be incorporated into the reporting sections above to detail climate-related opportunities, data quality assurance, engagement with stakeholders and forward-looking statements.
All in all, enough information needs to be provided to give investors a clear picture of the company’s ESG performance, challenges that may prevent it from achieving its targets or impact financial performance during transition to Net Zero operations, and opportunities for market growth and increased revenue.
Can TCFD Be Integrated With Other ESG Frameworks?
While many companies choose to follow the TCFD framework because of its focus on providing consistent and useful data to the financial industry, since it is no longer a standard that is being updated, it may ultimately become necessary to update your reports to comply with other standards like the ISSB as it evolves.
If you’re looking for information on other ESG frameworks, read our article: ESG Regulations Around the World in 2024. While there are many similarities in the various frameworks, each is designed to be applicable to specific industries or particular geographic jurisdiction which means integrating a TCFD report with other standards can feel complex.
Using a software solution like the AMCS Sustainability Platform helps simplify that complexity. Our single platform solution is already designed to be compliant with frameworks like TCFD, ISSB and others and continues to update to make sure you meet reporting requirements year after year.
Finally, while ESG reporting can be a useful tool for your organization, the real value comes from implementation. This allows you to proactively reduce risk and prepare for opportunities in low-carbon markets.
To help you achieve these goals and reduce the time spent building reports, AMCS can help streamline your reporting. It uses approved and validated methodologies to provide comparable emissions data and provides cloud-based data entry so different departments and suppliers can add the information needed to complete the report.
With AMCS as a partner, your ESG team can be confident in the quality of their reporting, even as standards continue to evolve and harmonize. That means they can focus instead on implementation and creating value year on year.
For more information on how AMCS can help build a TCFD-compliant ESG report or help you manage the shift from TCFD to ISSB, speak with one of our experts today.