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What is the Task Force on Climate-related Financial Disclosures (TCFD)?

Author
Marie-Anne VincentVP Strategy & Regulatory
Category
Climate Essentials
Topics
CarbonRegulations
Published
24 April 2023

The Task Force on Climate-related Financial Disclosures (TCFD) is a group established by the Financial Stability Board to develop recommendations on how companies should disclose their climate-related financial risks and opportunities. Here’s what you need to know about it. 

The framework proposed by the TCFD is voluntary, meaning that you're not legally required to follow its recommendations. However, many organizations have adopted it as a best practice for reporting on their risks and opportunities. This information enables them to make more informed decisions about investments, credit, and insurance underwriting, ultimately supporting the transition to a sustainable, low-carbon economy. 

The framework also forms the basis for most of the upcoming climate disclosures around the world. In the UK, listed companies are required to disclose a report aligned with the TCFD framework. 

According to the task force, climate-related risks are the risks that arise as a direct result of climate change. These can be physical, such as damage to infrastructure and property due to extreme weather events, or they can be transitional, such as policy and legal changes, shifts in technology, and market fluctuations – all of which result from efforts to mitigate or adapt to the changing climate. These risks can impact businesses and financial institutions in a variety of ways, including through changes in consumer behavior, supply chain disruptions, and changes in regulations and policy.

What are the TCFD's recommendations? 

The TCFD has made several recommendations to companies and financial institutions on how to disclose their risks. The main recommendations are structured under four pillars:

  1. Governance: Disclosing your company's governance around climate risks and opportunities.

  2. Strategy: Disclosing the actual and potential impacts of these risks and opportunities on your strategy and financial planning.

  3. Risk Management: Disclosing how the organization identifies, assesses, and manages climate-related risks.

  4. Metrics and Targets: Disclosing your company's metrics and targets used to measure progress in mitigating climate risks and capitalizing on climate-related opportunities. Note that this also covers your transition plan, i.e. the actions and activities you'll undertake to achieve net-zero emissions by 2050. To make this transition, you must ensure that you're covering all three scopes. 

An overview of scopes

Scope 1 emissions are generated by sources that you own or control directly, such as vehicles or manufacturing facilities. 

Scope 2 emissions are indirect emissions associated with purchased energy, such as electricity, heat, or steam, but can be owned and controlled directly by you if you install solar panels or purchase renewable energy certificates.

Scope 3 emissions are generated by sources outside of your direct control, such as suppliers or investment holdings. These emissions can be the most difficult to calculate, but it's important to track them since they can make up a significant portion of your carbon footprint. 

As a company, it's crucial to measure and report all three scopes of emissions in order to gain a comprehensive understanding of your environmental impact.

What are the TCFD's 11 Disclosures?

The task force requires organizations to adhere to the above four pillars and 11 disclosure questions that assess how they address key climate issues. Although all four pillars are vital, the TCFD considers the metrics and targets pillar as the crucial link between all the other pillars. This revolves around measuring GHG emissions, which enables you to understand your climate-related risks and opportunities. The disclosures are listed below: 

Governance

  1. Describe your board's oversight of relevant climate-related risks and opportunities.

  2. Describe management's role in assessing and managing climate-related risks.

Strategy

3. Outline the climate-related risks and opportunities that affect your company over the short, medium, and long term.

4. Describe the impact of these risks and opportunities on your business, strategy, and financial planning.

5. Assess the resilience of your strategy under different climate-related scenarios, including under a 2°C or lower scenario.

Risk Management

6. Describe your processes for identifying and assessing climate-related risks.

7. Describe your processes for managing these risks.

8. Explain how you identify, assess, and manage climate-related risks are integrated into your company's overall risk management.

Metrics and Targets

9. Disclose the metrics used by your company to assess climate-related risks and opportunities in line with its strategy and risk management process.

10. Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks.

11. Describe the targets used by the organization to manage these risks and opportunities and performance against targets.

Where should you file your disclosures? 

The task force on Climate-related Financial Disclosures does not prescribe a specific location for companies to file their recommended disclosures, as this is largely based on your company's area of jurisdiction. However, the CDP, a non-profit organization that operates a global disclosure system, is increasingly being used as a platform for filing TCFD-aligned disclosures. The CDP's questionnaires link to the 11 TCFD disclosures and expand on them.

If you operate in the UK, note also that as part of the annual reporting process, listed UK companies are required to disclose a report aligned with the TCFD framework, in addition to their SECR submission. This disclosure is usually made through the company's annual strategic report or directors' report.

What's next for the TCFD?

The TCFD is continuing to promote the adoption and implementation of its recommendations globally. It is working on enhancing its guidance by providing further details on scenario analysis and metrics for assessing climate-related risks and opportunities. 

The TCFD is also exploring opportunities to expand its scope beyond climate-related risks and opportunities to include other sustainability-related factors, which may help improve the overall resilience of companies and support the transition to a low-carbon global economy. 

How Sweep can help

Sweep empowers you to respond to Limited Partners (LP) and stakeholder requests with easy-to-use climate reporting tools. You can analyze your financed emissions with market-standard metrics based on the TCFD and generate flexible reports that scale with you.

Contact us to find out more about how we can support you. 

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