What to Know About the TCFD

The Task Force on Climate-Related Disclosures (TCFD) was assembled to address the lack of continuity and the scarcity of data in climate reporting that limits investors’ ability to make informed decisions about climate risk. Chaired by Michael Bloomberg and governed by top executives from world-leading financial institutions, the TCFD takes an investment-driven approach towards climate change-related reporting. The goals of the TCFD are to encourage corporate disclosure on climate-related topics to provide investors with better information for capital allocation, risk assessment, and understanding of a firm’s strategic planning.

The TCFD was created by the Financial Stability Board (FSB) to create the same sort of structure for climate reporting that financial reporting has across the United States, the European Union, and other areas with listed regulations for publicly-traded companies. The TCFD believes that climate reporting should be included in company’s public disclosures like financial filings, so they created a set of standards that are adoptable by all organizations, provide information on the climate-related governance and strategy of firms, and present a full understanding of the risks and opportunities in transitioning to a net-zero economy.

The TCFD recommendations for companies focus on four major components: governance, strategy, risk management, and metrics/targets. The TCFD is not just looking for data dumps; they want to see a full contextualized picture of a firm’s climate strategy and how they are prepared to handle changing environments. They want to see the risks and opportunities associated with physical changes (such as flooding or droughts) and transition changes (consumer demand, regulatory interventions, etc.). Following the TCFD recommendations should give investors a clearer picture of how well your business model is equipped to handle a changing environment.

The TCFD recommends providing information on how the board of directors oversees climate-related risks and opportunities. This is an area where you should describe the processes that the board takes to make sure the firm is well-positioned to handle climate change challenges. In this section, you should explain which committee boards or internal teams you have organized for this. You can explain who is involved, what their roles are, how often they meet, and what processes they use for managing and monitoring risk. You can also describe how the board would react to certain scenarios, like new carbon pricing regulations. The TCFD encourages interconnectivity between the four components, so tying governance to strategic decisions is a general best practice. Any examples of CEO leadership would be good to include here as well.

As TCFD advises a strong interconnectivity between the four components of recommendations, it’s best to draw a direct line from your strategy to what risks are most relevant to your business model and what your specific plans are to address them. Your risk mitigation should follow the same scenario planning model as outlined in your strategy. The TCFD wants to see how you identify, assess, and manage climate specific risks. How do you prioritize risk? Using a probabilistic model shows that you are factoring in a range of scenarios with various degrees of impact. You can break down risks into various levels (i.e. macroeconomic vs transactional risks, acute vs chronic risk, etc.).

This section should be an area where your company clearly discloses its energy consumption and greenhouse gas emissions along with targets for reduction. It’s best to list these data in a table, breaking emissions down into specific divisions (i.e. operations vs investments) and with relative measures of consumption (e.g. total, by revenue, by unit, etc.). Methodologies should be clearly stated, with the GHG Protocol being a global standard to use. Scope 1, Scope 2, and (if appropriate) Scope 3 emissions should be listed both separately and in aggregate. Targets should be clear, meaningful, and achievable, and should be in-line with your stated strategy for emission reduction.

Look Outside-In and Inside-Out — Since the TCFD is focused on providing quality information for investors, they want to know the risks imposed by climate change on your business along with the impact that you will have on the environment. These should be listed in each component of your disclosure statement.

It’s Not Just a Data Dump — Providing thorough and accurate data is hugely important, but investors don’t just want raw data. The governance and strategy sections are critically important for helping investors understand how you plan to adapt to change. The required data is rather limited in scope, so going past the minimum requirements will show that you’re taking proactive action for the impacts of climate change.

While the disclosures recommended by the TCFD should provide more harmonization in climate reporting standards and create a better means of understanding different companies abilities to manage climate-related risk, it is also intended to be a general overview of a firm’s approach to climate. The transformative work in emission reduction can be difficult and costly, but proactive investments can pay big dividends for your business and contribute to a shared responsibility for protecting the planet. With aggressive emission reduction targets, risk management tactics, and quality governance and strategy, companies can generate positive value while contributing to a better world.

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