The TCFD (Task Force on Climate-related Financial Disclosures) was established in December 2015 by the Financial Stability Board (FSB). The FSB is an international body that monitors and makes recommendations for the global financial system. The TCFD reporting body explains their objective is to develop voluntary, consistent climate-related financial disclosures for use by companies, investors, lenders, and insurers. According to the FSB, financial risk covers phenomena like the cost of extreme climate events, the cost of a poorly organised transition to a low-carbon economy, a risk in the cost of insurances, and falling asset prices. The task force’s recommendations help organisations understand where climate-related risks and opportunities could impact their businesses financially.
The TCFD’s most recent final report was published in 2022
The TCFD reporting is based on case studies to deliver valuable recommendations. These recommendations were developed through an extensive consultation process with over 150 organisations, including international organizations and regulators, policy makers and data service providers from all around the world. The recommendations are not mandatory, but the task force believes they will be adopted voluntarily by companies, as investors increasingly demand greater transparency about climate-related risks and opportunities. In its report, the TCFD states that “a comprehensive and consistent set of disclosure recommendations will foster awareness and understanding of climate-related risks among market participants, which should contribute to a more efficient allocation of capital.”
A “building block” approach
In order to make the disclosure process as easy as possible for companies, the TCFD recommends a “building block” approach that focuses on four main elements: governance, strategy, risk management, and metrics and targets. The first two elements—governance and strategy—are designed to help companies identify where climate-related risks and opportunities could affect their business financially. The governance recommendation includes a proposal for creating a “function within an organization with responsibility for overseeing climate-related financial risk management.” The strategy recommendation includes a proposal for developing “a clear statement from [an] organisation’s most senior decision-making body on how climate-related risks and opportunities are incorporated into the organisation’s overall strategy.” The third element—risk management—focuses on helping companies understand and manage their exposure to climate-related risks. The task force recommends companies disclose how they identify, assess, and manage these risks. Finally, the fourth element—metrics and targets—is designed to help companies understand how climate-related risks and opportunities could affect their financial performance. The task force recommends that companies disclose their greenhouse gas emissions as well as any other relevant environmental metrics. They also recommend disclosing any targets set for reducing emissions or otherwise mitigating climate-related risks.
The TCFD, only one example of how the business world is beginning to take action on climate change.
With its comprehensive and well-defined recommendations, the task force has provided a roadmap for how companies can disclose information about their exposure to climate-related risks and opportunities in a way that will be useful for investors, lenders, insurers, and other market participants. By following these recommendations, companies can provide much-needed transparency about their efforts to address one of the most pressing challenges of our time. For more information about how your company can get involved with the TCFD, please visit www.fsb-tcfd.org/en/.
Companies that disclose information about their exposure to climate-related risks and opportunities in a way that will be useful for investors, lenders, insurers, and other market participants can provide much-needed transparency about their efforts to address one of the most pressing challenges of our time. Don’t hesitate to check the TCFD reporting and make it a real business asset.