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The Task Force on Climate-Related Financial Disclosures (TCFD) was first created to support organizations that voluntarily wanted to disclose their climate risks in their process towards a low-carbon economy. The goal? Improving their transparency and keeping up with requests from creditors and investors.
In this guide, we’re sharing how the TCFD’s recommendations have changed over time and how they’ll help you in the following years. You’ll also get a quick run through the core pillars you should focus on in your disclosure, which are also valid for the majority of the other directives currently or soon in action.
What is TCFD (Task Force on Climate-related Financial Disclosures)?
The Task Force on Climate-Related Financial Disclosures is an initiative aimed at developing consistent climate-related financial risk disclosures for use by companies, investors, and regulators. It was created in 2015 by the Financial Stability Board (FSB), during a period when climate reporting wasn’t as heavily regulated as it is today.
The goal is to offer clear, comparable, and standardized insights into how climate change affects organizations financially. This way, stakeholders would be better equipped to understand climate-related risks and opportunities.
The group has since been disbanded and the International Financial Reporting Standards (IFRS) Foundation took over the TCFD’s framework and mission.
How does TCFD work?
While no longer a stand-alone framework, the TCFD recommendations are still valid and thus remain under constant changes by the IFRS. The latter is responsible for monitoring the progress companies are making on their climate-related reporting.
Nevertheless, you’ll find some of the TCFD recommendations are incorporated (albeit not credited) into sustainability initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) in the EU.
Who needs to comply with TCFD?
While a TCFD report isn’t mandatory, the framework was primarily built for financial institutions and large companies. Still, any company is encouraged to use their suggestions for their own climate-related disclosures.
What is the link between TCFD and CDP?
While the TCFD gives you the information you need to better understand your climate-related risks, the Carbon Disclosure Project (CDP) takes things one step further, offering the tools and guidance you need to actually handle reporting.
Jessie Frahm, Founder at Planet One Point Five, observes that TCFD reporting requirements can help organizations understand what physical risks (like a flood hitting your factory) could cost your business. She also notes that the CDP then “lets you disclose how you plan to mitigate these risks, making it easy for stakeholders to grasp your strategy.”
Read more on the alignment between TCFD suggestions and CDP’s corporate questionnaire.
What goes into the TCFD disclosure?
The group has clearly outlined its four core TCFD pillars that will guide you throughout the disclosure:
Governance
The first step as per the TCFD framework includes publicly sharing how your organization is planning to tackle its climate-related risks and opportunities. This analysis should focus both on your board’s stance on the matter as well as where your managers come in. For the latter, you’re expected to disclose the management’s role in analyzing and monitoring climate-related risks and opportunities.
Strategy
The Strategy pillar shifts the attention towards the material aspects of your organizational operations. You should now disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning, covering short, medium, and long term. Importantly, this applies where the information is material.
At this stage, you also need to investigate your company's capacity to handle different climate-related scenarios, including the 2°C or lower scenario. Start by identifying the scenarios that are relevant to your business, market, and sector-specific needs. Besides the mere scenario analysis, you need to start planning ahead by determining where to allocate resources to mitigate risks and leverage opportunities.
Risk management
How are you going to identify and assess climate-related risks? This is the main question to answer at this point by reporting on how you’re tackling risk identification and analysis. Go beyond risk assessment and plan ahead to share with your stakeholders how you’ll be managing risks (should they arise).
Metrics and targets
Disclose what metrics you've used to assess these climate-related risks and opportunities in line with your strategy and risk management process. Like with other climate-related directives, you're asked to provide greenhouse gas (GHG) emissions metrics (Scope 1, Scope 2, and Scope 3, where applicable).
Also, part of the TCFD requirements is sharing targets you're using to manage climate-related risks and opportunities and performance against these targets. The Task Force suggests disclosing targets, metrics, and strategy aspects as part of your annual financial reporting.
On how to use TCFD reporting, Jessie Frahm points out that it’s generally great to help you understand how external climate risks (or opportunities) could impact your business financially.
She also adds:
“Great tools and experienced professionals can help you map different scenarios of what could happen in the future under different circumstances. Personally, I like to see the identified risks and opportunities as being dealt a hand of cards.
Use this information by getting your best people in a room and discussing how you could play them to future-proof your business. You will discover so much about your organization in the process and by the end you will have clarity over what you are disclosing and, more importantly, for what reason.”
Next steps with the TCFD
Ready to start following the Task Force on Climate-Related Financial Disclosures recommendations yourself?
Put them into practice with our AI engine that enables enterprises to produce audit-ready metrics from raw data. Get a free ESG Flo demo and use our TCFD reporting software to measure and report your sustainability performance with higher accuracy and transparency.
