TCFD framework: What it is and why it matters

By | 4 minute read | April 6, 2022

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Sustainability guidance and reporting frameworks play an important role in promoting transparency between organizations and their stakeholders. There’s no shortage of guidance and reporting frameworks; this crowded landscape is often referred to as the ‘alphabet soup’ of ESG.

In this blog, we examine the Task Force on Climate-related Financial Disclosures framework and its role in the ESG ecosystem.

What is the TCFD framework?

TCFD, or Task Force on Climate-related Financial Disclosures, was created by the Financial Stability Board (FSB) in recognition that climate change presents a significant risk to the global financial sector, which they have estimated at USD$5 trillion in potential losses.

TCFD is a guidance framework that helps companies disclose climate-related financial risks to investors, lenders and insurers.  TCFD recommendations are focused on governance, strategy, risk management, metrics and targets.

When was TCFD framework created?

The Task Force was created in December of 2015 as part of the finance industry’s response to the global financial crisis, with a remit to identify and manage risks to the financial sector.  The FSB is an international body that aims to protect the global financial system, so the focus on climate-related impacts to the sector is particularly significant. This body then reported its final report in 2017, which included the eleven recommended disclosures which guide TCFD reporting.

Now under the guidance of Michael Bloomberg as chairman, the TCFD is made up of 31 Task Force members drawn from some of the world’s largest financial institutions across the G20.

TCFD disclosure examples and structure

TCFD is made up of 11 Recommended Disclosures divided into four pillars.  The four pillars are:

  • Governance: How does the organization’s governance bodies and management manage, assess and oversee climate-related risks and opportunities?
  • Strategy: What are the tangible material impacts of climate-related risks and opportunities on the whole business, including strategy and financial planning?
  • Risk Management: How does the organization define, assess and manage climate-related risks?
  • Metrics & Targets: What are the measurements in assessing material climate-related risks and opportunities?

Beyond these core Recommended Disclosures, in 2021 the TCFD published additional sectoral Supplemental Guidance for Banks, Insurance Companies, Asset Owners, Asset Managers and Non-Financial Groups. These can be found in the Summary of Changes document from TCFD.

Who is using the TCFD framework?

Over 1,600 companies and organizations in almost 80 countries and 6 continents—(which represent nearly USD $16 trillion in market capitalization)—endorse or have already adopted TCFD.

TCFD was started by governments, is backed by governments, and in many geographies, it is being made mandatory by governments. The G7 (US, France, Germany, UK, Canada, Italy and Japan) have agreed to make TCFD-aligned reporting mandatory. In the UK, premium listed companies are required to follow TCFD by April 2022.

Furthermore, the SEC’s 2022 proposal around “Enhancement and Standardization of Climate-Related Disclosures” is explicitly based off TCFD, and has significant overlap with TCFD’s Recommended Disclosures.

In addition, the UN’s Principles for Responsible Investment (PRI), the world’s largest ESG guidance framework, has endorsed TCFD-aligned reporting since 2020.

And it’s not just governments.  Prominent asset managers such as BlackRock explicitly encourage reporting in line with SASB and TCFD guidelines.

How does TCFD cover Environment, Social and Governance metrics?

TCFD is explicitly designed to address climate risks, falling squarely within the ‘E’ of ESG reporting. However, this framework does touch on the S of Social and the G of Governance.

The Task Force’s four pillars of disclosure requirements explicitly require governance, through the lens of climate risks and opportunities. In essence, TCFD is focusing on how governance links with and guides organizations’ approaches to the “environment” portion of TCFD. While TCFD is relatively silent on social components of ESG reporting, TCFD’s reporting guidance allows for flexibility in the way disclosures are written, so companies could choose to disclose topics such as climate justice or operational resiliency if they desire.

What’s the difference between SASB and the TCFD framework?

Like TCFD, SASB is also an ESG guidance framework often used by financial stakeholders such as investors, insurers and debt holders. However, SASB focuses on quantifying and reporting the outward ESG impacts and risks of an organization’s performance across 77 different industry standards, while TCFD addresses how climate change might impact the organization’s ability to create value.

Both TCFD and SASB are focused on financial materiality.  Where SASB provides a backward-looking snapshot of sustainability performance, TCFD is more interested in the organization’s approach to sustainability and climate change, and in assessing an organization’s readiness to deal with the associated risks and opportunities.  The two frameworks are therefore complementary rather than interchangeable.

How does TCFD fit in the future of ESG reporting?

Calls are now growing for a global standard in corporate reporting. With an eye towards reducing the reporting burden on companies, the Corporate Reporting Dialogue was convened by the International Integrated Reporting Council (IIRC) to strengthen cooperation, coordination and alignment between key standard setters and framework developers.

Members of the Corporate Reporting Dialogue consist of CDPGRISASB, the Climate Disclosure Standards Board (CDSB), the International Accounting Standards Board (IASB), and the International Organization for Standardization (ISO) with the Financial Accounting Standards Board (FASB) as an observer.

Back in December, Janine Guillot, Head of the Sustainability Accounting Standards Board (SASB), told Barron’s that ESG reporting standards could converge within 12 to 24 months. While the future of this global standard that is currently proposed and strongly endorsed is unclear, TCFD is sure to continue to play a critical role in climate-related disclosures.