The Task Force on Climate-related Financial Disclosures, or TCFD, is a global organization formed to develop a set of recommended climate-related disclosures that companies and financial institutions can use to better inform investors, shareholders and the public of their climate-related financial risks.
The goal of these disclosures is to bring transparency to companies’ climate-related risks. Broad disclosure of climate-related financial risks enables more informed investment, credit and insurance underwriting decisions and can help facilitate the transition to a more sustainable, low-carbon economy.
The Switzerland-based Financial Stability Board (FSB) established the TCFD in 2015. In 2017, the TCFD issued a ‘Final Report’ detailing 11 voluntary recommendations, known as the TCFD framework. Subsequent annual status reports provide guidance on implementing the TCFD recommendations and track their worldwide adoption.
As of November 2022, the TCFD garnered support from over 4,000 organizations across 101 jurisdictions, with a combined market capital value of USD 27 trillion. The number of companies disclosing TCFD-aligned information increased by 26% between 2017 and 2021.
While the TCFD recommendations may have started as voluntary disclosure guidelines, they are rapidly becoming part of the mandatory regulatory framework in many jurisdictions, including the European Union, Singapore, Canada, Japan and South Africa.
New Zealand and the United Kingdom are mandating climate risk disclosures in line with the TCFD framework by 2023 and 2025 respectively. In March 2022, the U.S. Securities and Exchange Commission (SEC) published proposed legislation on climate-related risk disclosures that incorporates key aspects of the TCFD framework.
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The TCFD framework breaks down a company’s climate-related risks into two major categories.
Physical risks
Physical risks are related to the physical impacts of climate change. Some physical risks are acute, driven by specific extreme weather events such as hurricanes, flooding, wildfire or drought. Others are chronic, associated with long-term shifts in climate patterns such as continually rising temperatures, rising sea levels and longer and more frequent heat waves. Physical risks can have sudden and significant financial impacts if they affect operations, transportation, supply chains or employee or customer safety.
Transitional risks
Transitional risks are risks inherent in the transition to a low-carbon economy. These include risks associated with evolving climate-related policies, regulations and disclosure requirements around issues such as greenhouse gas (GHG) emissions, net-zero carbon emission initiatives, carbon tax policies, energy and fuel costs and national or global energy policies. Transitional risks can have an ongoing direct financial impact and can also impact an organization’s reputation.
The TCFD recommendations are voluntary. They’re issued as guidelines to help businesses identify and disclose—in their financial reporting and filings, sustainability reports and annual reports—the risks, opportunities and potential financial impacts they face due to climate change.
These recommendations are widely applicable to organizations in all jurisdictions and across industries—including banks, insurance firms, asset management firms and other financial sector organizations. Entities in the financial sector have an added layer of responsibility to disclose not just their own climate-related risks but also the risks faced by the companies they invest in.
Themes and principles
The TCFD recommendations are organized around four (4) themes or areas for disclosure and seven (7) principles for effective disclosure. The four themes are:
Governance: The company must disclose its board’s oversight of and management’s role in, assessing and managing climate-related risks and opportunities.
Strategy: The company must disclose its climate-related risks and opportunities (near, medium and long-term) and the potential impacts they have on its businesses, strategies, financial planning and corporate governance. The company must also describe its resilience in the face of different climate scenarios, for example, a 2°C or lower climate scenario analysis.
Risk management: The company must disclose its processes for identifying, assessing and managing climate-related risks and how these processes are integrated into its overall risk management processes and strategy.
Metrics and targets: The company must disclose the metrics and targets it uses to measure success in countering climate-related risks and seizing climate-related opportunities. The company must also disclose its transition plan including actions and activities that would enable net-zero emissions by 2050. This includes the disclosure of metrics and targets relative to three GHG emissions categories, or scopes:
- Scope 1 emissions directly result from operations owned or controlled by a reporting organization.
- Scope 2 emissions are associated with the generation of purchased energy, such as electricity, heat or steam. These are indirect emissions but can be owned and controlled directly by the reporting organization.
- Scope 3 emissions are those that organizations don’t control directly but occur as a result of their operations or value chain. The Carbon Disclosure Project (CDP), which helps companies, cities and states manage their environmental impact, estimates that Scope 3 emissions account for 75% of companies’ greenhouse gas emissions on average (link resides outside ibm.com).
The Greenhouse Gas Protocol methodology is the most widely adopted standard for calculating GHG emissions. Scopes 1 and 2 emissions are often easier for companies to calculate since relevant information is readily accessible to the reporting company. Scope 3 emissions can be more difficult to calculate because they are generated by third parties (for example, a supply chain partner or investment holding) for which the reporting company has limited visibility or control.
The principles for effective disclosure, designed to help organizations make the most transparent and consistent climate-related financial disclosures possible, include:
- Principle 1: Disclosures should present relevant information
- Principle 2: Disclosures should be specific and complete
- Principle 3: Disclosures should be clear, balanced and understandable
- Principle 4: Disclosures should be consistent over time
- Principle 5: Disclosures should be comparable among organizations within a sector, industry or portfolio
- Principle 6: Disclosures should be reliable, verifiable and objective
- Principle 7: Disclosures should be provided on a timely basis
ESG (environmental, social and governance) disclosure is critical for organizations today as financial markets become increasingly conscious about making sustainable investment choices. Investors want to carefully assess the risks and opportunities arising from ESG issues and allocate capital toward businesses that are transparent about their ESG and sustainability goals and performance.
The TCFD recommendations provide a globally recognized framework for organizations to disclose their climate-related risks, opportunities and financial impacts. While it may seem like the framework is designed to address climate risks, the TCFD recommended disclosures do span across the three pillars of ESG reporting: environment, social and governance.
With TCFD-aligned disclosures, investors gain a consistent, comparable view into the financial impacts of climate change and other key ESG aspects. These aspects include an organization’s governance around climate-related risks and their overall risk assessment and management processes. Organizations may find benefit from adopting the recommendations and principles laid out by the TCFD framework.
The International Sustainability Standards Board (ISSB) was formed in 2021 to develop global standards for sustainability-related disclosures that would aid investors and potential stakeholders in making wise capital allocation decisions.
The ISSB strives to consolidate and improve upon already-implemented international reporting directives such as the TCFD. This allows companies to align their disclosures to one global reporting framework instead of tracking multiple reporting guidelines.
For example, the ISSB recently announced that companies must use climate-related scenario analysis to identify climate-related risks and opportunities and to report on their climate resilience. While the ISSB will use the existing TCFD guidance to help preparers undertake climate-related scenario analysis, it will also provide more specific guidance on which climate scenarios an entity should use based on their industry and jurisdiction.
The TCFD encourages organizations to learn more about its framework and disclosure recommendations, including its most recent status report (link resides outside ibm.com) The TCFD website (link resides outside ibm.com) also hosts resources such as case studies, reports, scenarios, instructional videos and more.
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Net zero indicates the point at which global net human-caused GHG emissions, including CO2 and CH4, have been cut to as close to zero as possible with any remaining residual emissions permanently removed from the atmosphere.
Sustainability in business refers to a company's strategy and actions to eliminate the adverse environmental and social impacts caused by business operations.