The Task Force on Climate-related Financial Disclosures (TCFD) has emerged as a globally recognized framework designed to assist organizations in disclosing climate-related risks and opportunities. In this blog post, we will delve into the details of the TCFD, including its purpose, applicability, steps for alignment, required metrics for disclosure, and recommended data sources to facilitate compliance.
The TCFD was established by the Financial Stability Board (FSB) in 2015 to enhance transparency and consistency in climate-related financial disclosures. Its primary objective is to provide organisations with a structured framework to identify, assess, and report on climate-related risks and opportunities in their financial filings.
While the TCFD is voluntary, its principles and recommendations have gained widespread adoption across various sectors and jurisdictions globally. It applies to organizations in both the public and private sectors, including corporations, financial institutions, and asset owners and managers. The TCFD framework is adaptable to organizations of all sizes and industries.
To align with the TCFD recommendations, organizations are encouraged to follow these steps:
Step 1 - Governance
Establish governance processes to oversee climate-related risks and opportunities, ensuring accountability at the board and senior management levels.
This involves assigning roles and responsibilities, integrating climate-related considerations into decision-making processes, and setting clear targets and incentives. (source: [TCFD Recommendations Report])
Step 2 - Strategy
Identify and analyse climate-related risks and opportunities that could affect the organisation's business, strategy, and financial planning.
This step involves conducting scenario analysis to assess the potential impact of different climate-related scenarios on the organisation's resilience and financial performance. (source: [TCFD Recommendations Report])
Step 3 - Risk Management
Integrate climate-related risks into existing risk management frameworks.
Organisations should evaluate and manage climate-related risks using appropriate risk management processes, including risk identification, assessment, mitigation, and monitoring. (source: [TCFD Recommendations Report])
Step 4 - Metrics & Targets
Disclose information on climate-related metrics and targets that are relevant to the organisation's operations and strategy.
This entails providing transparent and consistent disclosures on greenhouse gas emissions, energy consumption, water usage, and other relevant metrics, aligning with industry-specific standards and best practices. (source: [TCFD Recommendations Report])
To effectively align with the TCFD recommendations, organizations can utilize various data sources, including:
After the release of the inaugural ISSB Standards, namely IFRS S1 and IFRS S2, the Financial Stability Board (FSB) has approached the IFRS Foundation to assume the responsibility of monitoring companies' progress on climate-related disclosures, which was previously overseen by the Task Force on Climate-related Financial Disclosures (TCFD).
Both IFRS S1 and IFRS S2 fully integrate the TCFD's recommendations, signifying a significant milestone as the culmination of the TCFD's efforts since its establishment in 2017, following the FSB's request.
In line with its commitment to foster the effective implementation of IFRS S1 and IFRS S2, which aim to establish a global standard for sustainability-related disclosures, the ISSB is actively engaged in supporting capacity building and monitoring the widespread adoption of high-quality disclosures worldwide.
Starting in 2024, as the ISSB Standards are progressively adopted worldwide, the IFRS Foundation will take over the monitoring responsibilities from the TCFD, which has been overseeing companies' progress in aligning with the TCFD recommendations since their publication.
In response to the FSB's request, ISSB Chair Emmanuel Faber expressed appreciation for the TCFD's pioneering efforts in enhancing the practice and quality of climate-related disclosures, and he emphasised that the ISSB Standards build upon and consolidate market-leading, investor-focused sustainability-reporting initiatives, with the TCFD recommendations forming their core. The ISSB views this transfer of responsibilities as an opportunity to build on the legacy of the TCFD, further clarifying the landscape of Environmental, Social, and Governance (ESG) initiatives for companies and investors.
IFRS S1 provides comprehensive disclosure requirements, enabling companies to communicate sustainability-related risks and opportunities to investors across short, medium, and long-term perspectives.
IFRS S2, on the other hand, outlines specific disclosures related to climate change and is intended to be used in conjunction with IFRS S1.
Complying with the TCFD recommendations is a valuable step toward enhancing climate-related transparency and resilience within organisations. By following the steps for alignment and disclosing relevant metrics, organisations can effectively assess and communicate their climate-related risks and opportunities. Additionally, utilising internal data, external data sources and ESG data providers can support organisations in collecting and analysing the necessary information to align with the TCFD framework.