An Introduction to the TCFD Framework

Background:

The Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015 to help organizations account for financial risks related to climate change. This includes the needs of investors, lenders and insurance underwriters. Starting with their recommendations in 2017, the TCFD has developed recommended disclosures, supporting guidance and principles to achieve that goal.

Forums like the G20 and the International Financial Reporting Standards (IFRS) Foundation are using the TCFD framework as a basis for their disclosure requirements. TCFD recommendations themselves are voluntary, but many countries, investors, business partners and other entities are moving toward making these recommendations mandatory. The TCFD framework has designed these recommendations to be applicable to all organizations in every jurisdiction.

Purpose of TCFD:

Integrating TCFD allows organizations to make better strategic decisions by considering climate risks and opportunities into their decision-making. 

These are some of the benefits organizations gain from following the TCFD’s framework:

• Comparable, reliable and consistent disclosures that help investors, stakeholders and lenders evaluate and price climate change-related risks. 
• Improved climate credentials and trust with stakeholders as climate information becomes scrutinized as much as financial information. 
• Assessed climate risk and exposures to inform an organization’s short and long-term strategic planning. 
• Strengthened the financial market as a whole by improving understanding of climate risks.
• Comprehensive information to effectively allocate capital and move society toward a lower-carbon economy.

Pillars of TCFD framework:

The TCFD’s recommendations encompass 4 core areas of an organization: governance, strategy, risk management, and metrics and targets. Disclosure for each looks at that area’s role in dealing with an organization’s climate-related risks and opportunities.

There are 11 recommended disclosures under these areas to bring further transparency to climate reporting:

Governance:

• Does your disclosure describe board-level oversight over the climate? 
• What about management-level oversight?

Strategy: 

• Does your disclosure describe your climate-related risks? 
• What about the likely impacts of those risks? 
• What about expected resilience in likely climate scenarios?

Risk management: 

• Does your disclosure describe how you identify and assess new climate risks? 
• What about processes for managing those risks? 
• Are those processes integrated into your normal risk management structures?

Metrics and targets: 

• Does your disclosure describe the metrics you use to assess climate risks? 
• Does it list out all your current emissions? 
• What about your climate targets?

Guidance Notes: 

In addition to these broad recommendations, the TCFD also includes guidance for all sectors to give more context and suggestions for implementation. Supplemental guidance includes considerations for specific sectors, including energy and transportation. There’s also guidance for the financial and non-financial sectors that climate change affects the most. 

Climate-related Risks & Opportunities:

The TCFD identified a set of climate-related risks and opportunities to standardize disclosure information between different reporting organizations. The TCFD encourages organizations to prioritize the categories that are most relevant to them.

Risks:

TCFD divides risks into two categories. One category looks at risks from 'transitioning' to a low-carbon economy. The other looks at risks as a result of 'physical' shifts due to climate change.

Transition Risks: 

These are the four main categories for transition risks:

Physical Risks: 

Below are the two main categories of physical risks: 

Opportunities: 

Opportunities can also arise for organizations that make strides to reduce emissions. The TCFD identified a few opportunities that organizations can expect: 

Financial Impacts:

The linkage between risks/opportunities to the organization's financial status:

Income Statement:

Values in this category focus on how climate-related risks and opportunities affect whether a company is at a net profit or loss during a specified range of time.

• Revenues, like when consumer demand drops because a company’s products generate too many emissions.
• Expenditures, like if a business’s supplier is unable to operate as a result of extreme weather.

Balance Sheet:

Values in this category look at how these risks and opportunities impact an organization’s financial value at a point in time.

• Assets and liabilities, like when several acres of land are destroyed due to a wildfire.
• Capital and financing, like when a business needs to invest in R&D to make their products more energy efficient.