TCFD Compliance and Reporting: Closing FY 2024 with Transparency and Accountability

As climate change accelerates and its financial implications become clearer, businesses and financial institutions must embrace transparency in how they report and address climate-related risks and opportunities. The Taskforce on Climate-related Financial Disclosures (TCFD) has provided the essential framework for companies worldwide to disclose these risks comprehensively. These disclosures not only offer clarity for investors and stakeholders but also enable organizations to prepare for the future of a low-carbon economy.

The TCFD recommendations, released in 2017, focus on providing decision-useful and forward-looking information, ensuring that companies are transparent about the risks and opportunities they face in relation to climate change. The 11 recommended disclosures in the TCFD framework ensure companies disclose key climate-related information in a structured and standardized way.

The 11 Recommended TCFD Disclosures

The TCFD’s 11 recommended disclosures are structured around four key areas: Governance, Strategy, Risk Management, and Metrics & Targets. These disclosures ensure that climate-related risks are addressed and managed at all levels within an organization. Here’s a breakdown:

1. Governance

• Disclosure 1.1: Describe the board’s oversight of climate-related risks and opportunities.
• Disclosure 1.2: Describe the role of senior management in assessing and managing climate-related risks and opportunities.

Example: A company might disclose that its board regularly reviews the climate-related risks within its risk management committee, ensuring that climate change is considered in strategic planning and governance decisions.

2. Strategy

• Disclosure 2.1: Describe the climate-related risks and opportunities identified over the short, medium, and long term.
• Disclosure 2.2: Describe the impact of climate-related risks and opportunities on the organization’s business, strategy, and financial planning.
• Disclosure 2.3: Describe the resilience of the organization’s strategy to climate-related risks and opportunities, considering different climate scenarios.

Example: A company might explain how its strategy is aligned with the Paris Agreement's target of limiting global temperature rise to 2°C, and outline how it plans to shift to renewable energy sources in the face of evolving regulations.

3. Risk Management

• Disclosure 3.1: Describe the organization’s processes for identifying and assessing climate-related risks.
• Disclosure 3.2: Describe the organization’s processes for managing climate-related risks.
• Disclosure 3.3: Describe how the organization integrates climate-related risks into its overall risk management framework.

Example: A company may disclose its use of a climate risk scenario analysis to assess potential future impacts, such as floods or extreme weather, and describe how it is embedding these insights into its operational planning.

4. Metrics and Targets

• Disclosure 4.1: Disclose the metrics used by the organization to assess climate-related risks and opportunities.
• Disclosure 4.2: Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and related risks.
• Disclosure 4.3: Describe the targets used by the organization to manage climate-related risks and opportunities and performance against those targets.

Example: A company might disclose its carbon intensity targets (e.g., reducing emissions per unit of revenue) or outline its target to achieve net-zero emissions by 2050, and report progress on those goals annually.

The Growing Challenge of Greenwashing

While the TCFD framework provides clear guidelines for transparent and meaningful climate-related disclosures, greenwashing—the practice of misleading stakeholders about the environmental benefits of a company’s actions—remains a significant issue. Companies may overstate their commitment to sustainability or present selective data to create a more positive image of their climate performance than what is genuinely being achieved.

Greenwashing undermines the purpose of climate-related disclosures and can mislead investors, regulators, and customers. A key challenge is the lack of standardized metrics and the absence of consistent reporting. This is why frameworks like TCFD are so critical: they create a uniform structure that ensures companies are held accountable for their climate commitments and actions.

Examples of Greenwashing:

• A company may claim to be "carbon neutral" without providing verifiable details on its carbon offset programs or its emissions reduction targets.
• A financial institution may advertise its sustainable investment funds, but fail to disclose how it aligns these investments with climate-related financial risks as required by TCFD.

Greenwashing can mislead stakeholders into believing that a company’s climate actions are aligned with sustainability goals, when in reality, it may be failing to make meaningful progress.

The Role of TCFD in Preventing Greenwashing

The TCFD framework aims to eliminate greenwashing by providing specific, actionable guidelines for climate-related disclosures. It requires organizations to:

• Provide clear, quantifiable metrics on climate-related risks, such as GHG emissions.
• Disclose performance against climate-related targets, making it difficult for companies to make unsubstantiated claims.
• Ensure consistency and comparability across organizations, providing stakeholders with comparable, high-quality climate data to evaluate a company’s performance.

By following TCFD’s 11 recommended disclosures, companies can offer comprehensive, verifiable, and transparent information that mitigates the risk of greenwashing. This enables investors to make informed decisions, businesses to build trust with their stakeholders, and regulators to enforce more robust climate-related reporting standards.

The Growing Importance of TCFD Adoption

The TCFD framework has already gained significant traction globally, with over 3,800 organizations adopting its recommendations, including financial institutions managing $217 trillion in assets. Europe remains the leader in TCFD adoption, with many countries making TCFD-aligned disclosures mandatory. Countries like the UK, Canada, and Japan have integrated TCFD into their regulatory frameworks, ensuring that businesses are held accountable for their climate-related disclosures.

Despite progress, there remains considerable work to do. According to the 2022 TCFD Status Report, while 80% of companies disclose in line with at least one of the recommendations, only 4% fully comply with all 11 disclosures. This highlights the need for continued efforts to improve climate reporting practices and ensure companies move beyond basic compliance to meaningful climate action.

The Path Forward: Building a Sustainable, Transparent Future

As the world transitions to a low-carbon economy, the need for transparent, consistent, and actionable climate-related disclosures has never been greater. The TCFD provides a robust framework that ensures companies and financial institutions are held accountable for their role in addressing climate change. By aligning with the TCFD recommendations, organizations can not only enhance their resilience to climate-related risks but also provide stakeholders with the confidence that they are taking meaningful, actionable steps towards a sustainable future.

For organizations that are yet to fully adopt TCFD disclosures, now is the time to take action. Transparent and comprehensive climate disclosures will not only reduce the risk of greenwashing but will also build trust with investors, consumers, and regulators. This is crucial for companies looking to thrive in a rapidly changing world, where sustainability and climate action are essential to long-term success.