What is the TCFD and why does it matter?
Understanding the various layers and implications of the recommendations
Michael Bloomberg, TCFD chairman, may be more familiar to most than its acronym. But the Task Force on Climate-related Financial Disclosures (TCFD) is likely to become well known in coming years. What began as a voluntary set of recommendations has become part of the 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 by 2023 and 2025 respectively. This is part of the growing efforts to address global climate change thoroughly. The pressure on businesses to act on the TCFD’s recommendations will only increase with time.
The TCFD was created in 2015 by the Basel-based Financial Stability Board (FSB) whose role, since its establishment in 2009 after the global financial crisis, is to promote international financial stability. The TCFD’s focus is reporting on the impact an organisation has on the global climate. It seeks to make firms’ climate-related disclosures more consistent and therefore more comparable. It believes that better information will allow companies to incorporate climate-related risks and opportunities into their risk management, strategic planning and decision-making processes. As both companies and investors increase their understanding of the financial implications of climate change, markets will be better able to channel investment to sustainable and resilient solutions, opportunities and business models.
To achieve this objective the TCFD has developed a reporting framework based on a set of consistent disclosure recommendations for use by companies as a means of providing transparency about their climate-related risk exposures to investors, lenders and insurance underwriters. Improving the quality, consistency and transparency of climate-related financial disclosures will allow economies to have the necessary information to better assess the impact and effects of an organisation on climate change. Around 1,700 organisations worldwide, in the public and private sectors, as well as government entities, support the TCFD.
In January 2021, Switzerland officially became a supporter of the TCFD while many major Swiss companies have already followed its recommendations. The Swiss Federal Council has instructed the State Secretariat for International Finance (SIF), in close cooperation with the Federal Office for the Environment (FOEN), will be working on a draft law this year in consultation with the private sector and industry associations with the objective to make the TCFD recommendations binding.
The TCFD’s 11 disclosure recommendations span four different areas: governance, strategy, risk management, and metrics and targets. Full details can be found in the TCFD report.
The 11 recommendations can be summarised as follows:
In governance, companies must:
- describe the board’s oversight of climate-related risks and opportunities
- describe management’s role in assessing and managing climate-related risks and opportunities
- describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term
- describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning
- describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
In risk management:
- describe the organisation’s processes for identifying and assessing climate-related risks
- describe the organisation’s processes for managing climate-related risks
- describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.
In metrics and targets:
- disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
- disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks
- describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.
The TCFDs are important for businesses to improve their own understanding of their long-term climate-related risks and opportunities. Further, they matter because of the growing pressure on companies from governments, consumers and investors to respond to climate change. More governments will shift from recommending the TCFDs as guidance to enacting laws and policies to embed the recommendations into mandatory legislation and regulation.
What are the challenges and how can Swiss companies prepare?
TCFDs are part of the shift towards fundamentally addressing climate change and complying with new or revised legal or regulatory reporting requirements. There is a high bar to deliver ‘effective disclosures’ with principles ranging from being clear, balanced and understandable to reliable, verifiable and objective. In addition, they must be consistent over time, comparable among companies within a sector, industry, or portfolio and provided on a timely basis.
This is why adopting the recommendations of the TCFD is an iterative process and full implementation can take many years, with learnings along the way helping to adapt and optimise implementation plans. Beyond the fundamental questions of strategy and governance, several challenges remain. These include:
Short-term data vs long-term impact: Climate forecasting is not perfect. There is a lack of historical data to model the impact of climate change over the long-term and to quantify its potential financial impact over a range of different scenarios.
From scenario planning to financial impact: Companies are expected to take the results of the climate scenario modelling and translate these into financial impact, potential impact on business performance and to develop mitigating strategies, which must also be stress tested against various climate scenarios.
Climate change beyond borders: Identifying and measuring physical risks, especially future risk, is difficult. Companies with complex global supply chains will need to take location specific risk into consideration.
With Switzerland now a supporter of the TCFD and currently considering whether to make recommendations binding, companies need to understand where gaps in their knowledge are, be aware of where they are most exposed to climate risk across their value chain and begin the necessary steps to address the new challenges.
We help clients at all stages of maturity to design and implement frameworks that address the four pillars of the TCFD. Our offering comprises three distinct phases: Establish, Expand, Embed designed to be tailored to your specific organisation, and guiding you from your starting point to your end-goal.
- Establish: We work with you to build fundamentals for your TCFD implementation journey, and set your TCFD ambition, through:
- Gap analysis and peer benchmarking
- Stakeholder engagement
- Climate risk and opportunity assessment
- TCFD Roadmap design
- Expand: With a clear direction set for TCFD, we deep dive on some of the more specialised aspects of TCFD, including:
- Scenario analysis
- Upskilling & training for Board and Executive Committee
- Metrics & targets
- Reporting and communications
- Embed: With these key pieces in place, we provide support in steering your longer-term TCFD journey, through:
- TCFD Roadmap implementation
- Decarbonisation strategy
- Monitoring physical asset risk
- Governance support
This practical and proven approach will help you in your specific climate change journey to address not only the risks but also help you to identify the opportunities that this unique transformation provides. We will help you work towards and be inspired by current best practices whilst ensuring compliance with upcoming legal and regulatory disclosure requirements.