The impacts of climate change are environmental and financial, affecting all economic sectors. Financial markets require clear and comprehensive information on climate-related financial risks and opportunities to support informed and efficient capital allocation decisions. The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB) in 2015 to provide consistent climate-related financial risk disclosures for use by companies, banks, and investors. The TCFD’s recommendations are structured around four thematic areas representing core elements of organizations’ operations, and it provides seven principles for effective disclosure. Adopting the TCFD recommendations can help organizations better manage climate-related financial risks and opportunities, leading to a more stable and sustainable economy. This blog explores the importance of climate-related financial disclosures and the benefits of better disclosure.
The Importance of Climate-related Financial Disclosures
Climate change is not only an environmental issue but also a financial risk. Rising temperatures, climate-related policies, and emerging technologies can significantly impact the global economy. Financial markets need clear, comprehensive, and high-quality information on the impacts of climate change to support informed and efficient capital allocation decisions. Without the correct information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.
The need for clear and comprehensive information on climate-related financial risks and opportunities is becoming increasingly important. The impacts of climate-related financial risks can be significant and affect all economic sectors. For example, the physical risks associated with climate change can damage infrastructure, property, and other assets. The transition risks, such as changes in policy or market preferences, can lead to a significant revaluation of assets.
The importance of climate-related financial disclosures can be seen in the impacts of climate-related financial risks on the global economy. Climate-related financial risks can affect financial institutions, businesses, and households. The costs associated with climate change can substantially affect profitability, productivity, and economic growth. The financial sector is crucial in managing these risks and allocating capital efficiently.
In summary, climate change presents a significant financial risk to the global economy, and financial markets need clear, comprehensive, and high-quality information on the impacts of climate change. The TCFD plays a vital role in developing consistent climate-related financial risk disclosures to enable efficient capital allocation. Adopting TCFD recommendations can help companies, banks, and investors manage climate-related financial risks and opportunities better, leading to a more stable and sustainable economy.
The TCFD recommendations are structured around four thematic areas representing core elements of organizations’ operations: governance, strategy, risk management, and metrics and targets. These recommendations are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.
Under governance, organizations should disclose their governance around climate-related risks and opportunities. This includes describing the board’s oversight of climate-related risks and opportunities, as well as management’s role in assessing and managing these risks and opportunities.
Under the strategy, organizations should disclose the actual and potential impacts of climate-related risks and opportunities on their businesses, strategy, and financial planning. This includes describing the climate-related risks and opportunities identified by the organization over the short, medium, and long term, as well as the impact of these risks and opportunities on the organization’s businesses, strategy, and financial planning.
Under risk management, organizations should disclose how they identify, assess, and manage climate-related risks. This includes describing the organization’s processes for identifying and assessing climate-related risks, as well as processes for managing these risks.
Under metrics and targets, organizations are recommended to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This includes disclosing the metrics used to assess climate-related risks and opportunities, greenhouse gas emissions, and related risks, and describing the targets used to manage climate-related risks and opportunities and performance against targets.
The TCFD also provides seven principles for effective disclosure, including that disclosure should represent relevant information, be specific and complete, clear, balanced and understandable, consistent over time, comparable among companies, reliable, verifiable, and objective, and provided on a timely basis.
The TCFD also recommends that organizations describe the resilience of their strategy, considering different climate-related scenarios, including a 2°C or lower scenario, where such information is material.
Benefits of Better Disclosure
Better disclosure of climate-related financial information can lead to a range of benefits.
Firstly, it can enable organizations to evaluate climate-related risks to their company, suppliers, and competitors more effectively. This can allow for more informed decision-making and risk management.
Secondly, it can help investors and other stakeholders make better-informed decisions on where and when to allocate their capital. This can lead to more efficient capital allocation, where investments are directed toward companies more resilient to climate-related risks.
Finally, better disclosure can help organizations better evaluate risks and exposures over the short, medium, and long term. This can allow for more effective strategic planning, where organizations are better positioned to navigate the challenges and opportunities climate change presents.
TCFD Pilot Programs and Status Reports
The TCFD has conducted pilot programs for banks, investors, and insurers, where they have explored physical and transition risks and pioneered practical approaches for evaluating these risks using climate scenario analyses. Nearly 100 financial institutions worldwide have participated in these pilots, creating numerous tools, frameworks, and guides to manage better and disclose climate risks.
The TCFD also prepares annual status reports on climate-related financial disclosures and monitoring practices regarding their alignment with the TCFD recommendations. The latest status report provides insight into how companies respond to the recommendations and how disclosure practices evolve.
How CDP is aligned to the TCFD
CDP provides a platform for companies to report climate-related financial information in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. By translating the TCFD recommendations into standardized disclosure questions, CDP offers a unique mechanism for investors and disclosers to put the TCFD Framework into real-world practice. CDP has the largest TCFD-aligned environmental database in the world, with scores widely used to drive investment and procurement decisions towards a zero-carbon, sustainable, and resilient economy. CDP redesigned its climate change questionnaire in 2018 to align with the TCFD recommendations, with over 25 TCFD-aligned questions contained within the Governance, Risks & Opportunities, Strategy, Targets, and Emissions modules. CDP’s TCFD insights series explores how corporates are performing when it comes to disclosing against the TCFD recommendations.
TCFD and the SEC
In March 2022, “the Securities and Exchange Commission (SEC) proposed rule changes requiring registrants to include certain climate-related disclosures in their registration statements and periodic reports.” These new rules “would create new requirements for the disclosure of climate-related risks and impacts based on the TCFD disclosure framework, including information about material impacts of climate risk on a company’s business, and information about a company’s governance, risk management, and strategy related to climate risk” and may come into effect as early as late 2023 or early 2024 for some registrants.
the Task Force on Climate-related Financial Disclosures (TCFD) plays a crucial role in developing consistent climate-related financial risk disclosures to enable efficient capital allocation. Adopting TCFD recommendations can help companies, banks, and investors manage climate-related financial risks and opportunities better, leading to a more stable and sustainable economy. Better disclosure of climate-related financial information can enable organizations to evaluate climate-related risks more effectively, help investors make better-informed decisions, and help organizations better evaluate risks and exposures over the short, medium, and long term. The TCFD’s pilot programs and annual status reports provide valuable insights into how companies respond to the recommendations and how disclosure practices evolve. We encourage companies, banks, investors, and insurers to adopt the TCFD recommendations and improve climate-related financial reporting.
Contact Veritrove for help navigating the TCFD recommendations and improving your climate-related financial disclosures.