In our last blog, we referred to the alphabet soup of organisations involved in ESG. An organisation’s name that kept cropping up though, was the Task Force on Climate-Related Financial Disclosures (TCFD). Currently, its TCFD recommendations are being adopted by the large ESG frameworks and even within the regime of new government regulations on mandatory ESG disclosure.
From our last blog:
“The UK Government confirmed on 29 October that it will make it mandatory for large companies to disclose information in alignment with the TCFD recommendations from April 2022. This makes the UK the first G20 country to enshrine the mandate into law, subject to Parliament approval. More than 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis – in line with the TCFD recommendations.
Meanwhile, in New Zealand, beginning in 2023, new laws will require financial firms to explain how they would manage climate-related risks and opportunities with disclosure requirements based on the TCFD standards and the standards of New Zealand’s independent accounting body the External Reporting Board (XRB).”
TCFD’s Role in Shaping Global ESG Disclosures
TCFD’s formation came in 2015 at the bequest of the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. The FSB called on the Task Force to develop climate-related disclosures that “could promote more informed investment, credit [or lending], and insurance underwriting decisions” and, in turn, “would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.”
The reason for focusing on financial-sector organisations like banks, insurance companies, asset managers and asset owners was and is their undeniable capacity to influence the organisations in which they invest to provide better climate-related financial disclosures.
From TCFD’s website (https://www.fsb-TCFD.org/about/):
“Currently, investors, lenders, and insurers don’t have a clear view of which companies will endure or even flourish as the environment changes, regulations evolve, new technologies emerge, and customer behaviour shifts — and which companies are likely to struggle.
Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly and may potentially face a rocky transition to a low-carbon economy, with sudden value shifts and destabilising costs if industries must rapidly adjust to the new landscape.”
Essentially, TCFD encourages organisations to undertake both historical and forward-looking analyses, dividing climate-related risks into risks related to the transition to a lower-carbon economy and risks related to the physical impacts of climate change. It also encourages organisations to look for climate-related opportunities.
When considering the potential financial impacts of climate change, TCFD structures disclosures around four thematic areas that represent core elements of how organisations operate:
The table below summarises the current recommended disclosures under each core element.
More details/specifics of recommended disclosures under each core element can be found at pages 19 to 23 of TCFD’s report at FINAL-2017-TCFD-Report-11052018.pdf. Examples of climate-related risks can be found at page 10 of the same report.
Likewise, examples of potential opportunities for organisation can be found at page 11 of that report.
TCFD has interconnected its recommendations with the two primary accounting standard setting bodies, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB and their standards addressing risks and uncertainties that affect companies.
Additionally, TCFD has made it clear that their disclosure recommendations are not static and with improved data analytics and more widespread modeling of climate-related issues, disclosures will mature accordingly.
The TCFD’s climate-related disclosure requirements mean that organisations seeking approval for investment capital or finance will need to do more than just produce their balance sheet and accounts for the last three years to get across the line. Further, you can be damn sure that insurance companies won’t be shy either when it comes to insurance policy application and/or damage claims requirements.
This whole new extension of corporate management and reporting responsibility not only affects large organisations, it will quickly filter down and affect SME operations too.
Meeting TCFD recommendations
Now we’ll list recommended actions to meet TCFD climate-related financial disclosure criteria. This, with a view to assisting your organisation boost its ESG credentials, minimise climate risk, identify climate-related opportunities and develop sound climate-related financial disclosure.
In the TCFD report found at https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf, there are four thematic elements of climate-related disclosure. The illustration below lists these four elements, with recommended topics to be applied under each element:
More specific actions that should be taken under each topic are included in the same TCFD report and summarised here:
- Processes and frequency by which the board and/or board committees (e.g., audit, risk, or other committees) are informed about climate-related issues.
- Whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk management policies, annual budgets, and business plans as well as setting the organisation’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures, acquisitions, and divestitures.
- How the board monitors and oversees progress against goals and targets for addressing climate-related issues.
- Whether the organisation has assigned climate-related responsibilities to management-level positions or committees; and, if so, whether such management positions or committees report to the board or a committee of the board and whether those responsibilities include assessing and/or managing climate-related issues.
- A description of the associated organisational structure(s).
- Processes by which management is informed about climate-related issues.
- How management (through specific positions and/or management committees) monitors climate-related issues.
- A description of what they consider to be the relevant short-, medium-, and long-term time horizons, taking into consideration the useful life of the organisation’s assets or infrastructure and the fact that climate-related issues often manifest themselves over the medium and longer terms.
- A description of the specific climate-related issues for each time horizon (short, medium, and long term) that could have a material financial impact on the organisation.
- A description of the process(es) used to determine which risks and opportunities could have a material financial impact on the organisation. organisations should consider providing a description of their risks and opportunities by sector and/or geography, as appropriate. In describing climate-related issues, organisations should refer to Tables 1 and 2 of the report at https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf (pp. 10-11).
- organisations should consider including the impact on their businesses and strategy in the following areas:
- Products and services
- Supply chain and/or value chain
- Adaptation and mitigation activities
- Investment in research and development
- Operations (including types of operations and location of facilities)
- organisations should describe how climate-related issues serve as an input to their financial planning process, the time period(s) used, and how these risks and opportunities are prioritised. organisations’ disclosures should reflect a holistic picture of the interdependencies among the factors that affect their ability to create value over time. organisations should also consider including in their disclosures the impact on financial planning in the following areas:
- Operating costs and revenueCapital expenditures and capital allocation
- Acquisitions or divestments
- Access to capital
- If climate-related scenarios were used to inform the organisation’s strategy and financial planning, such scenarios should be described (a typical scenario being 2ºC or less scenario -refer to Section D of the TCFD report for information on applying scenarios to forward-looking analysis).
- Where they believe their strategies may be affected by climate-related risks and opportunities.
- How their strategies might change to address such potential risks and opportunities.
- The climate-related scenarios and associated time horizon(s) considered.
- A description of how organisations determine the relative significance of climate-related risks in relation to other risks.
- Whether they have considered existing and emerging regulatory requirements related to climate change (e.g., limits on emissions) as well as other relevant factors.
- organisations should also consider disclosing the following:
- Processes for assessing the potential size and scope of identified risks.
- Definitions of risk terminology used or references to existing risk classification.
- How they make decisions to mitigate, transfer, accept, or control those risks.
- How organisations describe their processes for prioritising climate-related risks, including how materiality determinations are made within their organisations.
- The processes for managing climate-related risks, including the risks included in Tables 1 and 2 of the TCFD report (pp. 10-11), as appropriate.
- organisations should describe how their processes for identifying, assessing, and managing climate-related risks are integrated into their overall risk management.
- organisations should consider including metrics on climate-related risks associated with water, energy, land use, and waste management where relevant and applicable.
- Where climate-related issues are material, organisations should consider describing whether and how related performance metrics are incorporated into remuneration policies.
- Where relevant, organisations should provide their internal carbon prices as well as climate-related opportunity metrics such as revenue from products and services designed for a lower-carbon economy.
- Metrics for historical periods to allow for trend analysis.
- Where not apparent, organisations should provide a description of the methodologies used to calculate or estimate climate-related metrics.
- Their Scope 1, Scope 2 and relevant Scope 3 GHG emissions and the related risks using the GHG Protocol methodologies to allow for aggregation and comparability across organisations and jurisdictions.
- As appropriate, generally accepted industry-specific GHG efficiency ratios.
- Historical periods of GHG emissions and associated metrics to allow for trend analysis.
- In addition, where not apparent, a description of the methodologies used to calculate or estimate the metrics.
- Their key climate-related targets such as those related to GHG emissions, water usage, energy usage, etc., in line with anticipated regulatory requirements or market constraints or other goals.
- Other goals including efficiency or financial goals, financial loss tolerances, avoided GHG emissions through the entire product life cycle, or net revenue goals for products and services designed for a lower-carbon economy. In describing their targets, organisations should consider including the following:
- Whether the target is absolute or intensity based.
- Time frames over which the target applies.
- Base year from which progress is measured.
- Key performance indicators used to assess progress against targets.
Where not apparent, the methodologies used to calculate targets and measures.
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