The Task force on Climate-related Financial Disclosures (TCFD) has become the talk of the town in terms of company disclosure of climate-related risks. What is it all about and how is it relevant for companies? Also, how does the TCFD relate to the CDP? We have put together an introduction.
The goal of the TCFD is to enable the financial sector to take into account climate-related investment risks. By providing a framework for company disclosure, the TCFD aims at improving the understanding and analysis of companies’ climate-related risks and opportunities. Scenarios predict that the transition to a low-carbon economy will cause disruption in several economic sectors with a subsequent loss in the book value of companies. This is deemed to be a significant risk for investors and in turn, an issue which is material to company reporting. According to the TCFD, the recommendations will support climate reporting and encourage companies to align their climate change risks disclosures and management with investors’ needs.
The TFCD recommendations, which were released in June 2017, are meant to be applicable to all organizations across sectors, and are thought to be a part of the Annual Report. Disclosure based on the recommendations should convey “decision-useful, forward-looking” information.
Four core areas are identified:
- Governance: Governance around climate-related risks and opportunities
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning – ideally based on a scenario analysis
- Risk management: The processes used by the organization to identify, assess, and manage climate-related risks
- Metrics and targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities
Beside these four “widely adoptable” core areas, the TCFD has adopted specific recommended disclosures as well as sector-specific guidance.
The TCFD recommendations and the CDP
Following the publications of the TCFD recommendations, the CDP (formerly Carbon Disclosure Project, the main framework for company climate disclosure) revised its questionnaire to increase the focus on the management of risks and on forward-looking metrics. The CDP has also adopted sector-based questionnaires to facilitate the evaluation of the climate and environmental performance of companies.
According to the CDP, by thoroughly disclosing to the CDP revised questionnaire, a company will substantially conform to the TCFD recommendations.
However, it is advisable for companies already reporting to the CDP to pay close attention to the TCFD’s recommendations, and in particular to the proposed classification of climate risks, not only to effectively address the specific issue concerning risks, but also to prepare for the augmented CDP questionnaire.
If your organisation is currently not reporting to the CDP, it can be useful to review and be inspired both by the TCFD’s four core recommendations as well as by their taxonomy of risks. While it may seem overwhelming to deal with the TCFD framework, even a basic application of the four general recommendations and of the risk disclosure may provide useful insights and help provide structure to your companies’ climate management.