Task Force on Climate-Related Financial Disclosures '- A Boardroom Guide

What Does TCFD Mean?

Amid the sea of environmental, social and governance (ESG) acronyms, one has gained prominence in headlines, corporate proxy statements, stakeholder requests for information and investor decision-making: TCFD. What is TCFD? What does TCFD mean for boards today - and in the future? And finally, what are the next steps that boards should take to operationalize these increasingly mandatory disclosures? TCFD stands for the Task Force on Climate-Related Financial Disclosures. For companies navigating climate-related issues, reporting requirements and stakeholder requests for information, TCFD outlines 11 recommended disclosures based on governance, risk and strategy. Metrics and targets are also covered by TCFD, meaning that corporations and their stakeholders have a comprehensive, comparable way to benchmark progress against themselves and their peers. For investors and stakeholders, it's a glance into which companies are taking a proactive stance toward greenhouse gas emissions, a warming planet and the world's transition to a lower-carbon economy. In issues related to climate change, which companies are best prepared - or most at risk?

What's the History of TCFD?

For boards at all stages of TCFD reporting, background information can be helpful. When Was It established? The Task Force on Climate-Related Financial Disclosures is an initiative of the Financial Stability Board (FSB), an international body established in 2009 to promote financial stability by coordinating strong regulatory, supervisory and other policies in the financial sector. The FSB includes representatives from finance ministries, central banks and financial regulators across 25 jurisdictions as well as representatives from four international financial institutions and six international standard-setting bodies. The Task Force is an industry-led effort chaired by Michael Bloomberg, with 32 global expert members from the private sector. Members represent financial and non-financial companies and include executives from organizations like Unilever, AXA and the Singapore Exchange. In 2015, in response to a request from G20 finance ministers and central bank governors, the FSB asked the Task Force ''to review how the financial sector can take account of climate-related issues.'' The TCFD issued draft recommendations in 2016, then its first recommendations reported in 2017. Yearly status reports have followed since then.

Why Was It Set Up?

The Task Force's mission was to develop climate-related financial disclosures that could ''promote more informed investment, credit and insurance underwriting decisions.'' The goal of the resulting framework is to help public companies and other organizations use their existing reporting processes to more effectively disclose climate-related risks and opportunities.

What Are the Benefits of TCFD?

TCFD reporting encompasses more than TCFD carbon disclosures and greenhouse gas emissions. Such metrics provide important insights into a company's overall health, competitiveness and, bottom line, particularly as the world moves to a lower-carbon future. By helping companies more effectively evaluate climate-related risks related to operations, suppliers and competitors, TCFD strengthens risk assessment. With a sharper view of risks and exposures over the short-, medium- and long-term, TCFD guides strategic planning. And overall, the processes used and knowledge gained in TCFD reporting helps companies make better-informed decisions on where and when to allocate capital.

In our view, the TCFD framework is a valuable tool for enhancing how companies in developing markets can manage and disclose information pertaining to material risks and opportunities from climate change. -BlackRock, ''Our Commitment to Sustainability'' Report

TCFD reporting has the potential to both streamline and strengthen many ESG activities, from immediate stakeholder communications to long-term strategy and planning. When a company conducts TCFD reporting, it's collecting and compiling valuable information. Stakeholders and investors want to see related to environmental, social and governance issues. TCFD reporting can help companies familiarize themselves with and implement new frameworks and metrics related to climate change. For example, the recommended TCFD disclosure around resilience includes a relatively new area of using scenarios to assess climate-related issues and their potential implications. TCFD reporting can help boards narrow their focus, know what to look for and take an iterative, incremental approach to move forward on ESG issues. Resources used for TCFD reporting can provide valuable intelligence on ESG practices worldwide. What are peers are doing about governance, strategy, risk management and metrics, and where does the company want in comparison? What has - and hasn't - worked so far? TCFD reporting can help boards and management see climate-related risks and opportunities in the short-, medium- and long-term and their potential impact on business, strategy and financial planning. It can guide bottom-line decisions on resource allocation, company valuations and more. ''An organization's disclosure of how its strategies might change to address potential climate-related risks and opportunities is a key step to better understanding the potential implications of climate change on the organization,'' the TCFD Task Force writes.

Is TCFD Mandatory?

In many industries and regions, TCFD reporting is voluntary - but this situation is rapidly changing. Companies in many G20 jurisdictions with public debt or equity are already legally obligated to include material climate-related information in their financial filings - and the drive to make these disclosures mandates is growing.

TCFD Government Regulations

Where are TCFD government regulations taking shape around the world? The UK leads the way in making these disclosures mandatory. This year, certain companies will be required to improve their climate-risk reporting. Additional rules finalized by the end of 2021 will apply to more entities and increase mandatory reporting. ''Broad, economy-wide, mandatory climate-risk disclosure rules are expected to be in place by 2025. Reporting rules are likely to be aligned with the Task Force on Climate-Related Financial Disclosures' (TCFD) recommendations.'' Other places to watch for TCFD government regulations, law and compliance requirements include New Zealand, where TCFD reporting could be required by roughly 90% of the nation's assets under management by 2023. In Switzerland, a bill is bending to make voluntary reporting binding.

Introduction To the TCFD Recommendations and Guidelines

Designed to be included in financial filings, Task Force on Climate-Related Financial Disclosures (TCFD) recommendations are intended to be adoptable by all organizations and to solicit useful, forward-looking information on the financial impacts of climate change and the transition to a lower-carbon economy. ''The Task Force's recommendations aim to be ambitious, but also practical for near-term adoption,'' states the TCFD final recommendations report. As boards see increasing pressure from investors, stakeholders and government, TCFD recommendations are shifting from an ESG ''nice to have'' to a ''must have.'' The time for the ''near-term adoption'' is now. An introduction to TCFD recommendations follows, focusing on TCFD guidelines and what boards need to know.

What You Need To Know About TCFD Recommendations

First of all, TCFD recommendations cover four core elements:

The organization's governance around climate-related risks and opportunities
Strategy - actual or potential impacts of climate-related risks around the organization's businesses, strategy and reporting
How the organization identifies, assesses and manages climate-related risk
Metrics and targets used to assess and manage climate-related risk

How To Implement TCFD Recommendations

Implementation for TCFD uses these core elements as the springboard for 11 recommended disclosures:

The board's oversight of climate-related risks and opportunities (governance)
Management's role in identifying and assessing climate-related risks and opportunities (governance)
Climate-related risks and opportunities over the short-, medium- and long-term (strategy)
The impact of climate-related risk on the organization's business, strategy and reporting (strategy)
The resilience of the organization's climate-related strategy under different scenarios (strategy)
Processes for identifying and assessing climate-related risks (risk)
Processes for managing climate-related risks (risk)
How processes for identifying, assessing and managing climate-related risks integrate into the organization's overall risk management (risk)
Metrics to assess climate-related risks in line with strategy and risk management processes (metrics and targets)
Scope 1, 2 or 3 greenhouse gas emissions and related risks (metrics and targets)
Targets used to manage climate-related risks and opportunities and performance against these targets (risks)

Even when broken down into core elements and recommendations, implementing the recommendations of the TCFD can feel overwhelming. Where should your company start? _________________________

Ready for your board to start operationalizing its TCFD and ESG efforts?

_________________________

A Recommended Preparation Process

In the next step of the TCFD recommendation preparation process, you need to decide what information to share, then track this information down. Global nonprofit Business for Social Responsibility (BSR) offers some guidance. First, start where you already have information, traction and activity. ''By beginning with those recommendations for which they already have programs or policies in place, companies can take an iterative approach and resolve challenges over time.'' Then determine what you want to disclose for each element. For governance, this could include looking at your board's and management's

Individual experience of climate change
Roles, responsibilities and ultimate accountability
Structures, committees and decision-making processes
Incentives and the methodology behind them

For strategy, consider:

What lines of businesses are impacted by climate-related risks and opportunities?
What are the estimated costs and impacts, and what processes did you use to determine these?
What capital have you committed so far, and how have these investments evolved?

Another TCFD recommendation involves scenario analysis - a good place to focus if you are using scenarios to make your climate strategy more resilient. The TCFD recommendations suggest analyzing climate risk against a variety of scenarios, including the 2oC and lower. Such disclosures may involve:

Climate vulnerabilities
Physical and transition risks
Methodologies and assumptions, both quantitative and qualitative

When implementing scenario analyses, use data from diverse sources. Focus on business specifics and key uncertainties. Consult with relevant stakeholders and regularly review these scenarios as part of your business processes. Disclosures on risk may start with identifying your major risk categories and issues, the frameworks and criteria you use to assess them, and how you monitor them at various locations. Company metrics, like an internal carbon price and participation in industry initiatives, could be relevant as well. Look at the processes you use for managing risk. How are risks prioritized, how is climate reflected, and do you use a centralized location for risk management? Finally, how do you integrate climate-related risk into overall risk management? This includes integration of climate indicators into projects and business decisions, engagement with stakeholders, and consideration of climate alongside ESG and enterprise risk management. For TCFD metrics and targets, an easy place to start is with your disclosures in mainstream financial reporting. Focus on the ones your investors have found most useful, home in on a specific project or target and include financial metrics as available. Examine greenhouse gases across geographies: base years against target years, KPIs, and progress over time. BSR recommends data from the past three years if available. Also, share how targets align to metrics and link with management remuneration. If you track Scope 1, 2 and 3 emissions and related risks, disclose the reference methodologies and standards you use to measure these risks, the risks related to your largest sources of emissions, and how you use metrics to understand progress against targets.

TCFD Timeline for Implementation

The Financial Stability Board Task Force does not specify a certain timeframe for implementing these recommendations - only ''as soon as possible'' with the recognition that ''this is a journey that will take time and that we all need to 'learn by doing.''' ''The most important part is to get started,'' the Task Force states.

TCFD Reporting

Now comes the next step: TCFD recommendation reporting. While the Financial Stability Board's task force intended these disclosures to be adoptable by all organizations, the evolving nature of ESG, in general, can make it challenging to know where to start when developing a TCFD climate risk report. Examples may be helpful for your TCFD reporting. The Climate Disclosures Board (CDB) and Sustainability Accountability Standards Board (SASB) compiled a Good Practice Guide with case studies on how companies like Unilever, Lloyds Banking Group, and Total tackled disclosures across the various elements and recommendations. The Good Practice Guide also offers takeaways across these and other examples that can be helpful when preparing a TCFD report.

Connect the dots. Make sure TCFD metrics, TCFD scorecards and other elements in the final TCFD report connect with other disclosures in the mainstream report and are presented with historical context. In particular, address the interrelationship between strategy and risk, and be sure to link financial and non-financial information.
View climate through the correct lens. In the TCFD reports submitted by G20 organizations to date, climate-related financial disclosures have demonstrated the potential for confusion. It's important to remember that when viewed through the intent of the Task Force, a TCFD climate risk report considers the risks and opportunities likely to arise from climate change, not the converse.
Clearly communicate TCFD impact and materiality. Acknowledging exposure to climate-related risks and detailing mitigation strategies is just the beginning. Clearly connect metrics and targets to risks and opportunities, and leave no uncertainty as to what risks are considered material.
Prioritize resilience. How well-equipped is your company strategy - and company - for withstanding the possible climate states of the future? A TCFD scenario analysis can be a useful part of - but not the sole element - of these disclosures. Companies can develop these scenario analyses incrementally: beginning with a specific location, asset class or part of their portfolio and expand over time.

Do you have to cover all 11 recommendations in your TCFD final report? In an ideal world, yes. ''For a company to effectively tell its story of how it is managing climate-related risks and opportunities, it requires disclosures across all four core elements of the TCFD,'' states the CDB/ SASB Good Practice Guide. ''The 11 disclosures are mutually supportive and when considered collectively inform and reinforce one another.'' That being said, ''We have not found any one company with full TCFD disclosures, which we note reflects the current stage of understanding and reporting practice,'' the Guide continues. ''However, companies should be encouraged to make as many of the 11 recommended disclosures as they can to tell their story of how they are effectively managing climate-related risks and opportunities.''

TCFD Metrics

It's important to recognize that climate-related metrics are a work in progress, particularly in regards to comparability. In the Good Practices Guide, CDB and SASB recognize that climate-related performance metrics beyond Scope 1 and 2 emissions often differ across companies and industries and are often normalized differently. Organizations should be aware of these limitations in their TCFD disclosures.

Supporters and Members

TCFD reporting has been gaining widespread acceptance. The World Economic Forum, which has made its own efforts to standardize ESG reporting, writes that: ''The TCFD recommendations are already established as the primary framework for disclosure of information on the management of climate-related risks and opportunities in main annual filings.'' ''Only two years after the final TCFD recommendations were published, demand for climate-related financial disclosures has skyrocketed and the supply is responding,'' Mark Carney, Governor of the Bank of England, said in early 2020. ''The TCFD is helping to bring climate risks and resilience into the heart of financial decision-making, making climate disclosure more comprehensive and comparable and helping investment for a two-degree world go mainstream.'' ''Companies and global organizations are accepting that climate risk is financial risk. Today's announcement also underscores the significant investor demand for information that will help them mitigate potential risks and evaluate opportunities in the transition to the low-carbon economy,'' said Mary Schapiro, Head of the TCFD Secretariat. Today, TCFD is supported by more than 1,700 organizations - including nearly 60% of the world's 100 largest companies - in 77 countries. Supporters range from Barclays to Barrick Gold Corporation, H&M Group to Hitachi Ltd. You can see a full list here. Read more on how to measure financial risk.

Next Steps in TCFD Reporting

It may be tempting to see TCFD reporting as an additional burden on a growing ESG checklist. But TCFD actually dovetails with - and can both streamline and strengthen - many ESG activities. First of all, when your company conducts TCFD reporting, you're collecting and compiling valuable information stakeholders and investors want to see related to environmental, social and governance issues. Moreover, the right tools can help. These tools include board portals, which governance professionals can use to:

Review TCFD-related commitments, risks and performance
Store monitoring reports and other informational resources

Boards can bolster these efforts with ESG analytics that:

Use proprietary datasets and analytics models to create ''board effectiveness scores'' for TCFD and ESG performance benchmarking
Work in tandem with news and stakeholder sentiment tracking tools to monitor corporate reputation

With the support of ESG software and analytics, boards can streamline their TCFD reporting and incorporate climate-related issues into their overall operations and strategy, for reduced risk, increased investment and greater long-term sustainability. _________________________

Ready for your board to start operationalizing its TCFD and ESG efforts?

Learn how Diligent's ESG solutions are helping companies operationalize ESG principles, track progress against standards, and monitor stakeholder sentiment.

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