In 2015, the Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) to provide uniform information on climate-related financial risks that companies, banks, and investors can use to communicate with stakeholders.
In 2017, the TCFD published its final report on climate-related financial disclosure recommendations, designed to help companies provide better information to support informed capital allocation.
What is the Task Force on Climate-Related Financial Disclosures?
TCFD recommendations guide all market players in disclosing information on the financial ramifications of climate-related risks and emerging opportunities so that they can be included in business and investment choices.
More than 1,600 companies and organizations in nearly 80 countries and six continents – with a combined market value of almost $16,000 billion – support or have already implemented the TCFD. More recently, investors have begun to use it to assess the success of their own holdings.
What are the recommendations?
TCFD signatories commit to disclosing their activity in four key areas, including:
- Governance – how companies manage the risks and opportunities associated with climate change.
- Strategy – examining the actual and potential consequences of climate change on business, strategy, and financial planning where this information is material.
- Risk management is the process by which an organization identifies, assesses, and manages climate-related risks.
- Parameters and objectives – are used to assess and manage climate-related risks and opportunities where this information is relevant.
The four recommendations are interrelated and supported by 11 recommended disclosures. These ones build out the framework with information that should help investors and others understand how reporting organizations think about and assess climate-related risks and opportunities. By following these recommendations, organizations can improve their transparency on climate change risks, help investors make informed decisions, and contribute to a more sustainable transition to a low-carbon economy.
Who is affected by the TCFD?
For several years now, the United Nations and a growing number of major institutions and governments (notably in Europe) have been calling for mandatory climate reporting for companies. In this context, the TCFD’s recommendations are increasingly integrated into the regulatory ecosystem of Corporate Social Responsibility (CSR) worldwide. For example, the European Union adopted a Sustainable Finance Action Plan in 2018, which encourages companies to adopt TCFD recommendations. Part of the reporting requirements under the CSRD and SFDR regulations are also aligned with the TCFD. Outside of Europe, Japan also announced in 2020 that it would require listed companies to disclose information on their exposure to climate risks in line with the recommendations.
TCFD: mandatory or not?
TCFD recommendations are voluntary in nature and apply to organizations in all sectors and jurisdictions. However, as more and more governments introduce legislation aligned with the TCFD, the number of companies that are required by law to comply grows.
Today, more than eight countries are already in the process of mandating TCFD-compliant disclosure, which has been endorsed by over 100 governments worldwide:
- The G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the USA) have made TCFD-compliant reporting mandatory. The UK being the first G20 country to make TCFD disclosure mandatory by law. The TCFD affects the UK’s largest listed companies, banks, insurers, and private companies with more than 500 employees and sales of £500 million.
- The TCFD framework isn’t just gaining ground in Europe. Countries around the world are looking at how to integrate the recommendations into their own ESG policy and regulation. New Zealand was the first country to make TCFD-compliant climate disclosure mandatory in 2021.
One thing is clear: the TCFD framework is rapidly moving from a voluntary approach to a regulatory policy response to climate risks for many more countries to come.
However, the TCFD’s recommendations are regularly deemed insufficient to achieve climate reporting that is useful for the ecological transition. Indeed, the TCFD bases its recommendations on a simple materiality analysis, in which companies only report on the economic and financial impacts and opportunities linked to the climate crisis without analyzing the consequences of economic activity on the climate.