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Background
In December 2015, the Financial Stability Board (FSB) established the industry-led Task Force on Climate-related Financial Disclosures (TCFD or 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.”
When the Task Force on Climate-related Financial Disclosures (the Task Force or TCFD) issued its final recommendations in June 2017 (2017 report), it understood the early nature of climate-related reporting and anticipated that disclosure would evolve as climate-related financial reporting matured.
Since 2017, the Task Force has sought to clarify issues raised by organisations in their implementation of the TCFD recommendations and provide additional supporting guidance and other information where appropriate.
The latest updated TCFD have provided more detailed examples and illustrations for users to apply with confidence. We have recently issued a report focuses on the risk management and metrics & targets pillars updated by the TCFD in recent years.
TCFD is Trending
As of October 2021 more than 2,600 organizations globally, with a total market capitalization of $25 trillion have expressed support for the TCFD. Further, 1,069 financial institutions, managing assets of $194 trillion, also support the TCFD. In recognition of the widespread adoption by companies of TCFD reporting, a number of countries, including the United Kingdom, New Zealand, and Switzerland, and the European Union that have proposed mandatory climate-risk disclosure requirements have indicated an intention to base disclosure requirements on the TCFD framework.
Furthermore, the TCFD's recommendations have been adopted by, and incorporated into, other voluntary climate disclosure frameworks such as the CDP, GRI, CDSB, and SASB frameworks. The TCFD also forms the framework for the Prototype that the IFRS Foundation provided to the ISSB as a potential starting point for its standard setting initiative.
The G7 Finance Ministers and Central Bank Governors have also endorsed the TCFD. As a result, although the reporting landscape is crowded with voluntary standards that seek different information in different formats, the TCFD framework has been widely endorsed by U.S. companies and regulators and standard-setters around the world. Thus, the Securities and Exchange Commission has recognised its position for sustainability disclosures to be in line with the TCFD Recommendations in its recent proposed rules for The Enhancement and Standardisation of Climate-Related Disclosures for Investors.
TCFD recommendation has been a key reference to many great sustainable reports and key governance to guide sustainable solutions. At GC Insights, we keep monitoring the best available practices for companies/ investors to conduct climate risk assessments and perform scenario analysis based on the TCFD Recommendations. We understand the growing trends of TCFD reporting is mainly pushed forward by mandatory compliance requirements and industry leaders targeting higher sustainable achievements. Some of the TCFD reporting landscapes around the world is as listed in Figure 1.
Figure 1: Government Initiatives promoting the TCFD Recommendations
The Latest Updated TCFD Framework
The Hong Kong Exchanges and Clearing Limited. has announced requirements for Mandatory TCFD-Aligned Climate-Related Disclosures by 2025. It has also formulated eight work process of recommendations in its published Guidance on Climate Disclosures for reporting on TCFD recommendations.
The eight work process including:
TCFD Recommendations- Scenario Analysis
“The Task Force considers scenario analysis as a useful tool for risk identification and assessment of climate-related risks and has been emphasising the importance of using scenario analysis to assess potential business, strategic, and financial implications of climate-related risks since publication of the TCFD recommendations 2017.”
Because it is difficult to project future emissions and other human factors that influence climate, scientists use a range of scenarios with various assumptions about future economic, social, technological, and environmental conditions. Such scenarios have been very useful in helping scientists to investigate possible ramifications of global climate change and to policymakers in assessing mitigation and adaptation options. However, they often have limitations for assessing the business implications of climate change at a local or industry sector level.
Lower transition risk is likely to result in higher levels of physical risk from climate change. Organisations, therefore, need to use scenarios that allow them to consider a range of potential transition and physical effects on their strategy and financial planning and how these effects compare to various publicly available scenarios and national goals.
“The goal of working with scenarios is not to predict the future but to better understand uncertainties and alternative futures, in order to consider how robust different decisions or options may be under a wide range of possible futures”. —Source: IPCC Scenario Process for AR5
Companies face significant challenges in the process of measuring, assessing, managing, and disclosing climate-related risks and opportunities using forward looking data and scenario analysis aligned with TCFD Recommendations. In the TCFD’s 2021 status report, results from scenario analysis showed a notable gap in reporting, only 13% (in 2020) of reporting companies (of 1651 total) included an evaluation of climate-related financial risks and opportunities using scenario analysis.
By exploring potential models and available tools, GC Insights offers research services for corporates and financial institutions to understand and analyse their climate risk exposures and assess potential climate-related ESG risk levels. We are constantly tracking the latest TCFD development and the wider ESG-related sustainability disclosure frameworks / standards and regulatory mandates.
For example, Entity level Article 9 of the EU Sustainable Finance Disclosure Regulation (SFDR) Draft RTS Requirements: References to international standards section
…(c) where a forward-looking climate scenario is used, an identification of that scenario, including the name and provider of the scenario and when it was designed; and (d) where a forward-looking climate scenario is not used, an explanation of why forward-looking climate scenarios are not considered to be relevant by the financial market participant.
The Enhancement and Standardization of Climate-Related Disclosures for Investors: https://www.federalregister.gov/documents/2022/04/11/2022-06342/the-enhancement-and-standardization-of-climate-related-disclosures-for-investors#footnote-104-p21344
Climate change and TCFD: https://www.hkex.com.hk/Listing/Sustainability/ESG-Academy/ESG-in-Practice/Climate-Change?sc_lang=en#popup4329014
2021 Status Report: Task Force on Climate-related Financial Disclosures: https://www.fsb.org/2021/10/2021-status-report-task-force-on-climate-related-financial-disclosures/
