Understanding the Task Force on Climate-Related Financial Disclosures (TCFD) for capital stewards of large and small organisations
The Task Force on Climate-Related Financial Disclosures (TCFD) emerged as a key framework for organisations disclosing climate-related financial risks and opportunities. Established in 2015 by the Financial Stability Board (FSB), it sought to standardise such disclosures across industries. As of October 2023, the TCFD has officially disbanded, with the International Sustainability Standards Board (ISSB) integrating its key elements into new standards like IFRS S1 and S2 (which we will cover in a future article). These standards maintain core pillars such as governance, strategy, risk management and metrics & targets while enhancing international ESG reporting.
Over 4,000 organisations across 100+ jurisdictions have endorsed the TCFD, underlining its influence in the financial landscape. While the framework advanced climate-related financial disclosures, challenges persist.
Four pillars
The TCFD provides 11 recommendations covering governance, strategy, risk management, and metrics and targets – the four key pillars – to help companies provide consistent and comprehensive information on their climate-related risks and opportunities. It also assists financial institutions in pricing climate-related risks and opportunities when making decisions about investments, lending, and insurance.
1. Governance
This pillar emphasises how an organisation oversees climate-related risks and opportunities. Companies are required to disclose:
- The board’s oversight of climate-related issues
- Management’s role in assessing and managing these risks
This ensures that climate considerations are integrated into high-level decision-making.
2. Strategy
The strategy pillar addresses how climate-related risks and opportunities impact an organisation’s business model and financial planning. Companies should:
- Identify climate-related risks and opportunities over short, medium and long-term horizons – many businesses use the business planning cycle, 2050 and 2100, respectively.
- Describe how these factors influence their business and finances
- Assess the resilience of their strategies under various climate scenarios, including those aligned with limiting global warming to 2°C or less
This forward-looking approach helps organisations prepare for different climate futures and adapt accordingly.
3. Risk management
The risk management pillar focuses on the processes used to identify, assess and manage climate-related risks. Organisations must disclose:
- Their processes for identifying and assessing these risks
- Their strategies for managing them
- How these processes are integrated into their overall risk management framework
A systematic approach ensures climate risks are embedded within broader risk management strategies.
4. Metrics & targets
This pillar requires organisations to disclose:
- The metrics used to assess climate-related risks and opportunities
- Scope 1, Scope 2, and, if relevant, Scope 3 greenhouse gas emissions (GHGs)
- Targets set to manage these risks and performance against them
A quantitative approach allows for comparability and tracking progress over time.
Benefits
The TCFD provides organisations with several benefits:
Competitive advantage – organisations that proactively adopt TCFD gain a competitive edge, as they are perceived as more resilient and forward-thinking. This attracts environmentally conscious investors, talent and customers.
Enhanced risk management and strategy – implementing TCFD strengthens risk management practices by integrating climate considerations into overall business strategies.
Improved investor relations and access to capital – financial institutions incorporate climate risk assessments into practices. Businesses adhering to TCFD may find it easier to secure capital, loans and insurance products.
Regulatory compliance – as TCFD transitions from voluntary guidelines to mandatory regulations in various jurisdictions, businesses that have already adopted these practices will be better positioned to meet new compliance requirements.
Challenges
Despite its benefits, challenges remain:
Implementation complexity – the complexity and the principles-based nature of TCFD allow for varying interpretations often leading to inconsistent application, making it difficult for investors to evaluate disclosures. In addition, there is a notable gap in investors’ understanding of how to interpret TCFD. Without clear comprehension, the purpose of enhancing transparency is undermined.
Regulatory pressure – as more jurisdictions begin mandating TCFD-aligned disclosures, organisations may feel pressured to comply without fully integrating the principles into operations, leading to superficial compliance rather than meaningful engagement.
Technical barriers – quantifying climate-related risks remains difficult due to a lack of standardised tools. Many firms struggle with scenario analysis (more on this below), a critical component of TCFD.
Focus on climate at the expense of broader ESG issues – critics argue that the narrow focus on climate may detract from other key ESG issues such as biodiversity and water.
Scenario analysis
The TCFD recommends conducting scenario analysis covering physical and transition risks using multiple scenarios to capture climate uncertainty. These are some of the activities the process involves:
- Identifying the scope of the analysis
- Developing scenarios using Representative Concentration Pathways (RCP) or similar models
- Defining focus and time horizons (short, medium and long-term)
- Identifying drivers such as policy changes, technology, etc
- Creating comprehensive risk lists for each scenario
- Analysing the impact on revenue, costs, assets and liabilities
- Assessing probability
- Prioritising key risks and opportunities
- Formulating risk mitigation and opportunity capitalisation actions
- Disclosing key assumptions and results
Organisations typically use at least two scenarios, including a 2°C or lower one and another relevant to them. Many use RCP 2.6, 4.5 and 8.5 by the Intergovernmental Panel on Climate Change (IPCC). Others use scenarios developed by the International Energy Agency (IEA).
Scenario analysis fosters cross-departmental collaboration and helps future-proof strategies. It is a complex process requiring input from management, risk and finance. While challenging, it enables organisations to better understand and manage climate-related risks and opportunities, informing strategic decision-making and enhancing resilience in an uncertain climate landscape.
Boards
Boards of directors play a crucial role in embedding ESG considerations across a business. Their responsibilities extend beyond regulatory compliance to embracing sustainability as a strategic priority. Boards must:
- Set the tone from the top, embedding ESG into corporate culture
- Oversee risk management, ensuring robust systems for data collection, monitoring, and reporting
- Drive sustainability strategy, aligning with broader corporate objectives
- Ensure accountability, maintaining stakeholder trust through ethical governance
- Ensure compliance, addressing disclosure requirements, supply chain scrutiny, anti-greenwashing measures and ESG rating regulation
- Have ESG expertise, challenging management on sustainability decisions
A proactive, informed board is essential for ensuring sustainability becomes a core aspect of business strategy. TCFD should be part of the ESG expertise of the board.
(See my article, The essential role of boards in sustainability, for more insights on this topic.)
Investors
Bearing in mind the challenges above, investors should actively demand companies adopt TCFD, or a standard that includes its core pillars, for several reasons:
- Risk assessment – recommended disclosures help investors assess climate-related risks as well as opportunities
- Comparative analysis – standardisation (albeit imperfect) facilitates comparison between companies
- Long-term value protection – understanding climate risk improves investment decision-making
- Engagement opportunities – better transparency fosters dialogue between investors and companies
Ultimately, by advocating for robust climate-related disclosures, investors can make better decisions and contribute to a more sustainable and resilient financial system.
Governments
Governments play a crucial role in driving TCFD adoption across economies. Many of them, including the UK, have mandated TCFD-aligned disclosures for large companies and financial institutions. The UK government is leading by example by implementing TCFD recommendations within their departments and agencies. The UK government has committed central government departments to a phased implementation of TCFD recommendations by 2025-2026.
In addition, governments collaborate through international forums like the G20 and UN to promote global adoption of TCFD recommendations.
Sector case: financial services
Financial firms play a critical role in climate change mitigation by directing funds to sustainable projects, encouraging greener corporate behaviour, mobilising investments and more. CDP, a non-profit organisation, found finance sector’s funded emissions over 700 times greater than its own. TCFD significantly influences financial firms’ approach to climate risk:
- Scenario analysis to assess the resilience of their business models to climate-related financial risks over various time horizons
- Comprehensive log of material climate-related financial risks to manage over various time horizons
- Board-level oversight of climate-related risks and opportunities management
- Financed emissions by sector tracking
- Proactive client engagement to manage sector-specific climate risks, particularly in high-emission industries
By adopting TCFD, financial firms improve their climate risk management, enhance their strategic planning and provide more comprehensive information to stakeholders about their climate-related financial risks and opportunities.
Considerations for smaller businesses
While larger corporations have made strides in adopting TCFD, smaller businesses often face unique challenges when it comes to implementing these guidelines, such as fewer people and less money for comprehensive reporting and lack of specialised knowledge for effective implementation.
Despite challenges, smaller businesses can align with sustainability expectations by leveraging resources like industry partnerships or consulting services with a gradual approach.
SMBs, whilst not directly subject to climate or ESG regulations, may be indirectly affected by the Scope 3 requirements of larger companies in their supply chain.
Final thoughts
The TCFD framework has driven climate-related financial disclosures forward, but challenges persist. As standards evolve, boards and investors must prioritise climate risk management. All organisations, governments and banks in particular, have a role in shaping sustainable economies.
Smaller businesses must recognise the importance of engaging with frameworks like the TCFD despite facing unique challenges. Doing so will position them advantageously within an evolving market landscape increasingly influenced by sustainability considerations.
To address some of the challenges above, companies can use ESG technology platforms, which leverage AI and blockchain. However, any sustainability reporting solution should be technology-agnostic – tailored to the company’s specific situation.
Find how we can help you implement TCFD and other sustainability reporting:
