Why TCFD Reporting Matters: A Guide
Following the Paris Agreement in 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD). The remit of the taskforce was to provide guidance allowing corporate stakeholders to disclose their climate-related risks and opportunities. These climate risks encompass physical risks, such as extreme weather, and transitional risks which refer to the potential financial and legal liabilities of adopting environmental policies.
Since its inception, the task force has introduced new recommendations to further its reach and original remit to allow for consistent and transparent disclosures. As of 2022, numerous nations actively encourage TCFD reporting and business leaders increasingly recognise its importance and overall utility.
This guide on TCFD reporting includes:
- The benefits of TCFD for businesses
- An explanation of the key elements of the TCFD framework
- A breakdown of the steps involved in TCFD reporting
- Examples of success stories of TCFD-aligned companies
Benefits of TCFD reporting for businesses
Companies may report to the TCFD in order to meet the requirements of new legislation. However, beyond compliance, there are several additional benefits to disclosing TCFD recommendations. These benefits are not exclusively related to the environment and carbon reduction, TCFD reporting can also help stakeholders make better financial decisions and elicit more investment.
Improved risk management
Climate change presents a new set of risks for all corporate and public entities. Physical risks resulting from rising greenhouse gas (GHG) emissions have meant that many sectors have already experienced significant impacts from climate-related weather events.
In addition to the physical risks, stakeholders have to be aware of the accompanying inherent transitional risks. To achieve a marked reduction in GHG emissions, businesses will have to adapt to a series of changes including the introduction of environmental legislation and rapid innovation of green technologies.
Access to capital and investment opportunities
Investors are concerned about the vulnerability of the global economy to escalating climate change. Therefore, companies willing to identify and manage their climate-related risk can gain the confidence of investors. TCFD-aligned companies can additionally attract interest from the maturing green finance market.
Enhanced decision-making processes
The TCFD recommendations can positively influence decision-making. By carefully examining a company’s activities using the TCFD framework, stakeholders can discover potential opportunities for innovation and growth.
Furthermore, disclosing TCFD information can support decision makers in developing new solutions to replace old and outdated processes. For example, implementing carbon reduction strategies ensures resource and energy efficiency in operations. Additionally, framing resource efficiency as a means to reduce emissions can motivate employees, particularly younger team members.
The TCFD reporting framework explained
The TCFD framework contains four key pillars relating to the management structure and activities of a reporting company. The four pillars, each including a set of recommendations, are defined under the following titles – Governance, Strategy, Risk Management, and Metrics & Targets.
The first set of recommendations focus on governance. Through these recommendations the reporting company can assess the level of readiness and awareness of climate-related risks amongst the management and board members.
The two recommended governance disclosures:
- Describe how the board oversees climate-related risks and opportunities.
- Describe management’s role in evaluating and managing climate-related risks and opportunities.
The next stage of the TCFD framework addresses the internal approach to managing both the current and prospective climate-related risks that the reporting company encounters.
The three recommended strategy disclosures:
- Describe the organisation’s climate-related risks over the short, medium, and long term.
- Describe the impact of climate-related risks and opportunities on the organisation’s strategy, businesses, and financial planning.
- Describe the resilience of the organisation’s strategy, while also taking climate-related scenarios into account (including a 2C or lower scenario).
The third level of the TCFD framework seeks to establish the ways in which the reporting company manages or discharges their climate-related risks. For instance, an agricultural business will likely have created a contingency plan for future warm weather and heat waves. This may include practical steps such as farm workers harvesting crops at different times to take advantage of cooler temperatures.
The three recommended risk management disclosures:
- Describe the organisation’s processes for finding and evaluating climate-related risks.
- Describe the organisation’s processes for managing climate-related risks.
- Describe how they’ve integrated all of the above processes into the organisation’s overall risk management plan.
Metrics & Targets
The final component of the TCFD framework asks reporting companies to disclose all of the metrics and targets they employ to identify and track their climate-related risks. Key metrics include: energy consumption, land and water use and overall waste output.
The three recommended metrics & targets disclosures:
- Disclose the metrics used to evaluate climate-related risks and opportunities in line with its strategy and risk management process.
- Disclose scope 1, scope 2 and, if appropriate, scope 3 GHG emissions and related risks.
- Describe the targets used to manage climate-related risks and opportunities and performance against metrics.
When disclosing climate-related targets, which is crucial for companies aiming to make progress on sustainability, it is advisable to establish a base year from which all future performance will be measured. Additionally, stakeholders should have clarity regarding the timeline for specific targets. Some targets may only apply to the company’s medium and long-term future.
Steps to effectively implementing TCFD reporting in a business setting
The TCFD guidelines provide a three-step approach for companies to identify climate-related risks and opportunities.
1. The first step involves performing a scenario analysis to identify all possible impacts of different climate conditions. For example, the prevalence of major wildfires can disrupt supply chains, posing a clear risk to businesses.
Different industry sectors and geographic settings have varying physical climate risks. Knowing which risks to focus on requires understanding your business, mapping the global footprint of its operations, and assessing different future climate scenarios.
Ecometricas TCFD risk assessor comes pre-loaded with multiple future climate scenarios covering a wide range of temperature outcomes, including Paris aligned scenarios. By mapping your business direct operations, and its suppliers, you will quickly be able to understand the headline physical climate risks for each location, both direct and indirect. In particular, our tool focuses on physical risk metrics for heat extremes including heatwaves, precipitation extremes / flooding, drought conditions and sea level rise, with additional new indicators in progress.
2. The second step focuses on assessing the financial implications of climate-related risks and opportunities. Through scenario analysis, companies evaluate how both physical and transitional risks can affect income, assets, and capital allocation. For example, a company’s supply chain and therefore revenue may be impacted by extreme heat waves.
Scenario analysis is an important component of TCFD reporting but it can also be a very complex part of the process. To help simplify things, we distill data from numerous authoritative sources for Paris aligned scenarios and climate projections. With everything together in one place, we can help you understand potential impacts across your global operations and how these impacts are expected to change in future decades and with different climate scenarios.
We only make use of well-established scenario data, such as those based on the SSPs (Shared SocioEconomics Pathways) so you can be sure that your results are reliable and TCFD compliant. Ecometrica provides map layers for each of the physical indicators for each scenario: focussing on SSP1-1.9 (equivalent to Paris-Aligned 1.5 degree warming), SSP2-4.5 (middle path, current trajectory) and SSP5-8.5 (one of worst case scenarios). For each scenario it creates outputs for 2030, 2040, 2050 and 2090.
3. The third step is for companies to calculate the true financial impact, as accurately as possible, of climate events. For instance, if rising sea levels make coastal properties uninsurable, companies can measure the decrease in the value of those assets.
Establish governance and oversight
To establish governance, the reporting company has to give an account of the function of the board in relation to climate issues. All board members and management should describe in detail their discussions and activities, if any, which concern the management of climate-related risk and opportunity. Relevant disclosures include: the nature and frequency of communication at board level about climate issues, whether climate issues feature in discussions about strategy and the role of the board in setting company-wide goals for mitigating climate risks.
Develop a climate-related strategy
Once a reporting company has identified their climate-related risks and opportunities, they can begin to explore the impact of these climate issues on strategy and financial planning. Stakeholders will leverage the results of scenario analyses to determine the timing and material impact of climate-related issues on different aspects of the business including on product, acquisitions, and operations.
If a company determines that they need to change course, especially in the medium to long term, they should outline the specific actions they intend to take. For example, they may announce plans to disclose their greenhouse gas emissions, as well as establish climate-related incentives for employees and the board.
Integrate climate-related risks into existing risk management processes
More stakeholders acknowledge that climate-related risks should be treated similarly to conventional risks such as operational or market risks. Therefore, it is vital that companies integrate climate-related risks into existing risk management strategies.
TCFD reporting aids this necessary integration by helping companies establish a systematic approach to manage them. By following TCFD guidelines, companies can identify, quantify and monitor their climate risks in a structured and coherent manner.
Successful TCFD reporting example
Page Group and Ecometrica
In 2021, Ecometrica’s client, PageGroup, approached Ecometrica to analyse their business against climate-related scenarios in line with the Task Force on Climate-related Financial Disclosures (TCFD). PageGroup is one of the worlds best known and most respected specialist recruitment consultancies, employing 7,000 people across 37 countries globally.
PageGroup was looking for a climate risk resilience assessment solution for 170 office sites
which are spread across the world. The organisation was looking to better understand its
exposure to physical risk related to climate change, initially for reporting purposes and to
help make decisions around improving climate resilience. These risks are to be reported in line with the recommendations of the TCFD and include a review of risk at different climate scenarios.
Ecometrica proposed using its climate change physical risk product which aims to provide
TCFD-compliant results. In using Ecometrica’s award-winning TCFD Risk Assessor, PageGroup is now able to predict heat waves, precipitation extremes / flooding, drought conditions and sea level rises against climate-related scenarios for each of their offices.