What Is TCFD Reporting and Why Is It Important?

The Task Force on Climate-related Financial Disclosures (TCFD) emerged as a framework to enhance the transparency and consistency of climate-related financial reporting. It originated from a recognition that climate change presents financial risks and opportunities not adequately captured in conventional financial disclosures. The TCFD’s objective was to develop recommendations for voluntary, consistent climate-related financial disclosures. This framework aims to provide decision-useful information to investors, lenders, and insurance underwriters. By promoting better information, TCFD enabled companies to integrate climate considerations into their risk management, strategic planning, and decision-making. Although the TCFD formally concluded its work in late 2023, its recommendations have been fully incorporated into the International Sustainability Standards Board (ISSB) standards, ensuring its continued relevance and impact.

Core Principles of TCFD

The TCFD recommendations are structured around four core thematic areas, often referred to as pillars, which represent fundamental elements of how organizations operate. These pillars provide a comprehensive framework for understanding and disclosing climate-related financial information.

Governance

Governance focuses on the organization’s oversight of climate-related risks and opportunities. This includes the board’s role in monitoring and guiding climate strategy, as well as management’s responsibilities in assessing and managing these issues. A clear governance structure ensures accountability and integration of climate considerations at the highest levels.

Strategy

The Strategy pillar addresses the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning. This involves evaluating how climate change could influence revenue, costs, assets, liabilities, and cash flows over various time horizons. Understanding these impacts helps develop resilient business models.

Risk Management

Risk Management describes the processes an organization uses to identify, assess, and manage climate-related risks. This includes integrating climate risk considerations into existing enterprise-wide risk management frameworks. It focuses on how climate risks are prioritized, monitored, and mitigated alongside other business risks.

Metrics and Targets

Metrics and Targets centers on the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This involves disclosing key performance indicators and goals related to climate performance. It provides quantitative data for consistent tracking and comparison of progress over time.

Key Disclosure Categories

Within each of the four core pillars, the TCFD outlines specific recommended disclosures, totaling eleven. These disclosures provide detailed guidance on the information companies should provide to stakeholders. Adhering to these categories helps ensure consistency and comparability across different entities and sectors.

Governance Disclosures

For Governance, companies describe the board’s oversight of climate-related risks and opportunities. This includes how the board monitors and evaluates climate issues and sets strategic direction. Organizations also describe management’s role in assessing and managing these risks and opportunities, focusing on their responsibilities and processes for integrating climate considerations into daily operations and decision-making.

Strategy Disclosures

For Strategy, three specific disclosures are recommended. Companies describe the climate-related risks and opportunities identified over the short, medium, and long term. This involves categorizing risks (e.g., physical risks from extreme weather, transition risks from policy changes) and identifying opportunities (e.g., new markets, technologies). Organizations describe the impact of these risks and opportunities on their businesses, strategy, and financial planning, including potential effects on operations, supply chains, and financial performance. The third disclosure describes the resilience of the organization’s strategy under different climate-related scenarios, such as a 2°C or lower scenario, to test business viability.

Risk Management Disclosures

The Risk Management pillar includes three disclosures. Companies describe their processes for identifying and assessing climate risks, detailing methodologies and tools used to evaluate potential impacts and likelihood. They also describe processes for managing climate risks, outlining actions to mitigate, transfer, accept, or control them. Finally, organizations describe how climate risk identification, assessment, and management processes are integrated into their overall risk management framework, demonstrating how climate considerations are embedded within existing risk policies and procedures.

Metrics and Targets Disclosures

For Metrics and Targets, three disclosures guide quantitative reporting. Organizations describe metrics used to assess climate risks and opportunities, such as those related to water, energy, or land use. Reporting Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions is a disclosure. Scope 1 covers direct emissions, Scope 2 covers indirect emissions from purchased energy, and Scope 3 includes other indirect emissions in the value chain. Companies describe targets used to manage climate risks and opportunities and their performance against these targets, including emissions reduction goals or renewable energy adoption rates.

Steps to Implement TCFD Reporting

Implementing TCFD reporting involves a structured approach to gather and present necessary information.

• Understand the scope and boundaries for reporting, determining which parts of the organization will be included. Defining these boundaries ensures a consistent and manageable reporting effort.
• Establish clear governance. This involves setting up internal structures, roles, and responsibilities for climate-related oversight.
• Identify relevant climate risks and opportunities. This involves pinpointing physical risks (e.g., extreme weather) and transition risks (e.g., policy changes), alongside potential opportunities.
• Collect and measure data, including GHG emissions and financial impacts, ensuring data quality.
• Conduct climate-related scenario analysis to test the resilience of the organization’s strategy under various climate futures.
• Integrate climate risks and opportunities into existing risk management and strategic planning processes, embedding climate considerations into established systems.

Presenting Your TCFD Disclosures

Once information is prepared and analyzed, the next stage involves presenting TCFD disclosures through appropriate channels. Organizations commonly publish TCFD-aligned information in annual financial filings, such as the 10-K report for publicly traded companies, sustainability reports, or on corporate websites. The TCFD encourages integrating climate-related disclosures into existing financial reporting, promoting a holistic view of financial and climate performance. This integration helps stakeholders understand the financial implications of climate change alongside traditional financial metrics. Disclosures are made annually, coinciding with regular financial reporting cycles. Some organizations seek third-party assurance or verification for their climate data and disclosures. This external review enhances the credibility and reliability of reported information.