The Task Force on Climate-related Financial Disclosure is a reporting framework targeting an audience of investors and the financial industry. TCFD guidelines attempt to offer more effective climate-related financial disclosure and risk management and a better understanding of carbon-related assets.
TCFD looks at how climate change affects on subscribers’ business rather than what impact they have on the environment. It aims to help organizations and financial systems prepare for macroeconomic shocks and unanticipated financial losses caused by extreme weather events and climate change. It also offers guidance on the risks posed by an abrupt adjustment to a low-carbon economy, such as rapid losses in the value of assets due to changing policy or consumer preferences.
A large number of organizations from both the financial and non-financial sectors are using the TCFD framework for disclosures and recommendations, but the reporting system appears to be particularly relevant for those with annual revenue above U.S. $1 billion, although many asset managers and owners looking to better understand risk and how this affects their investments also participate.
“Many companies have incorrectly viewed the implications of climate change to be relevant only in the long term and, therefore, not necessarily relevant to decisions made today. Those views, however, are changing as more information becomes available on the potential widespread financial impacts of climate change. […] Organizations that invest in activities that may not be viable in the longer term will likely be less resilient to the transition to a lower-carbon economy — and their investors will likely experience lower returns,” the TCFD cautions on its website.
Companies can be formal TCFD supporters as well as use it to disclose. The number of supporters has grown rapidly since the start of 2020 – about two-thirds of the 100 largest public companies in the world either support the TCFD or use it as a reporting framework.
In October 2020, the TCFD released its 2020 Status Report, which describes the progress companies are making in terms of their implementation of TCFD recommendations.
The TCFD says it is committed to market transparency and stability, to be achieved through effective disclosure. This, it says, allows companies to more effectively monitor and incorporate climate-related risks and opportunities into their management and strategic planning processes.
The disclosure and reporting process is structured around four interlinked areas that represent the core elements of how an organization operates:
- Risk Management
- Metrics and Targets
In April 2015, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board to establish a framework of recommendations for the financial sector, so it would be able to voluntarily report climate-related issues to investors, insurers, lenders and other stakeholders. As a result, the FSB launched the industry-led Task Force on Climate-related Financial Disclosures in December that year.
TCFD’s 32 international members, chaired by Michael Bloomberg, founder of Bloomberg L.P., include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies.
As support grows for TCFD, other frameworks are gradually aligning with its recommendations, such as the CDP and the UN Principles for Responsible Investment. The stress testing and regulatory guidance for the European Union’s Non-financial Reporting Directive 2014/95/EU was also based on TCFD recommendations.
Several national governments and public sector organizations formally support the TCFD. Its recommendations are also incorporated into the credit rating of Standard & Poor’s Global Rating. Over the past four years, the number of supporting CEOs has grown to 3,000 from 100.
Additional information about TCFD can be found here.