How did TCFD get its start?
In 2015, the G20 Finance Ministers and Central Bank Governors requested that the Financial Stability Board (FSB) create a task force to recommend climate related risks disclosures.
Why was this request so important?
The creation of TCFD by the FSB illustrated the direct connection of climate risks to global financial stability. The FSB itself was created in 2009 after the global financial crisis to promote international financial stability.
“The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system.”
Financial Stability Board
What does it do and how?
Its mandate explicitly states its purpose and how it works.
“The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions.”
Financial Stability Board mandate
The TCFD Recommended Disclosures are a set of eleven disclosures that focus on a company’s reporting of its financial impacts from climate risks and opportunities. Climate risks are classified as transition and physical risks. Transition risks can occur when societies and economies begin transitioning to a low carbon economy. If a company does not initiate lower carbon operations or products, it runs the risk that consumers may respond negatively by switching to other companies that have low carbon processes or products. The financial risks include lower revenues and decreased market share. Another transition risk is the imposition of a carbon tax that results in higher costs for carbon intensive operations. Physical risks are direct climate impacts that can be acute or chronic. Acute risks are associated with severe weather such as tornados or hurricanes or wildfire events. Chronic risks occur with rises in sea level or increases in severe weather patterns due to climate change.
The disclosure of climate related opportunities is also relevant for companies to signal their capability to address impending climate risks. Examples of opportunities include reducing operational costs with more efficient uses of resources or creating low carbon emitting products. By understanding the financial implications of climate change, investors and companies are better positioned to reduce their risks and direct their investments to sustainable opportunities and business models.
TCFD’s reporting framework has four core elements, which include the following:
The four elements get to the heart of how companies are managing their climate related risks and opportunities. TCFD disclosures encompass how a company connects climate risks and opportunities to the involvement of top management, the incorporation of its strategy, the description of risk management processes, and the disclosure of metrics and targets.
Who were the TCFD members?
Equally important to TCFD’s purpose was its membership composition. The members were industry experts from a variety of global organizations that included insurance companies, large banks, pension funds, large non-financial companies, asset managers, accounting and consulting firms, and credit rating agencies. Michael Bloomberg, founder of Bloomberg L.P. and U.N. Special Envoy on Climate Ambition and Solutions, chaired the group.
TCFD’s influence has been profound. The four elements are the foundation for several mandated and voluntary frameworks and standards. These include the European Sustainability Reporting Standards (ESRS), the U.S. Securities Exchange Commission’s (SEC) climate related disclosures, and the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards.
As of October 12, 2023, the TCFD was disbanded, but its work continues to be built upon. The FSB asked the ISSB to monitor the progress of companies’ climate-related disclosures and build on the work of the TCFD. In June The ISSB published its first standards, IFRS S1 and IFRS S2, which fully incorporate the recommendations of the TCFD.
Please Note: Many organizations in the sustainability reporting realm have switched to using only acronyms for their names, which can be overwhelming. Although many of these acronyms have become official names, I try to spell them out in my posts. A case in point is the IFRS Foundation. IFRS stands for International Financial Reporting Standards. The IFRS Foundation is now the umbrella organization that that oversees two standards boards. ISSB is one, and the other is the International Accounting Standards Board (IASB), which develops the IFRS Accounting Standards. The IFRS Foundation oversees the ISSB, IASB, SASB (Sustainability Accounting Standards Board) Industry Standards, and TCFD.
Is TCFD still relevant?
Companies just beginning their climate risks and opportunities reporting should consider using the TCFD Recommended Disclosures. It will provide an understanding of the financial implications of climate related risks and opportunities, along with practice reporting about them using a consistent set of disclosures. If a company is then required to report using ESRS or to the U.S. SEC’s climate disclosures, practice with TCFD will come in handy.
Here are some examples of companies reporting with TCFD.
- Ford’s Climate Change Report, 2023
- Morningstar 2023 TCFD Report
- 2023 Owens Corning Sustainability Report
In my next post, I will discuss the ISSB’s Sustainability Disclosure Standards, IFRS S1 and IFRS S2.