TCFD standards: all you need to know

Have you ever heard of TCFD recommendations? These so-called standards are now used by investors to assess your company's value. Explanations.

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Have you ever heard of TCFD recommendations? They are also known as "TCFD standards". Either way, they are now essential. Why? Because these so-called standards provide your company’s stakeholders (investors, customers, suppliers, etc.) with information about the strength of your company. More: its resilience to climate change' risks. Better: its potential to seize opportunities related to the emergence of a sustainable economy. One last reason to read our article? 😋 TCFD-aligned reporting may become mandatory in the next few years. It is already for some companies in the UK.

❓ TCFD: what are we talking about?

Task Force on Climate-Related Financial Disclosures (TCFD): definition 📖

The Task Force on Climate-Related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB), in 2015.

The objective was to develop consistent climate-related financial risk disclosures, that would be used by companies, banks, and investors to provide information to stakeholders.

In other words, the Financial Stability Board wanted to support the publication of reliable information on financial institutions’ exposure to climate-related risks and opportunities, in order to ensure the stability of the financial system, by a better understanding of climate risks.

In the long term, the idea was to encourage the ecological transition's financing and the development of a sustainable and low carbon economy.

Who is concerned? 🙋‍♀️

The TCFD standards have already been adopted by over 1,600 companies and organizations, located in almost 80 countries. To figure out, they nearly represent $16 trillion in market capitalization.

Five member countries of the G7 (United-States, France, Germany, United-Kingdom and Japan) agreed to make TCFD-aligned reporting mandatory. More specifically, UK's premium listed companies are required to follow TCFD recommendations by April 2022. In the United-States, the SEC’s 2022 proposal around the standardization of climate-related disclosures is based off TCFD standards.

One last thing? The United Nations’ Principles for Responsible Investment (also called PRI), which is the world’s largest ESG guidance framework, has approved TCFD-aligned reporting since 2020.

TCFD and SASB: what is the difference between them? 🤔

SASB quantifies and reports the outward ESG impacts and risks of a company, while TCFD focuses on how climate change can impact the company. SASB evaluates the organization's sustainability performance, whereas TCFD analyzes the organization's governance strategy toward sustainability and how this one manages climate related risks and opportunities.

However, SASB is also an ESG guidance framework that is used by financial stakeholders (investors, insurers, and debt holders). Indeed, both TCFD and SASB are dedicated to financial materiality.  Concretely, they are complementary.

What were the "TCFD Pilot Projects"? 🚀

After the publication of the final TCFD recommendations in June 2017, the UNEP FI (United Nations Environment Programme Finance Initiative) launched the ‘TCFD Pilot Projects’ for banks, investors, and insurers.

Concretely, these pilots studied physical, transition and litigation risks, as well as practical approaches to evaluate these risks.

Almost 100 financial institutions - from all around the world - participated and were supported by a few technical partners (climate modelers, climate risk experts, etc.).

As a result, the pilot programmes created many tools, frameworks, and guides to empower the financial industry to better manage and disclose their climate risks.

👍 What are the benefits of TCFD standards?

Today, it has become clear that a company cannot reasonably sustain its model over the long term, without considering potential developments and risks related to climate change.

As global economy, the world of finance is concerned. In fact, many financial leaders have already understood that climate-related risk has material impact on financial markets. In this context, market participants can no longer ignore such information. More: they want to get such information.

For this reason, organizations which already follow TCFD recommendations are associated with the ideas of responsibility, stability, resiliency and profitability. 😍

One more thing ? As the TCFD standards got the support from the G20, its recommendations are known and recognized by countries and companies from all around the world. They provide companies and other organizations a guarantee of their strategies's resilience under different climate-related scenarios

⚙ How do investors use information from TCFD disclosures?

Financial organizations use TCFD reports to identify the climate related financial risks faced by companies. Then, they integrate these informations to their existing risk management and mitigation strategy and processes.

The insights of TCFD reports are also used for investors' engagements, as they allow them to focus on projects that minimize climate risks and maximize opportunities. As an example, the institutions committed to align with the Paris Agreement (2015) or other net-zero emissions goals are looking for the TCFD's data. The idea? To get information about their investees' GHG emissions and climate targets, to draw their decarbonization trajectories.

Be careful: TCFD disclosure can also influence capital flows. As TCFD reports give a deeper understanding of companies' climate risks, those identified as highly exposed may face elevated funding costs - divestment, in the worst case. 😨

📑 What are the TCFD recommendations?

TCFD's four recommendations are tied to: governance, strategy, risk management, and metrics and targets.

Either way, they share the following key features:

  • they are adoptable by all organizations;
  • they are included in financial filings;
  • they are designed to solicit decision-useful, forward-looking information on financial impacts;
  • they are focused on risks and opportunities related to low carbon transition.

Governance 👑

Governance's part deals with the disclosures of the organization's governance around climate-related risks and opportunities.

For governance disclose, the TCFD recommendations advocate to describe management's role in assessing and managing relevant climate related risks.

Strategy 🧩

Strategy disclose is related to actual and potential impacts of climate-related risks and opportunities on the organization's strategy and functioning.

Three types of disclosure are recommanded:

  • the climate risks and opportunities identified over the short, medium and long term;
  • the impact of these climate related risks on organization's business, strategy and financial planning;
  • the resilience of the strategy chosen, compared to different scenarios (including a 2°C scenario or a lower scenario).

Risk Management 🛡

Here, the idea is to explain how the organization identifies, assesses and manages climate-related risks.

Like "Strategy" part, there are three recommended disclosures

  • the decription of the processes to identify and assess climate-related risks;
  • the description of the processes to manage these risks;
  • the description of the way the so-called risks are integrated into the overall risk management set-up.

Metrics and Targets 🎯

Finally, metrics and targets' part reports on the metrics and targets that are used to assess and manage relevant climate-related risks and opportunities.

The metrics and targets disclose can include figures about Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions.

🧐 How does the Task Force on Climate-Related Financial Disclosures define climate risks and opportunities?

One key objective of the TCFD is to underline how the impacts of climate change can be translated into financial risks and opportunities.

That's why the task force produced such a consistent taxonomy of climate risks and opportunities. The idea is to ensure a mutual understanding between reporting companies and investors. Moreover, it allows investors to compare climate risks and opportunities across organizations.

Climate related risks 🔥

Climate risks are divided in two categories:

  • transition risks, which are related to the actions taken in favor of a low carbon economy (policy, legal, technology and market changes, for example);
  • physical risks, which are caused by the climate change (including climate issues like severe storms, cyclones and floods, but also rising sea levels and higher seasonal temperatures).

Organizations following TCFD recommendations are required to refer to these categories for their climate related financial disclosures (both strategy and risks' parts).

Climate opportunities ☀

Climate opportunities refer to activities that may help societies to mitigate and/or to adapt to global warming. They also produce financial benefits for the companies that bet on them.

For sure, each organization will have its own opportunities, determined by its own market and sector.

However, to provide some framework, the TCFD identified as key opportunies:

  • the activities dedicated to resource efficiency;
  • the transition to low-emission energy;
  • the production and spread of climate-friendly products and services.

Potential financial impacts are provided to help reporting companies to figure out how their incomes, cash flows, and balance sheets could be impacted by climate change.

However, it is important to underline that climate related risks and opportunities are still hard to clearly define. Indeed, it is impossible to assess without any doubt all the consequences - and the magnitude - of global warming.

In this context, even sustainability strategy, financial impact and scenario analysis remain subjects to some adjustments.

For this reason, the task force higly recommends reporting companies to get informed on historical and forward-looking scenario analysis.

✅ What is an effective TCFD report?

First, climate-related financial information should be provided through organizations' mainstream financial filings, where they are integrated with other financial and accounting data.

The task force also recommends to report to beneficiaries and clients. In addition, climate related financial disclosure can be publicly shared on the organization's website.

As a good practice, the TCFD advises to apply seven reporting principles outlined in its implementation guide. The idea is to make sure to produce a high quality and useful climate related financial disclosure. 😉

To be clear, climate related financial disclosures should:

  • detail relevant information;
  • be complete, specific and clear ;
  • be consistent;
  • be comparable within a sector or an industry ;
  • be reliable and objective;
  • be delivered on a defined time basis.

🍀 What about Greenly?

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