What are Climate-related Financial Disclosures?

What is Climate-related Financial Disclosure?

The objective of climate-related financial disclosure is to inform investors, lenders, insurance underwriters and other stakeholders of how climate-related issues create or erode enterprise value.

There are several sustainability reporting frameworks, which encompass many subjects including climate. But the one that policy makers seem to be coalescing around is the Task Force on Climate-related Financial Disclosures (TCFD) framework, a set of recommendations first published in 2017.

What is the TCFD framework?

The TCFD was created by the Financial Stability Board (FSB) in 2015. It was in response to a request from G20 Finance Ministers and Central Bank Governors to review how the financial sector might be impacted by climate change, and how it can build resilience against climate-related risk.

The Task Force was set up to develop recommendations for effective climate-related disclosures that would enable climate intelligent investment, credit, and insurance decisions.

The Task Force divides climate-related risks into two major categories:

(1) risks related to the physical impacts of climate change

(2) risks related to the transition to a lower-carbon economy

Learn more about physical and transition risks.

As of October 6, 2021, the TCFD had more than 2,600 supporters globally, across 89 countries and 1,069 financial institutions. These supporters are responsible for assets valued at a total of $194 trillion across nearly all sectors of the economy.

Who needs to disclose?

The TCFD encourages all organizations to implement their reporting recommendations, but in particular it recommends organizations with public debt or equity, asset owners and asset managers to implement recommendations.

Climate reporting is in the early stages of development and implementation. Currently, climate-related risk frameworks mostly involve voluntary reporting, but this is changing fast.

Why should your company disclose?

Disclosing is a great way to help identify climate risks and opportunities. Particularly for companies who have never looked at their climate risks before.

There are further benefits to disclosing your climate-related risks before governments start to enforce the practice. These include:

getting ahead of regulatory and policy changes
support global efforts on climate action
reputation benefits in front of consumers and the broader society
gaining a competitive advantage

What needs to be disclosed?

The TCFD framework has four interlocking pillars:

- Governance
  - - Describe the board’s oversight of climate-related risks and opportunities.
    - Describe management’s role in assessing and managing climate-related risks and opportunities.

- Strategy

- - - Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
    - Describe the impact of climate-related risks and opportunities on the organization’s business, strategy, and financial planning.
    - Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

- Risk management

- - - Describe the organization’s processes for identifying and assessing climate-related risks.
    - Describe the organization’s processes for managing climate-related risks.
    - Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.

- Metrics and targets

- - Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.
  - Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
  - Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.

Further information on the Recommendations and Supporting Recommended Disclosures can be found on page 15 of the 2021 TCFD Implementing Guidance report.