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TCFD: Exploring the New Regulations for Reporting Climate-Related Data

TCFD reporting regulations

Published on Jun 07, 2022

The last decade saw the beginning of alignment between different approaches on values and purpose, along with a growing understanding of ESG, sustainability, and climate change journey.   

Concerns like climate change, biodiversity, freshwater access, air and water pollution, solid waste management, human rights, and democracy are garnering attention and compelling governments to shift to recommend the Task Force on Climate-related Financial Disclosures (TCFDs) guidance to embed the recommendations into mandatory legislation. This is compelling businesses to develop a strong business case for companies to report on material impacts in the supply chain and value chain level. 

The lack of understanding at a corporate level is being reflected at the investor level giving rise to confusion between ESG, sustainability, climate risk, social impact, performance measurement, and a plethora of different issues. Due to the lack of clarity about what ratings or data products intend to measure and a lack of transparency about the strategies used, organizations are facing difficulty approaching and tracking methodologies in their operations. 

The urgency to find transparent, robust, decision-useful data has only increased over the years. In 2021 global ESG assets were on track to exceed $53 trillion by 2025. The combination of green, social, sustainability, and sustainability-links bond issuance is likely to hit $1.35 trillion in 2022.  

Climate crisis

The Task Force on Climate-related Financial Disclosures (TCFD) reports are effective for businesses to improve their understanding of their long-term climate-related risks. Due to the growing pressure on companies from governments, consumers, and investors to respond to climate change, the TCFD has become even more crucial. The sustainability guidance and reporting frameworks play a critical role in promoting transparency between organizations and their investors and stakeholders. 

The TCFD - Task Force on Climate-related Financial Disclosures - is likely to become well known in the coming years. A voluntary set of recommendations are now advancing on the path of becoming a part of the regulatory framework in many jurisdictions of the European Union, Canada, Singapore, Japan, and South Africa. With the growing efforts to address global climate change, the pressure on businesses to act on the TCFD’s recommendations is only set to increase with time. 

Read more: Creating Value for Climate Change Crisis Through the Lens of Private Equity 

Decoding the TCFD Framework 

The TCFD - Task Force on Climate-related Financial Disclosures - was formulated by the FSB (Financial Stability Board) to bring to the spotlight the substantial risk climate change poses to the global financial sector, which has been estimated at USD$5 trillion in potential losses.  

TCFD acts as a guidance framework that helps enterprises disclose climate-related financial risks to investors, lenders, and insurers. TCFD has based its recommendations on governance, strategy, risk management, and metrics and targets. 

To achieve this objective, the ESG reporting framework developed by TCFD is based on a set of uniform disclosure recommendations. These recommendations act as a medium of providing transparency about an organization's climate-related risk exposures. Improving the quality and transparency of climate-related financial disclosures will permit economies to gain the required information better to assess their impact and effects on climate change.  

Climate effects framework

The TCFD’s disclosure recommendations span four areas:  

  • Governance 

  • Strategy 

  • Risk management 

  • Metrics and targets 

The TCFD’s recommendations are as follows: 

In governance, organizations must: 

  • represent the board’s oversight of climate-related risks and possibilities 

  • represent the role of the management in assessing and addressing climate-related risks and opportunities 

In strategy, organizations should: 

  • define the climate-related risks and opportunities that have been identified over the short, medium, and long term 

  • define the impact of climate-related risks and opportunities on their businesses, strategy, and financial planning 

  • define the stability of their strategy by considering different climate-related scenarios 

In risk management, organizations should: 

  • describe their processes to identify and assess climate-related risks 

  • describe their processes to manage climate-related risks 

  • describe how their processes to identify, assess, and manage climate-related risks are integrated into their overall risk management 

In metrics and targets, organizations should: 

  • disclose the metrics used to assess their climate-related risks and opportunities in line with their strategies along with the risk management process 

  • define Scope 1, Scope 2, and Scope 3 greenhouse gas emissions 

  • define the targets used to manage climate-related risks and opportunities, along with their performance against targets 

Corporate organizations

Read more: Climate Crisis - SEC Proposes New Climate Disclosure Requirements 

What does this Signify for Organizations?  

Every enterprise today needs to ensure that they are disclosing their environmental performance. Disclosure propels environmental action in multiple ways.  

  • It informs better business decision-making through the process of estimating data on environmental impacts, risks, and strategies.  

  • It offers better oversight of which areas require the most attention and helps identify effective actions.  

  • Disclosures are essential to track the advancement of environmental action on a market-wide scale and provide accountability.  

Through widespread disclosure, organizations can perceive what markets are doing to meet emissions targets in line with a 1.5°C future and where the potential barriers lie. The TCFD reports are critical for businesses to enhance their understanding of their long-term climate-related risks and opportunities.  

Many governments are shifting from recommending the TCFDs as guidance to legislating laws and policies to embedding the recommendations into mandatory regulation. Companies should start preparing to go further. They should work on building the TCFD recommendations and embody high-quality mandatory disclosure regulations. These mandatory disclosure regulations can include financial and risk-based data along with insights into its impact on people and the planet.  

Climate-related Financial Disclosures

Significance of TCFD  

The current generation of investors and financial leaders is well aware of the impacts of climate-related risk on financial economies. Ignoring this critical data is no longer an option. Companies that are incorporating the TCFD recommendations will sooner rather than later benefit from stability, resiliency, and profitability. Because the TCFD has support from the G20, the recommendations are held credible by countries and companies around the world and have great potential to affect global change.  

Integrating the recommendations of the TCFD is an iterative process. It can take many years for full implementation, along with learnings that will offer ways to adapt to and optimize implementation plans.  

Climate change is genuinely presenting a significant risk to the viability of business. This involves physical impacts and poses additional risks of transitioning to a lower-carbon economy. Consumers are now seeking lower-carbon products, shifting demand away from more traditional products and services. And investors are increasingly considering the TCFD recommendations, as evidenced. 

TCFD can also be employed as an opportunity to establish a competitive advantage by demonstrating how an organization can proactively pursue the opportunities of a transition to a low-carbon economy and capture market share through a first-mover advantage.  

Read more: Future of Energy: Is it Cleaner, Dirtier, or Both? 

How does the TCFD report fit in the future of ESG reporting? 

Demands for a global standard in corporate reporting are growing. With an eye to reducing this reporting burden on companies, the Corporate Reporting Dialogue was convened by the IIRC - International Integrated Reporting Council - to strengthen the cooperation, coordination, and alignment between key standard framework setters and developers. While the future of the proposed and strongly endorsed global reporting standard is currently unclear, TCFD is hopeful that it will continue to play a critical role in climate-related disclosures. 

TCFD infographic

A New Dawn for Corporate Reporting 

ESG has moved beyond a niche issue. The market saturation of individualized ESG reports from businesses is estimated to be $53 trillion. This management of ESG assets by 2025 indicates that the topic is not fading away. It is now time for businesses to establish baseline rules to bring accountability, objectivity, and standardization to their operations and to enhance the trust in ESG reporting. Climate disclosures should be their first step in gaining this trust.  

Employing a disciplined approach to reporting can benefit the organization and enable them to build a quality report. This practical and proven approach will help them in their specific climate change journey to not only identify and address the risks but also to discover opportunities that this unique transformation will bring. 

With a presence in New York, San Francisco, Austin, Seattle, Toronto, London, Zurich, Pune, Bengaluru, and Hyderabad, SG Analytics, a pioneer in Research and Analytics, offers tailor-made services to enterprises worldwide.    

SG Analytics, a leader in ESG services, offers bespoke sustainability consulting services and research support for informed decision-making. Contact us today if you are in search of an efficient ESG integration and management solution provider to boost your sustainable performance.