The TCFD Recommendations: making the case for climate-related financial disclosures

Climate change is recognised as a significant threat to the stability of the global economic, social and geopolitical system. The TCFD recommendations represent a concerted commitment amongst experts to better account for the risks and opportunities that organisations now face and to build a more sustainable global financial system.

The need for improvements to disclosures is becoming ever more apparent with 106 credit ratings so far revised based on environmental and climate-related factors. In addition to this, investors have now called on the world’s largest banks to implement the TCFD recommendations, making it harder for organisations not to take note.

What is the TCFD?

Recognising the need to better understand the climate-related risks and opportunities presented to businesses, at the request of G20 leaders in 2015 the Financial Stability Board (FSB) established the industry-led Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg. The Task Force’s mission is to encourage consistent, reliable and clear disclosure regarding climate-related financial risk. In June 2017, the recommendations for disclosure were published in the TCFD final report.

Why is it important?

“Increasing transparency makes markets more efficient, and economies more stable and resilient” Michael R. Bloomberg, Chair, TCFD.

Complete and consistent disclosure is required if insurance underwriters, investors and lenders are to make informed decisions on how best to distribute their capital and take into account the risk of their investments. Organisations will also feel the benefits. Identifying and managing the potential implications of climate change to a company’s business model will futureproof businesses and enable an effective transition to a low-carbon economy.

Additionally, the TCFD seeks to reduce the reporting burden for organisations. Multiple climate-related disclosure standards are currently in circulation. However, these lack guidance and contain significant inconsistencies across frameworks. The TCFD recommendations seek to complement these standards to create one, clear consistent framework specifically for climate-related financial disclosures for companies. Indeed, CDP have aligned all of its 2018 questionnaires with the TCFD recommendations.

Who do the recommendations apply to?

The Task Force has developed four widely adoptable recommendations, applicable across jurisdictions to both financial and non-financial sector organisations. Whilst the guidelines for disclosure are voluntary, the backing of the FSB mean the recommendations are likely to set the standard for global best practice. It is therefore in the interest of all organisations to consider how they can be implemented.

Importantly, the recommendations reach out to financial-sector organisations, large asset owners and large asset managers whose position at the top of the investment chain gives them the power to influence organisations to supply better climate-related financial disclosures.

The recommendations

The TCFD recommendations set out to help organisations identify the appropriate information required for investors to make well-informed decisions. They are structured around four areas related to how an organisation operates:

• Governance: Who is responsible for assessing and managing climate-related risks and opportunities?
• Strategy: How does the organisation measure the impact of climate-related risks and opportunities on their strategy and financial planning?
• Risks management: How does the organisation identify and manage climate-related risks?
• Metrics and targets: What metrics and targets does the organisation use to manage the relevant climate-related risks and opportunities?

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What should my organisation do next?

Whilst the Task Force does not provide an exact timeframe for implementing the recommendations, they do urge organisations to take action as soon as possible. A group of 16 banks are in fact already piloting the recommendations. To find out more on what the TCFD recommendations are, why they are important and beneficial and how they can be implemented, read our eBook.