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TCFD and what you need to know

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August 18, 2022
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What is TCFD*, why is it important, and what does it mean for your entity?

So, what is the TCFD?

The Task Force on Climate-related Financial Disclosures, or TCFD, was established in 2015 by the Financial Stability Board and consists of 31 members from across the G20, chaired by Michael Bloomberg. It aims to ensure that “financial risks and opportunities related to climate change will become a natural part of companies’ risk management and strategic planning processes”[1]. The Task Force was developed in response to the growing understanding that climate change presents material risks to organisations and that there are opportunities associated with the mitigation and adaptation activities that are required to address the impact of climate change.

In 2017, the TCFD released a framework which can be used by organisations to disclose climate-related risks and opportunities as part of their reporting suite. The TCFD framework covers four thematic areas and includes 11 recommended disclosures for inclusion in an organisation’s financial filings to provide insight into how that organisation considers and assesses climate-related risks and opportunities[2].

*Concurrent with the release of its 2023 status report on October 12, 2023, the TCFD has fulfilled its remit and disbanded. The FSB has asked the IFRS Foundation to take over the monitoring of the progress of companies’ climate-related disclosures.

[1] Task Force on Climate-related Financial Disclosures, “Our Goal”, 2022, https://www.fsb-tcfd.org/about/#our-goal[2] Task Force on Climate-related Financial Disclosures, “Recommendations of the Task Force on Climate-related Financial Disclosures“, 2017, p.13, https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf

Why does society need the TCFD framework and how is it relevant to my company?

Climate change, driven by an increase in greenhouse gas emissions, is generating disruptive physical, economic, and social effects. In 2015 the Paris Agreement set out the goal of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”[1]. Drastic changes are required from all facets of society, including the private sector and financial institutions, in order to deliver this goal and minimise further adverse effects from climate change.

The TCFD framework provides a standardised approach to disclosing the impacts of climate change on an entity’s operations, strategies, and financial performance. All organisations are likely to be impacted by climate change, even though any risks or opportunities may not be immediate or direct. For example, there may be adverse effects on business operations due to supply chain reliance on raw materials sourced from a location impacted by bushfires, or transport disruptions due to more frequent extreme weather events. Organisations reporting against the TCFD framework may also identify potential business opportunities such as an increase in resource efficiency or gaining a competitive advantage by offering low-emission products. The process of preparing the climate-related disclosures recommended by the TCFD provides an organisation with a deeper understanding of any risks and opportunities due to climate change and supports decision making to address these, ensuring resilience into the short, medium, and long-term future.

[1] United Nations, “Paris Agreement”, 2015, p.3, https://unfccc.int/sites/default/files/english_paris_agreement.pdf

What are the four pillars of the TCFD framework?

The TCFD framework includes four thematic areas or pillars:

  • Governance: Disclose the organisation’s governance around climate-related risks and opportunities.
  • Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
  • Risk management: Disclose how the organisation identifies, assesses, and manages climate-related risks and opportunities.
  • Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

What disclosures are expected under the TCFD framework?

The TCFD framework includes 11 recommended disclosures for all industry sectors, and guidance providing context and implementation suggestions for these disclosures[1]. It also includes supplemental guidance for the financial sector and those non-financial sectors most likely to be impacted by climate change. The recommended disclosures for all sectors are:‍

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

Risk Management

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

Metrics and Targets

  • Disclose the metrics used by the organisation 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 organisation to manage climate-related risks and opportunities and performance against targets.

[1] Task Force on Climate-related Financial Disclosures, “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures”, 2021, https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf

How do I calculate my Scope 1, Scope 2, and Scope 3 GHG emissions?

Fair Supply have developed an Integrated Assessment Engine (IAE) which can calculate your Scope 1, Scope 2, and Scope 3 GHG emissions using expenditure or investment data. At the core of the IAE sits a flexible global supply chain module that complements this client-supplied data to complete a full set of upstream and downstream supply chains. Often, companies only have visibility over their direct suppliers and customers which are referred to as tier 1 suppliers (upstream) and tier 1 customers (downstream).

However, frameworks for reporting supply chain impacts require visibility way beyond tier 1 for both upstream and downstream impacts. The IAE's supply chain module accepts all supplier or customer assessments that our clients may have already undertaken and completes the missing layers of the clients' supply chains to deliver full upstream and downstream visibility of the supply chains. While special focus is placed on the first 10 tiers of the supply chains, the IAE internally assesses our clients’ supply chains way beyond tier 10, and without a system boundary.

Once this numerical assessment is complete, results are processed to align with the TCFD reporting framework. Fair Supply’s IAE is capable of assessing approximately 40 billion supply chains, represented in more than 1.8 billion monetary transaction values and price-layering information. It draws information from more than 200 economic source datasets for more than 200 industry sectors in more than 200 countries, and utilises state-of-the-art methods to assess the supply chain impacts.

How Fair Supply's IAE works.

What is scenario analysis?

One of the recommended disclosures under the Strategy pillar is that an organisation describes the resilience of their strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. This approach has been recommended given the inherent uncertainty regarding the impacts of climate change both from a timing and magnitude point of view[1]. A scenario analysis enables an organisation to assess how identified climate-related risks and opportunities might impact their operations over time and prepare a response to each of those potential impacts.

The TCFD recommends that organisations consider a “set of scenarios that cover a reasonable variety of future outcomes, both favourable and unfavourable”5. Scenario analyses can be qualitative, quantitative, or a combination of both, depending on the availability of data, and should challenge ‘business as usual’ approaches. These scenarios should be informed by the latest scientific consensus on likely global average temperature levels and resultant climate change impacts.

Once the set of scenarios is identified, organisations are encouraged to evaluate the impact of each scenario on its business operations, including costs, revenue, supply chain impacts, business interruption, and the potential timings at which those impacts are expected to occur. With this evaluation completed, the organisation can identify potential responses to each risk and opportunity, such as changes to its investments, technology, operational locations, or business model.

Fair Supply’s team of experts can support your organisation through the scenario analysis process using the methodology outlined in the TCFD recommendations5.

[1] Task Force on Climate-related Financial Disclosures, “The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities”, 2017, https://assets.bbhub.io/company/sites/60/2021/03/FINAL-TCFD-Technical-Supplement-062917.pdf

Does TCFD align with other reporting frameworks?

The TCFD aims to provide a standardised reporting framework for disclosure of climate-related risks and opportunities. The development of this framework was informed by existing frameworks to provide a shared set of principles and to minimise reporting burdens, including:

  • CDP (previously known as the Carbon Disclosure Project)[1]
  • Climate Disclosure Standards Board (CDSB)[2]
  • Global Reporting Initiative (GRI)[3]
  • Sustainability Accounting Standards Board (SASB)[4]
  • International Integrated Reporting Council (IIRC)[5]

Other frameworks, including International Financial Reporting Standards (IFRS) Climate-related Disclosures[6] and the Prudential Practice Guide: CPG 229 Climate Change Financial Risks published by the Australian Prudential Regulation Authority[7] (APRA), were built upon the TCFD recommendations.

[1] See https://www.cdp.net/en/[2] See https://www.cdsb.net[3] See https://www.globalreporting.org[4] See https://www.sasb.org[5] See https://www.integratedreporting.org[6] See https://www.ifrs.org/content/dam/ifrs/project/climate-related-disclosures/issb-exposure-draft-2022-2-climate-related-disclosures.pdf[7] See https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf

What does it mean to support TCFD?

The TCFD encourages organisations to become a supporter of the TCFD recommendations by completing a statement of support here. Joining the TCFD as a supporter demonstrates that an organisation is taking action to address climate-related risks and opportunities, seeking to build more resilience in its strategies, and increasing the transparency of its climate change impacts to the public.

Taking a step further and choosing to implement the TCFD recommendations by including climate-related risks and opportunities in their disclosure reporting brings additional benefits to an organisation. Expanding the scope of disclosure allows investors and stakeholders to evaluate an organisation against a broader range of considerations and make better informed choices in relation to its likely long-term performance. Financial market participants can utilise climate-related disclosures to guide capital allocation decisions and ensure that risk is appropriately priced. Organisations will also gain an in-depth understanding of the full range of their own risks and opportunities, and those of their business partners. Armed with this information, organisations are well placed to mitigate and/or take advantage of the risks and opportunities associated with climate change, and incorporate these into their current decision making processes.

Who is using the TCFD reporting framework?

Climate-related disclosure is currently voluntary. However, countries including the UK, Japan, and New Zealand are introducing mandatory TCFD-aligned climate disclosure starting in 2022, 2022, and 2023, respectively. Although not yet legislated in Australia, the Australian Securities & Investments Commission (ASIC) has recommended that listed companies voluntarily make disclosures in line with the TCFD framework[1]. In addition, the Australian Prudential Regulation Authority (APRA) has issued a guideline that aligns with TCFD for climate risk reporting[2].

According to the 2021 TCFD Status Report, there has been a year-on-year increase of 72% in the number of TCFD supporters since 2018. Organisations that support the Task Force have a market coverage of 25 trillion USD in combined market capitalisation and a total of 195 trillion USD in assets[3]. Australian-based financial institutions such as ANZ and Westpac Group have already been disclosing their climate-related risks in accordance with the TCFD framework. Other non-financial organisations, such as BHP, Woolworths Group, and Lendlease, have also released climate-related disclosure. Globally, other notable companies which have adopted the TCFD recommendations include Legal and General Group, ArcelorMittal, Orbia, Ford, Allianz, CPP Investments, Cemex, Standard Bank Group, Maersk, Japan Airlines Group, Fujifilm Group, Citigroup, General Motors, and Unilever[4].

[1] See https://asic.gov.au/about-asic/news-centre/articles/managing-climate-risk-for-directors/[2] APRA, “CPG 229 Climate Change Financial Risks”, 2021, https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf[3] Task Force on Climate-related Financial Disclosures, “2021 Status Report”, 2021, https://www.fsb.org/wp-content/uploads/P141021-1.pdf[4] See https://www.fsb.org/wp-content/uploads/P141021-1.pdf

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Overview

What is TCFD*, why is it important, and what does it mean for your entity?

So, what is the TCFD?

The Task Force on Climate-related Financial Disclosures, or TCFD, was established in 2015 by the Financial Stability Board and consists of 31 members from across the G20, chaired by Michael Bloomberg. It aims to ensure that “financial risks and opportunities related to climate change will become a natural part of companies’ risk management and strategic planning processes”[1]. The Task Force was developed in response to the growing understanding that climate change presents material risks to organisations and that there are opportunities associated with the mitigation and adaptation activities that are required to address the impact of climate change.

In 2017, the TCFD released a framework which can be used by organisations to disclose climate-related risks and opportunities as part of their reporting suite. The TCFD framework covers four thematic areas and includes 11 recommended disclosures for inclusion in an organisation’s financial filings to provide insight into how that organisation considers and assesses climate-related risks and opportunities[2].

*Concurrent with the release of its 2023 status report on October 12, 2023, the TCFD has fulfilled its remit and disbanded. The FSB has asked the IFRS Foundation to take over the monitoring of the progress of companies’ climate-related disclosures.

[1] Task Force on Climate-related Financial Disclosures, “Our Goal”, 2022, https://www.fsb-tcfd.org/about/#our-goal[2] Task Force on Climate-related Financial Disclosures, “Recommendations of the Task Force on Climate-related Financial Disclosures“, 2017, p.13, https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf

Why does society need the TCFD framework and how is it relevant to my company?

Climate change, driven by an increase in greenhouse gas emissions, is generating disruptive physical, economic, and social effects. In 2015 the Paris Agreement set out the goal of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”[1]. Drastic changes are required from all facets of society, including the private sector and financial institutions, in order to deliver this goal and minimise further adverse effects from climate change.

The TCFD framework provides a standardised approach to disclosing the impacts of climate change on an entity’s operations, strategies, and financial performance. All organisations are likely to be impacted by climate change, even though any risks or opportunities may not be immediate or direct. For example, there may be adverse effects on business operations due to supply chain reliance on raw materials sourced from a location impacted by bushfires, or transport disruptions due to more frequent extreme weather events. Organisations reporting against the TCFD framework may also identify potential business opportunities such as an increase in resource efficiency or gaining a competitive advantage by offering low-emission products. The process of preparing the climate-related disclosures recommended by the TCFD provides an organisation with a deeper understanding of any risks and opportunities due to climate change and supports decision making to address these, ensuring resilience into the short, medium, and long-term future.

[1] United Nations, “Paris Agreement”, 2015, p.3, https://unfccc.int/sites/default/files/english_paris_agreement.pdf

What are the four pillars of the TCFD framework?

The TCFD framework includes four thematic areas or pillars:

  • Governance: Disclose the organisation’s governance around climate-related risks and opportunities.
  • Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
  • Risk management: Disclose how the organisation identifies, assesses, and manages climate-related risks and opportunities.
  • Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

What disclosures are expected under the TCFD framework?

The TCFD framework includes 11 recommended disclosures for all industry sectors, and guidance providing context and implementation suggestions for these disclosures[1]. It also includes supplemental guidance for the financial sector and those non-financial sectors most likely to be impacted by climate change. The recommended disclosures for all sectors are:‍

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

Risk Management

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

Metrics and Targets

  • Disclose the metrics used by the organisation 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 organisation to manage climate-related risks and opportunities and performance against targets.

[1] Task Force on Climate-related Financial Disclosures, “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures”, 2021, https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf

How do I calculate my Scope 1, Scope 2, and Scope 3 GHG emissions?

Fair Supply have developed an Integrated Assessment Engine (IAE) which can calculate your Scope 1, Scope 2, and Scope 3 GHG emissions using expenditure or investment data. At the core of the IAE sits a flexible global supply chain module that complements this client-supplied data to complete a full set of upstream and downstream supply chains. Often, companies only have visibility over their direct suppliers and customers which are referred to as tier 1 suppliers (upstream) and tier 1 customers (downstream).

However, frameworks for reporting supply chain impacts require visibility way beyond tier 1 for both upstream and downstream impacts. The IAE's supply chain module accepts all supplier or customer assessments that our clients may have already undertaken and completes the missing layers of the clients' supply chains to deliver full upstream and downstream visibility of the supply chains. While special focus is placed on the first 10 tiers of the supply chains, the IAE internally assesses our clients’ supply chains way beyond tier 10, and without a system boundary.

Once this numerical assessment is complete, results are processed to align with the TCFD reporting framework. Fair Supply’s IAE is capable of assessing approximately 40 billion supply chains, represented in more than 1.8 billion monetary transaction values and price-layering information. It draws information from more than 200 economic source datasets for more than 200 industry sectors in more than 200 countries, and utilises state-of-the-art methods to assess the supply chain impacts.

How Fair Supply's IAE works.

What is scenario analysis?

One of the recommended disclosures under the Strategy pillar is that an organisation describes the resilience of their strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. This approach has been recommended given the inherent uncertainty regarding the impacts of climate change both from a timing and magnitude point of view[1]. A scenario analysis enables an organisation to assess how identified climate-related risks and opportunities might impact their operations over time and prepare a response to each of those potential impacts.

The TCFD recommends that organisations consider a “set of scenarios that cover a reasonable variety of future outcomes, both favourable and unfavourable”5. Scenario analyses can be qualitative, quantitative, or a combination of both, depending on the availability of data, and should challenge ‘business as usual’ approaches. These scenarios should be informed by the latest scientific consensus on likely global average temperature levels and resultant climate change impacts.

Once the set of scenarios is identified, organisations are encouraged to evaluate the impact of each scenario on its business operations, including costs, revenue, supply chain impacts, business interruption, and the potential timings at which those impacts are expected to occur. With this evaluation completed, the organisation can identify potential responses to each risk and opportunity, such as changes to its investments, technology, operational locations, or business model.

Fair Supply’s team of experts can support your organisation through the scenario analysis process using the methodology outlined in the TCFD recommendations5.

[1] Task Force on Climate-related Financial Disclosures, “The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities”, 2017, https://assets.bbhub.io/company/sites/60/2021/03/FINAL-TCFD-Technical-Supplement-062917.pdf

Does TCFD align with other reporting frameworks?

The TCFD aims to provide a standardised reporting framework for disclosure of climate-related risks and opportunities. The development of this framework was informed by existing frameworks to provide a shared set of principles and to minimise reporting burdens, including:

  • CDP (previously known as the Carbon Disclosure Project)[1]
  • Climate Disclosure Standards Board (CDSB)[2]
  • Global Reporting Initiative (GRI)[3]
  • Sustainability Accounting Standards Board (SASB)[4]
  • International Integrated Reporting Council (IIRC)[5]

Other frameworks, including International Financial Reporting Standards (IFRS) Climate-related Disclosures[6] and the Prudential Practice Guide: CPG 229 Climate Change Financial Risks published by the Australian Prudential Regulation Authority[7] (APRA), were built upon the TCFD recommendations.

[1] See https://www.cdp.net/en/[2] See https://www.cdsb.net[3] See https://www.globalreporting.org[4] See https://www.sasb.org[5] See https://www.integratedreporting.org[6] See https://www.ifrs.org/content/dam/ifrs/project/climate-related-disclosures/issb-exposure-draft-2022-2-climate-related-disclosures.pdf[7] See https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf

What does it mean to support TCFD?

The TCFD encourages organisations to become a supporter of the TCFD recommendations by completing a statement of support here. Joining the TCFD as a supporter demonstrates that an organisation is taking action to address climate-related risks and opportunities, seeking to build more resilience in its strategies, and increasing the transparency of its climate change impacts to the public.

Taking a step further and choosing to implement the TCFD recommendations by including climate-related risks and opportunities in their disclosure reporting brings additional benefits to an organisation. Expanding the scope of disclosure allows investors and stakeholders to evaluate an organisation against a broader range of considerations and make better informed choices in relation to its likely long-term performance. Financial market participants can utilise climate-related disclosures to guide capital allocation decisions and ensure that risk is appropriately priced. Organisations will also gain an in-depth understanding of the full range of their own risks and opportunities, and those of their business partners. Armed with this information, organisations are well placed to mitigate and/or take advantage of the risks and opportunities associated with climate change, and incorporate these into their current decision making processes.

Who is using the TCFD reporting framework?

Climate-related disclosure is currently voluntary. However, countries including the UK, Japan, and New Zealand are introducing mandatory TCFD-aligned climate disclosure starting in 2022, 2022, and 2023, respectively. Although not yet legislated in Australia, the Australian Securities & Investments Commission (ASIC) has recommended that listed companies voluntarily make disclosures in line with the TCFD framework[1]. In addition, the Australian Prudential Regulation Authority (APRA) has issued a guideline that aligns with TCFD for climate risk reporting[2].

According to the 2021 TCFD Status Report, there has been a year-on-year increase of 72% in the number of TCFD supporters since 2018. Organisations that support the Task Force have a market coverage of 25 trillion USD in combined market capitalisation and a total of 195 trillion USD in assets[3]. Australian-based financial institutions such as ANZ and Westpac Group have already been disclosing their climate-related risks in accordance with the TCFD framework. Other non-financial organisations, such as BHP, Woolworths Group, and Lendlease, have also released climate-related disclosure. Globally, other notable companies which have adopted the TCFD recommendations include Legal and General Group, ArcelorMittal, Orbia, Ford, Allianz, CPP Investments, Cemex, Standard Bank Group, Maersk, Japan Airlines Group, Fujifilm Group, Citigroup, General Motors, and Unilever[4].

[1] See https://asic.gov.au/about-asic/news-centre/articles/managing-climate-risk-for-directors/[2] APRA, “CPG 229 Climate Change Financial Risks”, 2021, https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf[3] Task Force on Climate-related Financial Disclosures, “2021 Status Report”, 2021, https://www.fsb.org/wp-content/uploads/P141021-1.pdf[4] See https://www.fsb.org/wp-content/uploads/P141021-1.pdf

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