TCFD Key Recommendations for Climate Risk Disclosure

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led task-force established at the December 2015 G20 summit for improving voluntary financial disclosure of climate-related risks. Eight months after the release of its Phase I report (discussed  in a policy brief), the TCFD published a comprehensive set of recommendations on December 14 in its Phase II report. The recommendations provide detailed guidance for companies on how and what to integrate in their financial climate risk disclosure. These recommendations are categorized into four different components: Governance, Strategy, Risk management, and Metrics.

Core Elements of Recommended Climate Risk Disclosures

Governance

The first set of recommendations relates to the organization’s governance for addressing climate-related risks and opportunities.

At the board-level, TCFD report recommends disclosing how and how often is the board informed about climate-related issues, whether it integrates them when reviewing, guiding, monitoring the organization’s activities, and how it oversees progress against goals and targets for addressing those issues.

At the management-level, the TCFD suggests disclosing whether the organization has assigned climate-related responsibilities to management-level positions, what those responsibilities entail and how they are reported to the board. Just as for board-level, the report also invites organizations to describe processes by which management is informed about climate-related issues and how it monitors them.

Strategy

The second set of recommendations covers how climate-related issues may affect an organization’s businesses, strategy, and financial planning over the short, medium, and long term.

TCFD recommends organizations state what they consider to be the relevant short-, medium-, and long-term horizons, according to the nature of their assets / infrastructure, then identify the specific climate-related issues that could have a material financial impact on the organization for each time horizon and by distinguishing between physical and transition risks. According to the report, the risks and opportunities should be assessed by sector and geography when appropriate, and the methodology used should also be described along with the assessment.

Based on the above recommended disclosure, TCFD suggests disclosing as a first step how identified climate-related issues have already impacted the organization’s:

  • businesses, strategy and financial planning
  • products and services
  • supply chain and/or value chain
  • adaptation and mitigation activities
  • investment in R&D
  • operations, by types and location

As a second step, the report recommends assessing how the organization’s strategy is likely to perform under various climate-related scenarios and how what actions are subsequently taken to mitigate risks and take advantage of opportunities.

Risk management, metrics and targets

The last sets of recommendations relate to how the organization identifies, assesses, and manages climate-related risks, including the metrics and targets used.

The TCFD suggests disclosing the processes implemented within the organization for assessing the potential size and scope of identified climate-related risks, for managing those risks (be it through mitigation, transfer, acceptance or control) and for prioritizing them. More specifically, the organization should explain how materiality determinations are made.

According to the TCFD, organizations should consider providing the key metrics used to measure and manage those risks, especially metrics associated with water, energy, land use, and waste management where relevant, as well as the organization’s internal carbon prices. All metrics should be provided for historical periods to allow for trend analysis, along with a description of the methodologies used to calculate them.

Moreover, the TCFD recommends setting climate-related internal targets, such as those related to GHG emissions, water usage, energy usage, etc., but also efficiency goals, financial loss tolerances, or net revenue goals for products and services designed for a low-carbon economy. Targets description should detail whether the target is absolute or intensity based, time frames, key performance indicators and methodology used to assess progress against targets.

Examples of climate-related risks and their potential financial impacts

The report provides examples of physical and transition risks, along with their potential impacts on the organization’s finance.

Examples of climate-related risks and their potential financial impacts

The main challenge ahead: Identifying risk at asset-level

The process of scanning assets for physical climate risk exposure will require considerable effort and challenges, from accessing raw climate data at asset-level, to selecting appropriate indicators and time frame, and interpreting the output while accounting for climate data’s unique complexity and sources of uncertainties.

To support corporations and investors looking to identify hotspots and quantify value at risk in their portfolio of assets, facilities or across their supply chain, Four Twenty Seven has developed a suite of enterprise applications that provide rapid, cost-effective screening across portfolios of 10,000+ assets.

Learn more about CREST, our Climate Resilience Support Tool for corporate climate risk management, and our climate data analytics services for financial institutions.

Commit to getting informed. Email climate@427mt.com or call (415) 930-9090 to learn more about what climate change means for your organization.