Report: Advancing TCFD Guidance on Physical Climate Risks and Opportunities

This seminal report aims to inform and support early adoption efforts of climate risk reporting, based on findings from industry-led working groups  from the financial sector and corporations. The report calls on companies to perform forward-looking risk assessments and disclose material exposure to climate hazards. It also invites firms to investigate benefits from investing in resilience and opportunities to provide new products and services in response to market shifts. 

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TCFD recommendations

The Task Force on Climate-related Financial Disclosures (TCFD) seeks to “develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers and investors.” It has crystallised a growing concern among investors and business leaders about the physical impacts that climate change could have on the economy and on financial markets.

The TCFD’s initial report noted a lack of understanding about the impact of climate change on corporate value chains and infrastructure, the channels through which these impacts are transmitted to financial markets, and a lack of transparency in reporting these risks. The final report recommended that financial disclosures should include metrics on the physical risks and opportunities of climate change but did not provide detailed guidance on appropriate metrics.

Without formal or regulatory guidance on metrics and indicators, firms are uncertain about what to include in their disclosures. Investors are therefore likely to receive a heterogeneous mix of financial reports including diverse indicators, metrics, assumptions and timeframes, which will fail to provide comparable data across a portfolio or provide the necessary transparency.

Advancing TCFD guidance on physical climate risk and opportunities

Recognising the challenges in the path towards standardising disclosure of physical risks and opportunities related to climate change, the European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) launched an initiative, “Advancing TCFD guidance on physical climate risk and opportunities.” The initiative aims to work with innovative thinkers in the financial and corporate sectors to identify the greatest needs for guidance, research and development. It also seeks to lay the foundations for a common conceptual framework and a standard set of metrics for reporting physical climate risks and opportunities.

The preliminary guidance in this report aims to build on the TCFD recommendations and provide common foundations for the disclosure of climate-related physical risks and opportunities. The report also identifies areas where further research or market action is needed so that detailed, consistent, industry-specific guidelines can be developed on the methodology for quantifying and reporting these risks and opportunities. The project focused on disclosure metrics that are specific to corporations. Improving the quality of firms’ climate disclosures is not just important for them, but also critical to managing climate risks and opportunities in financial markets.

Project process

This EBRD-GCECA initiative involved three industry working groups of a dozen participants, with a mix of financial institutions (asset owners, asset managers, banks, insurance), corporations, credit rating agencies, and a financial data provider. Each working group met several times over the first half of 2018 to discuss and consider research questions related to the topic on hand. The working groups debated how best to help the market make progress on disclosure.

  • Working group 1: Metrics for physical climate risk management and disclosure.
  • Working group 2: Metrics for climate resilience opportunities.
  • Working group 3: Climate intelligence for business strategy and financial planning.

The recommendations we developed aim to serve a dual purpose, seeking to improve corporations’ understanding of their own exposure and risk profile as well as opportunities arising from climate change, and provide clear signals for financial institutions to understand risks and opportunities implicit in individual holdings as well as portfolio-wide exposures.

The working groups built on the TCFD guidance, existing reporting frameworks, and an extensive review of literature to develop a set of recommendations on physical risks and opportunities. As a general rule, this report has prioritised recommendations that are consistent with current industry practices and that leverage metrics and frameworks already used for financial disclosures. It also includes a mix of recommendations that focus on providing better information, as well as recommendations that require more sophisticated analysis. In line with the TCFD recommendations, the recommendations of this EBRD-GCECA initiative are geared to facilitating comparability across companies within a sector, industry or portfolio, and to promoting disclosure of reliable and verifiable information.


Disclosing physical climate risks

A corporation’s vulnerability to climate impacts goes well beyond the physical exposure of its facilities. It includes supply chains, distribution networks, customers and markets. Furthermore, a company’s resilience to climate impacts depends on its risk management and business plans, as well as its governance.

Figure ES-1. How climate change affects corporate value chains

The impacts of climate change on corporate value chains depend on where the company operates and what impacts may affect relevant locations, but they also depend on the company’s activities. Corporations whose production processes consume high volumes of water, for example, may be particularly sensitive to changes in drought and the availability of water. Similarly, corporations with high energy consumption or significant use of outdoor labour will experience greater challenges as average temperatures rise, affecting both energy costs and labour productivity.

Recommendation 1: Assess exposure to all first-order climate impacts

Corporations should consider all first-order impacts when undertaking a climate risk assessment – heat stress, extreme rainfall, drought, cyclones, sea-level rise and wildfires – and additional climate hazards relevant to their industries, such as ocean acidification for fisheries. Exposure to climate hazards should be assessed at the local scale, using the most recent climate data and literature.

Recommendation 2: Assess climate risks over the duration of an asset’s lifetime or over the lifetime of a financial instrument

This report recommends that corporations provide more detailed information on the location of their critical operations, suppliers and market, at least at the country-level, as part of segment reporting to enable investors and creditors to conduct analysis on exposure to risk in their portfolio.

Firms should consider climate impacts over the following timeframes,

  1. Assess changes in asset performance over the past 5-10 years (or longer) that are attributable to extreme weather events or to climate variability, in order to detect possible impacts from climate change.
  2. Assess potential impacts over the expected lifetime of the asset and/or over the lifetime of the investment or loan.

Recommendation 5:  Disclose the impacts of weather variability on value chains

Corporations with moderate or high sensitivity to variability in temperature and precipitation should identify and disclose whether and how changes in temperature and precipitation have materially affected their performance.

Recommendation 6:  Perform forward-looking assessment climate-related risks

Corporations should disclose 1) their assessment of the types of climate-related risks to which they may be exposed in the future due to the geographic exposure of their facilities and 2) the estimated financial impacts from the risks they have identified as being material.

Recommendation 7: Describe risk management processes for the physical impacts of climate change

Corporations should describe their processes for identifying, assessing and managing the physical risks of climate change, as noted by the TCFD. For these physical impacts, aspects of particular interest to financial institutions and banks include risk management processes, insurance coverage, planned facility moves or retrofits, corporate adaptation strategy, and engagement with local authorities to build climate resilience locally.

Disclosing physical climate opportunities

The TCFD also encourages corporations to disclose opportunities related to the impacts of a changing climate. This recommendation is critical to ensuring that businesses and financial institutions continue to thrive in a changing environment. It is also vital for promoting the healthy development of resilience products and services that cater to new market needs for resilience.

The TCFD defines “climate-related opportunity” as “the potential positive impacts related to climate change on an organisation,” and notes that opportunities “will vary depending on the region, market and industry in which an organisation operates.” This report identifies three broad types of opportunities related to physical climate change impacts:

  1. Opportunities related to managing existing climate-related physical risks
  2. Opportunities to respond to new emerging risks
  3. Opportunities to adapt to market shifts and cater to new market needs

Recommendation 8: Identify opportunities based on managing risks and market shifts

Corporations and financial institutions should strive to identify opportunities in managing existing climate-related risks and responding to emerging risks. Corporations should also assess the potential changes in their value chains, explore potential market shifts as customer needs change and target their products and services to cater to growing demand for adaptation solutions.

Recommendation 9: Assess climate opportunities over timeframes relevant to business planning

Corporations should define the appropriate timescales in which to report opportunities in consultation with their investors. Opportunities in response to managing existing risks that affect recent and current accounts and the next year’s accounts should be reported as part of core financials. Opportunities arising from market shifts are unlikely to be reported quantitatively and are more appropriate for disclosure in general reporting on future business expectations.

Recommendation 10: Disclose business opportunities at the segment level; for critical facilities, disclose resilience benefits at the facility level

Opportunities may be disclosed at different levels to best serve firms and investors. Opportunities due to shifting market demand or new products should be reported at the segment level, in line with risk disclosures. Benefits from managing existing or emerging risks may be disclosed at the segment level (for process or supply-chain improvements, for example). For critical facilities, it may be advantageous for firms to disclose significant resilience upgrades or strategic improvements at the facility level, to showcase good stewardship and provide confidence that critical facilities are protected.

Recommendation 11: Disclose benefits from resilience investments using the same metrics as for risk disclosure

Corporations should acknowledge the importance of accurately accounting for the opportunity effects on their core financials arising from actions to manage current risks and respond to emerging risks. These metrics may include avoided negative impacts on revenues, operating expenses, capital expenses, supply chain costs, value-at-risk, or projected annual average losses.

Recommendation 12: Include business opportunities in qualitative disclosures

The disclosure of opportunities involving market shifts and new products and services can be achieved by qualitative disclosures of the lifecycle of new commercial opportunities. The disclosures may include information on the development stage of endeavours, sector, the size of potential markets, and the length of time until commercial viability.

Scenario analysis for physical climate risks and opportunities

With regard to climate intelligence for business strategy and financial planning, the TCFD recommendations strongly advocate the development and use of scenarios when analysing climate risks and opportunities. In this context, scenario analysis is intended as a tool to address challenges and acquire key information. Scenarios provide a narrative, either qualitative or quantitative, which “describes a path of development leading to a particular outcome.”

Recommendation 13: Consider current and desired GHG concentration pathways and related warming projections as a basis for scenario analysis of physical climate risks and opportunities

Corporations should not be concerned with developing new climate scenarios themselves. Instead, as a basis for their scenario analysis of physical risk, they should consider at least two main types of existing climate scenarios, based on the Intergovernmental Panel on Climate Change (IPCC):

  • Current GHG pathway: National climate policies currently in place around the world are projected to reduce baseline emissions, which would result in warming of about 3.4°C above pre-industrial levels.[i]
  • Desired (‘aspirational’) GHG pathway: These are the scenarios compatible with limiting warming to below 1.5°C by 2100 (with a probability of ≥50 per cent), and to below 2°C in the 21st century (with a probability of about 80 per cent).

Recommendation 14: Integrate scenario analysis of physical climate risks and opportunities into existing planning processes to ensure strategic, flexible and resilient businesses and investments

The main reason to undertake scenario analysis is to obtain a comprehensive assessment from firms of their risks and opportunities. Firms should achieve this by exploring different possibilities of what might happen in the future, despite uncertainty and by integrating climate change considerations into their existing business strategies and financial planning.

Recommendation 15: Avoid standardised scenario analysis in order to have a more comprehensive range of outcomes

Firms should look at more than one scenario and multiple climate models in order to have a more comprehensive range of potential outcomes. Although a degree of comparability is desirable, it is also recommended that corporations develop their own scenarios, which should be highly contextual, and based on the views and values of individual corporations.

Recommendation 16: Consider data from a wide variety of sources and scales when developing scenario analysis of physical climate risks

In order to construct plausible physical climate risk and opportunity scenarios, firms should consider inputs from a wide variety of sources and levels of detail. These include scientific data (not only on climate change), macroeconomic data, socio-economic data, data on political economics and policy, corporate data, ‘vision’ and market analysis data, ‘big data’, and so on.

Recommendation 17: Take account of scientific uncertainty inherent in climate data and in scenario analysis of physical risks and opportunities

Corporations and financial institutions are very well accustomed to making decisions within a large spectrum of uncertainty. In the same way, they should consider and manage the uncertainty that surrounds climate data and climate science for scenario analysis. Scientific uncertainty should be taken into account and made explicit when assessing climate-related financial risks and opportunities.

Recommendation 18: Disclose qualitative information that is relevant to the company and its investors

The ultimate objective in disclosing the use of scenarios is to build investor confidence that a company is meaningfully engaged on the topic of climate change, that it is looking at a broad range of outcomes and is responsive and proactive, rather than defensive and reactive. In this context, firms should disclose information on their climate risks and opportunities in the way that is most appropriate to them, as well as to their investors, and to the type of information disclosed or its format (quantitative or qualitative).


Efforts to formalise and standardise the assessment and disclosure of climate-related risks and opportunities are still in their infancy. As science and business continue to progress in their understanding of climate impacts, the recommendations made in this report will evolve over time, informed by emerging practices and the continuous efforts of corporations, financial institutions, credit rating agencies, industry groups, think-tanks, regulators and governments.

Climate disclosures will remain a topic of active research and discussion, and this report aims to support the emergence of market practices that bring transparency to markets and help build resilience in firms and financial institutions.

The Participants in the Initiative

The EBRD hosted the initiative and funded its technical secretariat.  The GCECA provided a secondment to the technical secretariat. The technical secretariat was provided by Four Twenty Seven, the leading provider of intelligence on climate risk to financial markets, and by Acclimatise, an advisory company specialised in adaptation to climate change.

The expert working groups in the initiative included participants from Agence Française de Développement, Allianz, APG Asset Management, AON, the Bank of England, Barclays, Blackrock, Bloomberg, BNP Paribas, Citi, Danone, the Dutch National Bank, DWS Deutsche AM, European Investment Bank, Lightsmith Group, Lloyds, Maersk, Meridiam Infrastructure, Moody’s, S&P Global Ratings, Shell, Siemens, Standard Chartered, USS and Zurich Alternative Asset Management.

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Access conference materials (slides, summary, op-eds)