What companies need to know:
The Financial Stability Board (FSB) established the TCFD to develop a voluntary framework of 11 recommendations for companies to show how climate-related risks or opportunities can impact their financial resilience in the future.
Championed by former Bank of England Governor Mark Carney and chaired by Michael Bloomberg, the TCFD provides a framework for disclosing climate related risks and opportunities in two significant ways: 1) inclusion in mainstream financial filings, 2) using scenario analysis to inform business strategy.
Why is it important?
Financial markets need comparable and consistent information to make informed investment, credit, and insurance underwriting decisions. This information is essential if investments are going to be redirected to support the transition to a lower carbon economy and minimise financial stability risks around sudden devaluations of carbon-intensive assets (‘stranded assets’). Consistent adoption of the TCFD recommendations will lead to effective measurement and improved company resilience, informed decisions by investors, and better evaluation of risks and exposures by lenders, insurers and underwriters.
Recent announcements reflected increased momentum toward ’mandatory’ TCFD-consistent disclosure requirements:
- Jerome Powell, chairman of the U.S. Federal Reserve, said for the first time that U.S. regulators
will consider the implications of climate change on monetary policy, bank regulation and
financial stability. - Christine Lagarde, President of the European Central Bank, suggested that the EU is moving towards mandatory reporting by companies of climate-related risks, declaring that the current system of voluntary disclosure by companies creates risks to financial stability.
- The UK has announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. The new rules will cover a substantial part of the UK economy, including listed companies, large private companies, banks and UK asset managers, among others.
Major stakeholder groups, including investors and environmental groups, have pressed companies to move further and faster on climate-related disclosures.
What companies need to do:
Implementing TCFD usually takes 5 years, so to prepare for the 2025 compliance deadline, companies should start now and aim to build out disclosure over time. Reporting and communicating in compliance with the TFCD is complex and likely to evolve. But over time, companies will be expected to include climate-related risks and opportunities in their mainstream financial filings and in the scenario-planning they use to develop strategy. Regulators and other stakeholders will not expect perfection immediately but will want to see companies develop a multi-year approach to climate-related disclosures.
Getting started on TCFD now will help position the business for compliance with the regulatory requirements which are currently being developed - and will minimise the disruption around that process.
- Year 1: Usually qualitative disclosure including: governance (climate training undertaken, number of times climate or sustainability was discussed at board level). How does that link to the overall strategy of your company, including operations and business opportunities?
- Years 2-4: Use a materiality based approach to risk management disclosing both qualitative and quantitative information; identify and report higher carbon areas which are most relevant for the business; indicate which metrics are used to measure climate risk (transition and physical)
- Year 5: Disclose metrics and targets and scenario analysis informed by climate science