The Taskforce on Climate-related Financial Disclosures (TCFD) is a market-led, government-supported initiative created in 2015 by the Financial Stability Board (FSB). Since then, TCFD has developed its framework of recommendations designed to help companies integrate climate-related issues into their financial reporting. This comprehensive guide helps you understand what the TCFD is, what the 11 TCFD recommendations are, and more.
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The Taskforce on Climate-related Financial Disclosures (TCFD) is an initiative created by the Financial Stability Board (FSB) after G20 Finance Ministers, and Central Bank Governors asked, in 2015, how the financial sector could take into account climate-related issues.
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To start its preliminary work and draft its first recommendations, the TCFD selected an initial group of 29 representatives from various financial institutions in 2016. After several recommendation drafts were issued and public feedback considered, the TCFD published its official set of recommendations to help companies report on their climate-related impacts in 2017. Since 2017, the Taskforce on Climate-related Financial Disclosures (TCFD) has published an annual progress report assessing the impact of TCFD recommendations on the financial world, what has been achieved, and what to expect in the coming years.
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The TCFD is structured around four pillars representing fundamental elements of business operations: governance, strategy, risk management, and metrics and objectives.
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In this Academy article, we will take an in-depth look at the TCFD recommendations, how they can be used to improve the attractiveness of companies to investors, and whether reporting according to the TCFD recommendations will become mandatory.
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Climate change is set to become a major financial risk for organizations very soon (if not already). Therefore, companies and financial institutions must have access to proper reporting and disclosing tools to measure climate-related risks. A crucial reminder of the effects that poor company governance and risk management policies can have on asset values came from the financial crisis of 2007–2008. Moreover, a 2015 study estimated that the global stock of assets at risk will be ranging from $4.2 trillion and $43 trillion between now and the end of the century. As a result, informed and efficient investments in a lower-carbon economy, as well as accurate scenario analysis, are required to reduce future risks.
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To prevent this from happening again and shift investment flows from climate-negative projects to climate-positive projects, the TCFD developed a set of 11 recommendations. These recommendations are designed around four principles: governance, strategy, risk management, and metrics & targets.
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This recommendation category aim to guide companies’ governance disclosures around climate-related risks and opportunities.
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When relevant, strategy recommendations help to disclose how climate-related risks and opportunities are having an actual or anticipated influence on the organization's operations, strategy, and financial planning.
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TCFD recommendations around risk management help disclose how organizations identify, assess, and manage climate-related risks.
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These recommendations help disclose the measurements and targets used to evaluate and manage pertinent climate-related risks and opportunities when the information is sufficient.
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Regarding scenario analysis, TCFD recommends considering multiple climate scenarios, including trajectories for 2°C and below, and disclosing the resilience of their strategy when there is sufficient information to do so.
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ESG stands for Environmental, Social, and Governance. ESG is a set of standards that investors use to screen investments. Many ESG frameworks are published or revised regularly, and TCFD recommendations can be used for ESG rating.
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The TCFD recommendations include environment (E) and governance (G) in their four pillars of recommendations. Large companies choose to use the TCFD reporting standards for their ESG reporting.
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In 2021, multiple G7 countries declared their willingness to introduce mandatory climate regulation aligned with the TCFD recommendations for major enterprises and/or certain sectors. In 2022, the UK became the first country to introduce TCFD-aligned mandatory climate reporting for large organizations, requiring targeted companies to align their reporting with the taskforce recommendations. Other countries, like Canada, New Zealand, Japan, and Switzerland, are planning to have mandates in place before 2025.
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In 2022, the SEC (Securities and Exchange Commission) introduced proposed regulations that would require large companies to disclose their GHG (greenhouse gases) emissions as well as their climate-related risks, aligning with the TCFD.
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The European Union has also introduced its own mandatory climate regulation: the CSRD. The EU regulation is based on the TCFD recommendations, as the EU expert group (EFRAG) responsible for developing the CSRD is a supporter of the TCFD.
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The TNFD (Taskforce on Nature-related Financial Disclosures), established in 2021, comes after the TCFD. Although both initiatives are built on the same four pillars of recommendations, their scope of work differs. While the TCFD solely focuses on climate-related risks and carbon accounting, the TNFD is developing a framework to address problems related to natural ecosystems: ocean pollution, deforestation, soil erosion, biodiversity loss, and many more. Â
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Nevertheless, according to the IPCC and the IPBES (equivalent to the IPCC for biodiversity), climate change and biodiversity are systemic problems that interconnect and must be dealt with with a combined approach. Therefore, both the TCFD and the TNFD point to each other to complete their sets of recommendations.
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On a structural level, both initiatives are very similar. The TNFD and the TCFD are built on the same principles: Governance, Strategy, Risk Management, Metrics & Targets. The implementation process of the TNFD is also very similar to that of the TCFD: approximately 18 months of consultation until finalization, then the path to mandatory reporting will be determined.
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A first step to align with the TCFD recommendations is to start with the fourth pillar: Metrics & Targets. Mastering this pillar will be essential to complete other reporting recommendations. Therefore, measuring your organization's carbon emissions, on scope 1, 2, and 3, as well as identifying emissions hotspots and designing a reduction strategy will be crucial.
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Coolset offers autonomous analysis of your carbon emissions, our carbon analysts outline emissions hotspots and provide you with the right tools to deploy an effective emission reduction strategy.
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