Task Force on Climate-Related Financial Disclosures (TCFD)

Information presented in this profile is for reference only. The Climate Action in Financial Institutions Initiative does not guarantee as to the exhaustiveness of this information and invites you to contact the Secretariat (contact@mainstreamingclimate.org) if you wish to propose any modifications.

By including this profile, the Initiative, its Supporting Institutions and the Secretariat do not endorse the activities described below nor the guidance and information provided in this profile.

Last updated: August 2019

Website: www.fsb-tcfd.org/

Contact: info@fsb-tcfd.org

Summary: Put in place by the G20’s Financial Stability Board the Task Force on Climate-Related Financial Disclosures (TCFD), composed of 32 international experts, was mandated to “develop voluntary, consistent climate-related financial risk disclosures”[1]. The TCFD was announced at the end of 2015 and presented its final recommendations in June 2017. These recommendations have been broadly taken up by other initiatives and promote disclosures in four different areas: governance, strategy, risk management, and metrics and targets. As of June 2018, over 250 organizations have expressed their support for the TCFD.

What are the objectives of the initiative?

Overarching question: What constitutes effective financial disclosure across industries regarding physical, liability and transition risks associated with climate change?

Principal objective: “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders”[2]

Who launched it? Who is participating?

G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB) to review how the financial sector can take account of climate-related issues. To this end, the Financial Stability Board of the G20 established an industry-led task force: the Task Force on Climate-related Financial Disclosures.

The TCFD’s 32 members were chosen by the FSB to include both users and preparers of disclosures from across the G20’s constituency covering a broad range of economic sectors and financial markets.

Why has this been put into place?

As stated in the final report of the TCFD: “climate change poses significant financial challenges and opportunities, now and in the future”[3]. The members of the G20, representing 85% of the global economy, would be widely exposed to these climate-related risks, should they be untreated. The first step towards managing these risks is to have access to the data to assess them and improving reporting thus plays an essential role.

“Better access to data will enhance how climate-related risks are assessed, priced, and managed. Companies can more effectively measure and evaluate their own risks and those of their suppliers and competitors. Investors will make better informed decisions on where and how they want to allocate their capital. Lenders, insurers and underwriters will be better able to evaluate their risks and exposures over the short, medium, and long-term.”[4]

What are the main work streams/areas of work?

In their June 2017 recommendations and report, the TCFD identified four areas of focus for improving disclosure and management of climate-related risks:

  • Governance: The organization’s governance around climate-related risks and opportunities
  • Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning
  • Risk management: The processes used by the organization to identify, assess, and manage climate-related risks
  • Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities

What are outcomes of the initiatives linked with the 5 Principles?

The results of the TCFD are intentionally broad and are not formally binding. However, the recommendations made by the Task Force are likely to be adopted and adapted by policy-makers and regulators at the national level.

The recommendations are structured around the four thematic areas (the overview below was taken from the Final report, p. 14) and provide, where necessary supplemental guidance for different actors:

One key point of these recommendations is the emphasis on disclosure of forward-looking information through scenario analysis (including a “2°C or lower” scenario).

The recommendations made in the TCFD’s final report have found a large audience:

  • UNEP FI developed a pilot project with 16 banks (among them Santander, BNP Paribas and Société Générale, all supporting institutions of the Initiative) on implementing the TCFD recommendations for banks.
  • PRI (Principles for Responsible Investment) will update its Reporting Framework to align with the TCFD’s guidance for asset owners and asset managers.
  • CDP (Carbon Disclosure Project) has indicated that it has reviewed its climate change questionnaire for 2018 to integrate TCFD recommendations.
    As of March 2018 over 100 CEOs and 15 regulatory entities have signed the “Statement of Support for the TCFD Recommendations”.
    As of April 2018 16 companies have committed to implementing the TCFD’s recommendations in the next three years through the Climate Disclosure Standards Board’s (CDSB) Commitment
    France: Brune Poirson, Secretary of State to the Minister for the Ecological and Inclusive Transition announced in September 2017 that the country will “push to make the TCFD recommendations binding”.

Have intermediate or final reports / guidance been issued?

Calendar and milestones

Supporting institutions of the Climate Action in Financial Institutions Initiative supporting the TCFD recommendations, as of August 2019:

[1] https://www.fsb-tcfd.org/

[2] Ibid.

[3] https://www.fsb-tcfd.org/publications/final-recommendations-report/

[4] https://www.fsb-tcfd.org/about/

Links with the 5 Voluntary Principles for Mainstreaming Climate Action

This section aims to support discussions on the implementation of the 5 voluntary Principles for Mainstreaming Climate Action. Information provided in this section is for reference only; the Climate Action in Financial Institutions Initiative, its Supporting Institutions and the Secretariat do not endorse the activities nor the guidance and information provided in this section.

The TCFD’s recommendations regarding disclosures on governance address the commitment of both a company’s board and management to address climate-related risks. The recommendations thereby emphasize the importance of leadership when it comes to addressing climate-risks in a coherent manner.

The TCFD recommends in its final report that “all Sectors Organizations should describe how resilient their strategies are to climate-related risks and opportunities, taking into consideration a transition to a lower-carbon economy consistent with a 2°C or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks.

Organizations should consider discussing:

‒ where they believe their strategies may be affected by climate-related risks and opportunities;

‒ how their strategies might change to address such potential risks and opportunities; and

‒ the climate-related scenarios and associated time horizon(s) considered.”

Regarding the management of climate risks, the TCFD recommends in its final report to disclose the ways in which “the organization identifies, assesses, and manages climate-related risks and opportunities”.

The TCFD recommends that “Organizations should describe their processes for managing climate-related risks, including how they make decisions to mitigate, transfer, accept, or control those risks. In addition, organizations should describe their processes for prioritizing climate related risks, including how materiality determinations are made within their organizations.”

The Supplemental Guidance for Banks recommends that “Banks should describe significant concentrations of credit exposure to carbon-related assets. Additionally, banks should consider disclosing their climate-related risks (transition and physical) in their lending and other financial intermediary business activities.”

Regarding metrics and targets, the TCFD recommends in its final report  to disclose the metrics used to cover scope 1, 2 (and if appropriate scope 3) emissions, as well as the “targets used by the organization to manage climate-related risks and opportunities and performance against targets”.

“Organizations should describe their key climate-related targets such as those related to GHG emissions, water usage, energy usage, etc., in line with anticipated regulatory requirements or market constraints or other goals. Other goals may include efficiency or financial goals, financial loss tolerances, avoided GHG emissions through the entire product life cycle, or net revenue goals for products and services designed for a lower carbon economy. In describing their targets, organizations should consider including the following:

‒ whether the target is absolute or intensity based,

‒ time frames over which the target applies,

‒ base year from which progress is measured, and

‒ key performance indicators used to assess progress against targets.”

The Supplemental Guidance for Banks recommends that “Banks should provide the metrics used to assess the impact of (transition and physical) climate-related risks on their lending and other financial intermediary business activities in the short, medium, and long term. Metrics provided may relate to credit exposure, equity and debt holdings, or trading positions, broken down by:

‒ Industry

‒ Geography

‒ Credit quality (e.g., investment grade or non-investment grade, internal rating system)

‒ Average tenor Banks should also provide the amount and percentage of carbon-related assets relative to total assets as well as the amount of lending and other financing connected with climate-related opportunities.”

All four areas of recommendations of the TCFD (governance, strategy, risk management and metrics and targets) detailed in its final report aim at an increased transparency regarding the climate performance of institutions to provide decision-makers the necessary information to take sustainable investment decisions and ensure the stability and efficiency of financial markets.

“The Task Force determined that the two primary accounting standard setting bodies, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), have issued standards to address risks and uncertainties affecting companies. Both International Accounting Standard (IAS) 37 “Provisions, Contingent Liabilities and Contingent Assets” and Accounting Standards Codification (ASC) 450 “Contingencies” provide guidance on how to account for and disclose contingencies. Additionally, IAS 36 “Impairment of Assets” and ASC 360 “Long-lived Asset Impairment” provide guidance on assessing the impairment of long-lived assets. The disclosures of both contingencies and management’s assessment and evaluation of long-lived assets for potential impairment are critically important in assisting stakeholders in understanding an organization’s ability to meet future reported earnings and cash flow goals.”