Key Takeaways:
- The TCFD is a voluntary reporting framework for governance and climate related risk management.
- It’s mostly intended for larger corporations to promote consistency across global climate-related disclosure.
- Progress is still needed, with only 50% of companies reviewed disclosing in alignment with at least three recommended disclosures.
- The Task Force is not a standard-setting body, and has defined metric categories broadly to allow some flexibility in reporting.
What is it?
When it comes to accounting and reporting standards, there are plenty of international bodies at the party. The 5 leading sustainability reporting organisations are sometimes referred to as ‘The Alliance’. This includes the CDP, CDSB, GRI, IIRC and SASB – so yeah, it’s a little bit crowded.
The TCFD has been endorsed by the above group, and appears to be popular in financial markets for its simplicity. It essentially works hand in hand with all forms of reporting.
The Task Force provides a global framework for companies and other organisations to develop more effective climate-related financial disclosures through their existing reporting processes.
As of late 2021 there are around 2,600 participants (mostly large corporations) who have adopted the framework.
12 governments (including the European Union) have also made steps to incorporate or mandate the recommended framework into their national reporting standards – at least for large financial and insurance institutions.
The framework is in some respects flexible, and not all companies adopt all 11 recommended disclosures. In fact, as of 2021 only around half the companies disclosed three out of four disclosures. Not great, but it’s getting better.
Who started it, and who is it for?
The TCFD was kicked off in 2015 by The Financial Stability Board (FSB). The FSB is an international association based in Switzerland, affiliated with the much larger organisation the Bank of International Settlements (BIS). BIS commenced in 1930 and is owned by Central Banks accounting for 95% of global GDP.
Michael Bloomberg (American businessman, politician, philanthropist and author) has chaired the TCFD since its formation
It’s certainly a ‘top down’ approach, with the framework targeting the larger companies first. These companies have resources to maintain reporting, and arguably make the largest impact
“The TCFD will seek to develop a set of recommendations for consistent, comparable, reliable, clear and efficient climate- related disclosures”
What are some of its intentions?
Around the time of the cop21 Paris climate agreement (2015), it was evident that consensus was needed in climate reporting.
The wide range of existing sustainability disclosure schemes highlighted the need for consensus
Companies and stakeholders sought out consistency for effective reporting and good practice regarding climate metrics.
Bloomberg states “Markets are increasingly looking to channel funds to sustainable and resilient investments, and it is critical that climate reporting requirements are standardised across jurisdictions to help investors and consumers make decisions.”
By developing global baseline sustainability reporting, the task force aims to fight climate change “all-hands-on-deck”
How does it work?
As above, there are four pillars: Governance, Strategy, Risk Management and Metrics and Targets.
These are then broken down further into 11 recommended disclosures. It’s important to remember that these are not mandated, and not all companies report on all 11 disclosures.
The most disclosed section is a) in Strategy on ‘risks and opportunities’. However the least disclosed section is also in Strategy, c) ‘resilience of strategy’. We understand it’s difficult to plan for an uncertain future, however we hope to see more institutions disclose such strategies.
Surprisingly, Technology & Media were one of the worst industries when it came to disclosure, with only 16% of TCFD-aligned companies managing to report on all 11 disclosures. Materials and Buildings actually proved to be the most aligned, followed by Energy (38% and 36%).
What is the actual impact of the TCFD?
Ultimately the Task Force is a forward looking climate risk plan. By asking companies to stick to the four main pillars, they’re keeping things clear and simple. Reporting on the possibility of lost dollars, as well as non-financial impact, investors can assess the risk involved.
Deloitte says that adopting the recommendations of the TCFD is an iterative process and full implementation can take many years, with learnings along the way helping to adapt and optimise implementation plans.
Even if companies don’t intend on disclosing their results publicly, Manifest Climate says that going through the exercise of looking at your business through the TCFD lens can be extremely useful.
Mardi McBrien from CDSB notes that the TCFD does not require organisations to write separate reports, but to build on existing disclosures in established reports – such as the Annual Report or Sustainability Report.
In Summary
It’s evident there’s some serious momentum behind the TCFD. Many intergovernmental organisations like the United Nations, as well as numerous countries and central banks are on board.
As more and more large corporations, as well as huge carbon dioxide emitters get on board, the more impactful TCFD reporting will get. It allows investors and policymakers to directly understand the impacts, risks and strategies companies are using.
While we absolutely acknowledge there’s a long way to go, it’s been a rapid acceleration so far. More and more nations are looking to make sustainability and climate reporting mandatory, which will only boost the relevance of consistent reporting practices like the TCFD.
Whether it will keep climate change to lower than 2 degrees celsius of warming is yet to be seen.
