What is the TCFD and why does it matter?
With Task-Force for Climate Related Financial Disclosures (TCFD) now mandatory for many large UK businesses, through both the FCA’s and BEIS’ regulations, we take a closer look at what they are and why they matter.
A short history of the TCFD
The demand, and increasingly expectation, on companies to disclose climate-related information is driven by the recognition that climate change represents significant financial risk, and that the global financial system must assimilate this risk and align with wider trends towards sustainability.
The mainstreaming of this thinking, and sustainability, in finance has resulted in a huge proliferation of sustainability and climate-related reporting standards and regulations. A natural consequence of this has been the emergence of significant inconsistencies in the types of information and data reported by businesses, and the development of an environment that is challenging to navigate.
The TCFD was established by the Financial Stability Board in 2015, at the request of the G20. Its aim has been to respond to this challenge in the reporting of climate-related financial information by providing transparency and consistency in disclosures. This foundational attempt to develop a framework for disclosing climate-related information initially targeted the finance sector, but the scope has since expanded to include non-financial organisations.
The TCFD’s initial recommendations were published in 2017 and have now been endorsed globally by both governments and the private sector. As a much-needed framework for aligning climate-related disclosures, the TCFD should over time provide a greater volume of in-depth, accurate and comparable data on companies’ climate-related activities, impacts and exposure. Further, with the integration of the TCFD framework in the International Sustainability Standards Board (ISSB) proposed framework, it is clear that it will underlie corporate climate-related disclosures for years to come.
In 2021, the UK became the first country in the world to set out its intention to make TCFD reporting mandatory for large publicly listed or privately held businesses and this has now been implemented by both the FCA and BEIS.
What does the TCFD look like?
With TCFD reporting now mandatory for many large UK businesses, expectations from regulators and investors are evolving. For all businesses, TCFD reporting will represent an iterative process, where the depth and analysis of disclosures increases with time, as businesses get to grips with them. However, the fundamentals of the TCFD framework remain much the same.
The TCFD framework consists of 4 key pillars detailed below:
- Governance – this pillar covers an organisation’s disclosure of its governance for climate-related risks and opportunities.
- Strategy – this pillar covers an organisation’s disclosure, where this is deemed to be material, of the actual, or potential, impacts of climate-related risks and opportunities on its business, strategy and financial planning.
- Risk Management – this pillar covers an organisation’s disclosure of its methodology for identifying, assessing, and managing climate-related risks.
- Metrics and Targets – this pillar covers an organisation’s disclosure, where this is deemed to be material, of the metrics and targets that< it uses to manage its climate-related risks and opportunities.
It is under these four pillars that 11 recommended disclosures are set out to guide a company in achieving the broader aims of the pillars described above.
Moving forwards with TCFD
This article – an initial brief on some of the background to the TCFD and its framework – is intended to be the first in a series from us that will dive deeper into climate-related disclosures and the broader concepts involved, such as climate risk.
3Keel is already supporting businesses in this area and if you would be interested in hearing how we can help then please do get in touch.