I am a big fan of the Task Force on Climate-related Financial Disclosures (TCFD). I’ve written and spoken about the TCFD in the past. Those discussions have largely focused on the global embrace of the TCFD and its emergence as a singular organizing framework for reporting on climate change. This is true and the proposed rules in play in the United States, EU, UK, Japan, Singapore, Canada, Australia, and other countries as well as the newly formed International Sustainability Standards Board (ISSB) all build on the TCFD’s four central disclosure pillars. This is good news because we need harmonization of reporting standards. The prior alphabet soup fragmentation of ESG standards was chaotic and unhelpful to companies and investors. 

But for a moment, I’d like to step outside the context of reporting and highlight five things that I love about the TCFD as a tool for companies to use in understanding and addressing their climate-related risks and opportunities. 

1. It is an effective management tool

The TCFD provides a logical and intuitive framework that companies can use to identify and manage their climate-related financial risks and opportunities. Even if a company had no intention of issuing a sustainability report, had no climate goals, and were not thinking about discussing climate in its SEC filings, I would still recommend that it apply the TCFD framework to evaluate its climate-related financial impacts to help it in the sound management of the company. 

2. It focuses on bottom line financial impacts

Sound-minded people have different opinions on the role of the corporation and the obligations of corporate leaders to their shareholders and to society. Some believe companies should solely focus on shareholders’ financial returns. Some believe companies have an obligation to society more broadly. The TCFD takes an issue of broader societal importance - climate change - and focuses on its financial impacts on the company. This is the common denominator that transcends issues of the societal role of the corporation. 

3. Its four core pillars make sense and are easily applied

When I was in the private practice of law, many clients asked to be told what to do when addressing climate change. They wanted a road map. The TCFD provides a useful roadmap.

Its four pillars focus on:

  • Governance - what is the company’s governance structure for addressing climate-related financial risks? This pillar prompts the company to think about whether the board plays a role in overseeing potential climate-related financial risks and opportunities, whether the right members of management are involved, and how management reports to the board on climate issues. 

  • Strategy - what is the company’s strategy for addressing its climate-related financial risks and opportunities? Some companies might evaluate their climate-related financial risks and opportunities and determine that they don’t need to do much to address them. Other companies might face significant risks that they need to address by means of a considered strategic plan. Mapping out a strategy is just good business. 

  • Risk management - has the company evaluated and identified its significant climate-related risks and opportunities? The TCFD breaks this analysis down to help companies to think about their risk exposure. It prompts companies to consider physical risks due to climate change. These include both acute physical risks such as those related to exposure to severe weather, flooding, fires, and other acute events that can impact vulnerable physical facilities or operations. Physical risks also include chronic risks such as drought, poor arability of land, and the impacts of increased heat on outdoor workers and operations. The third type of risk is transition risk. This relates to the risks companies face due to the transition to a lower carbon economy. For example, a company in a carbon intensive industry might face transition risks associated with shareholder, consumer, and employee pressure. It also might face risks due to carbon taxes and tariffs, and regulations limiting the carbon intensity of products or services. 

  • Metrics and targets - how is the company implementing its strategy to reduce its climate-related risks, and how is it measuring its progress? This goes back to the age-old adage that you can’t manage what you don’t measure. 

4. The framework can be applied with a light touch or it can support a rigorous analysis of a company’s climate-related financial impacts. If you review the TCFD reports that companies have released, they can go into quite extensive analyses of risks and the resilience of their strategies. They also can be concise and reflect a less rigorous undertaking. Either approach might be perfectly acceptable and useful to the company, depending on its industry, operations, and risk management philosophy. The TCFD is a guide to help companies build a strategy for thinking about and addressing climate-related risks. It provides significant flexibility to enable companies to apply its principles as best suit their needs. 

5. The framework can apply to topics beyond climate change. The TCFD framework has been applied to nature-related risks, as discussed in a previous edition of this newsletter that addressed the TNFD. A beauty of the TCFD framework is that it can help companies to address a host of issues that represent potential economic externalities that could have financial impacts on the company. For example, it could be applied to human capital management, supply chain human rights, environmental issues beyond climate, and other topics. It would apply in the same manner as for climate. That is, a company could, for example, consider its governance structures for addressing human capital management. It might evaluate its risks and opportunities associated with its diversity, training, compensation, and other human capital practices, and how those risks and opportunities translate into financial risks and opportunities. It could then develop a strategy for addressing its human capital risks and opportunities, and metrics and targets to measure progress against those strategies. It would also consider its governance of human capital issues to ensure appropriate management of the issue within the company and up to the board. 

I am not a paid booster of the TCFD. I promise. But I am a fan. As we come to end of this calendar year, we sit rather poised on a precipice. There are a good host of proposals related to climate reporting working their way through their regulatory processes. Many companies might wonder at this point what they should do at this point as the rules are sorted. My advice is to measure your GHG footprint at least at a high level to understand your emissions hot spots, and apply the TCFD framework to evaluate your climate-related financial risks and opportunities and to build a plan to address them. This is just good management practice independent of the impending disclosure requirements. 

Regulatory News


Reserve Bank of Australia urges business to act now on climate threats or face potential legal action

Australia’s Reserve Bank (RBA) has warned banks and businesses that they will face litigation if they do not take action to manage financial threats from climate change. The RBA’s head of domestic markets advised that corporations need to report on physical and transition risks or risk “more severe” effects. Chief among these transition risks is the potential economic loss from reduced fossil fuel exports in the future for Australia, one of the world’s major fossil fuel exporters. The RBA, along with other financial regulators in Australia, have been writing new disclosure rules for the past five years to govern reporting on climate-related risks. 


Coastal Protection Act doesn't do enough for climate change, advocates say

As climate change persists, coastal homes and businesses around the world are at risk due to rising sea levels. In response, the Canadian government is nearing the finalization and enactment of the Coastal Protection Act, which will set new limits on how closely private property owners can build to the shoreline. While this is a necessary step in protecting both property owners and coastal ecosystems, the legislation is drawing criticism for failing to address septic and sewage systems and wells, each of which present environmental hazards when reached by seawater. Critics suggest introducing a separate policy to apply similar limits to septic, sewage, and wells so as to not further delay the Coastal Protection Act.


China accelerates standardized emissions accounting system

China has released an action plan prioritizing the development of a nationwide, standardized system for emissions accounting and verification. First, they will be accelerating the creation of standards for emissions-intensive industrial sectors including steel, metals, building materials, refining and petrochemicals, and chemicals. These sectors will be expected to enroll in China’s national carbon compliance market by 2025. 

The action plan released by the country’s top economic planner, environmental ministry, and statistics bureau required authorities and industry associations to complete general emission accounting and verification methodology that is capable of “providing a reliable and scientific foundation for the nation’s carbon peaking and carbon neutrality.”


Taiwan requires climate data in annual reports 

Taiwan will mandate companies to include climate data, including GHG emissions, in annual reports and prospectuses. In March, the country’s Financial Regulatory Commission’s (FRC) finalized a roadmap with proposed rules that will require companies making more than TWD 10 billion, including all steel and cement companies, to begin reporting in their 2022 annual reports while companies making TWD 5-10 billion would begin in 2025. In a new announcement from the FCA, they have said that listed companies will have to disclose climate-related information in their annual reports beginning in 2024, after a one-year buffer period. The proposed rules are in line with the TCFD, requiring disclosure on climate risks and opportunities, strategy, governance, and metrics and targets. 

International - ISSB

65 organizations sign letter urging stronger alignment of regulatory and standard-setting efforts 

A letter from the World Business Council for Sustainable Development (WBCSD), UN Principles for Responsible Investment (PRI), and the International Federation of Accountants (IFAC), representing a group of 65 leading investors, companies, and accountancy firms have urged the International Sustainability Standards Board (ISSB), US Securities and Exchange Commission (SEC), and the European Financial Reporting Advisory Group (EFRAG) to “more closely align with and support a global baseline for reporting sustainability-related information.”

The organizations believe that current draft standards are not sufficiently compatible and ask that ISSB, EFRAG and the SEC avoid regulatory and standard fragmentation by “aligning key concepts, terminologies, and metrics on which disclosure requirements are built.” The letter acknowledges that the working group assembled by the ISSB for jurisdictional alignment is pursuing historic work, and that interoperability is needed for financial market’s sustainable, long-term value creation. 


Mixed messaging from the federal government on oil and gas leasing

The Biden administration seems to be getting its lines crossed on oil leasing rules. A ruling from the 5th Circuit Court of Appeals last week has allowed the federal government to pause oil and gas leasing, one of the Biden administration’s earliest priorities. But the government seems to have changed its mind - or acceded to political compromise - on leasing in the meantime. The ruling came a day after the president signed the Inflation Reduction Act, which mandates the federal government to hold oil and gas lease auctions. The law requires the Department of the Interior to lease 2 million acres of public lands and 60 million acres of federal water for oil and gas drilling each year. 

California climate disclosure proposal fails to pass Assembly

California’s Climate Corporate Accountability Act, or Senate Bill 260, has fallen one vote short of passage in the Assembly, having passed in the California Senate. The bill’s sponsor, Senator Scott Wiener, vowed to reintroduce the bill next year.