Persefoni Expert Publications
What is the Task Force for Climate-Related Financial Disclosure (TCFD)?
The TCFD was created to help companies disclose climate-related risks. Here's what you need to know about it.
Published March 17, 2022
The US Securities and Exchange Commission (SEC) is preparing to mandate the issuance of climate-related disclosures. This means the US will join countries like the UK, Japan, New Zealand, and Singapore in ensuring their largest publicly traded companies disclose climate-related information in accordance with globally recognized standards, specifically, the Task Force on Climate-Related Financial Disclosures (TCFD).
So, as the TCFD moves from a voluntary reporting framework to one which is imposed by regulatory commissions, there are some important questions to cover: ‘What is the TCFD?’ ‘Will it be a requirement in your jurisdiction?’ and ‘How will it affect your organization?’.
What is the Task Force on Climate-Related Financial Disclosures?
Despite increasing knowledge of climate change and its impacts, the financial market has struggled to grasp how companies will adjust. In 2015, the Financial Stability Board (FSB) established the industry-led task force in response. Their task was to identify the informational needs of the financial market (investors, lenders, and insurance underwriters) when assessing and pricing climate-related risks and opportunities.
In order to promote informed decision-making and allow key stakeholders to understand the financial implications of climate change, recommended disclosures and supporting guidance were developed. Together, they create principles on how organizations can provide information on their climate risks and inform their investors of their climate-related assessments.
What are the TCFD recommendations?
The TCFD first released their recommendations for climate-related disclosures in a 2017 report. The report set a clear and consistent structure for organizations to follow. Recommendations were designed to be applicable to all organizations in every jurisdiction, and give reliable, comparable, and forward-looking information for investors to base decisions. Adoption of TCFD provides prospective investors and stakeholders with the information to understand how organizations are positioned to face the implications of climate change, now and in the future. The recommendations identified four thematic areas that organizations must use to disclose the full spectrum of their climate risk:
Governance - Disclose the company's governance around climate-related risks and opportunities.
Strategy - Disclose the actual and potential impact of climate-related risks and opportunities on the organization’s strategy and financial planning.
Risk Management - Disclose how the organization identifies, assesses, and manages climate-related risks.
Metrics and Targets - Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Under these four thematic areas are 11 recommended disclosures to bring further transparency to climate reporting. The TCFD recommendations filled some of the gaps of previous reporting frameworks, focusing on the integration of climate-related information with broader risk and financial disclosure in mainstream financial reporting.
Benefits of TCFD alignment
The TCFD allows companies to make better strategic decisions by integrating climate risks and opportunities into their decision-making. Organizations aligned to the TCFD will have comparable, reliable, and consistent disclosures, which can be shared with their investors and stakeholders. Thus, improving their climate credentials and building trust.
As TCFD affiliated disclosures move from the realm of voluntary to regulatory, the benefits of accurately disclosing climate risks increase. As climate information is increasingly scrutinized as much as financial information, the risk of not accurately disclosing climate-related information becomes a legal hazard.
How will it affect your company?
Eight countries will be enforcing TCFD-aligned climate disclosure mandates in the coming years (United Kingdom, Japan, New Zealand, Singapore, China, Switzerland, Canada, France).
If an organization is headquartered in one of these countries, they will have to ensure their compliance with the recommendations set forth by the TCFD, and begin reporting on their climate information holistically.
A critical step in this process is the assessment and management of climate-related metrics, including your carbon footprint. Namely, Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions. This step allows organizations to develop a baseline understanding of their climate-related performance and supports actions such as target setting, creating a climate reduction strategy, and internal/external reporting.
Measuring a carbon footprint is a complex and daunting task. To simplify this process, companies should leverage climate management and accounting platforms. These platforms automatically calculate an organization's carbon inventory and ensure each calculation is recorded in a transparent ledger. This transparency eases audit and assurance efforts by enabling such providers to understand the basis of calculations, assumptions and data sources in a straightforward and centralized manner.
With countries such as the UK, Japan, and New Zealand setting a precedent for mandated TCFD-aligned disclosure, it is only a matter of time before others follow. Regulatory measures are coming into place; the need to measure, manage, and disclose your emissions in line with the TCFD is accelerating. Companies will have to move quickly to keep up with the advancing regulations and prepare for the inevitable TCFD-aligned carbon mandates.
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Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.
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