TCFD: Why it Matters and What You Need to Know

The Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015 to help organizations adjust and respond to financial risks related to climate change. The FSB tasked the TCFD with identifying the informational needs of the financial market when assessing and pricing climate-related risks and opportunities. This includes the needs of investors, lenders, and insurance underwriters.

Starting with their recommendations in 2017, the TCFD has developed recommended disclosures, supporting guidance, and principles to achieve that goal. These resources promote informed decision-making, allow key stakeholders and investors to understand the financial implications of climate change, and provide guidance on how organizations can provide information on their climate risks.

Today, there are more than 3,000 organizations that support the TCFD and encourage its implementation. Major entities like the G20 and the International Financial Reporting Standards (IFRS) Foundation are using the TCFD framework as a basis for their disclosure requirements.

The U.S. Securities and Exchange Commission (SEC) is preparing to mandate climate-related disclosures from public companies. When passed, the U.S. will join countries like New Zealand and Singapore in ensuring their largest publicly traded companies disclose climate-related information in accordance with globally recognized standards, including the TCFD. Understanding the TCFD framework is crucial for any organization, especially those who are just starting their journey into carbon accounting.

Our guide covers what the TCFD is, key points from their recommendations, and what your organization needs to know for the future. While we highlight the main points of the TCFD’s framework and other important information in our guide, the TCFD’s main site is your go-to source for more in-depth information.

What Is the Purpose of the TCFD?

The TCFD allows organizations to make better strategic decisions by integrating climate risks and opportunities into their decision-making. Guidance is also crucial to keep up with rapid changes related to climate change, like climate policies and new technology.

These are some of the benefits organizations gain from following the TCFD’s framework:

• Comparable, reliable, and consistent disclosures that help investors, stakeholders, and lenders evaluate and price climate change-related risks
• Improved climate credentials and trust with stakeholders as climate information becomes scrutinized as much as financial information
• Comprehensive information to effectively allocate capital and move society toward a lower-carbon economy
• Assessed climate risk and exposures to inform an organization’s short- and long-term strategic planning
• A strengthened financial market as a whole, by improving understanding of climate risks

Accurate climate risk disclosure is especially beneficial now as TCFD-affiliated disclosures are moving from voluntary to regulatory. Inaccurate disclosure can become a legal hazard as more regulations are established.

>> Download our eBook on The TCFD's Role in Emerging Climate Disclosures

Are TCFD Recommendations Mandatory?

TCFD recommendations themselves are voluntary, but many countries, investors, business partners, and other entities are moving toward making these recommendations mandatory.

Who Should Report Using the TCFD Framework?

Any organization can use the TCFD framework. The TCFD designed these recommendations to be applicable to all organizations in every jurisdiction. They also have additional guidance for different sectors.

What Are the Four Areas of TCFD’s Framework?

The TCFD’s recommendations encompass four core areas of an organization: governance, strategy, risk management, and metrics and targets.

Disclosure for each looks at that area’s role in dealing with an organization’s climate-related risks and opportunities.

• Governance disclosure focuses on the system and processes in an organization.
• Strategy disclosure focuses on actual and prospective impacts on an organization’s strategy and financial planning.
• Risk management disclosure focuses on the organization's methods to find, evaluate and manage risks and opportunities.
• Metrics and targets disclosure focuses on findings and goals used to evaluate and manage risks and opportunities.

There are 11 recommended disclosures under these areas to bring further transparency to climate reporting. The TCFD recommendations filled some of the gaps in previous reporting frameworks, focusing on the integration of climate-related information and financial disclosure in mainstream financial reporting.

Recommended Governance Disclosures

Governance is the first layer of the TCFD’s recommendations. Looking at climate impact at the governance level can shed light on high-level inefficiencies, like slow board approval or low visibility into the organization’s climate impact.

These are the TCFD’s recommended governance disclosures:

• Describe how the board oversees climate-related risks and opportunities.
• Describe management’s role in evaluating and managing climate-related risks and opportunities.

Recommended Strategy Disclosures

After governance, organizations should look at everything related to the actual and prospective impacts of climate risks and opportunities. For example, a chain of beachside restaurants will need to understand the impact of rising sea levels or upcoming environmental legislation on their operations.

These are the TCFD’s recommended strategy disclosures:

• Describe the organization’s climate-related risks over the short, medium, and long term.
• Describe the impact of climate-related risks and opportunities on the organization’s strategy, businesses, and financial planning.
• Describe the resilience of the organization’s strategy, while also taking climate-related scenarios into account (including a 2°C or lower scenario).

Recommended Risk Management Disclosures

Risk management dives into how your organization finds and manages climate-related risks. For example, the owners of our fictional beachside restaurant chain will need to develop a way to predict rising sea levels when scouting for new locations.

These are the TCFD’s recommended risk management disclosures:

• Describe the organization’s processes for finding and evaluating climate-related risks.
• Describe the organization’s processes for managing climate-related risks.
• Describe how they’ve integrated all of the above processes into the organization’s overall risk management plan.

Recommended Metrics and Targets Disclosures

Metrics and targets are one of the most important disclosures since they help illustrate your organization’s progress and improvement.

For example, our beachside restaurant owners may find that faulty plumbing is causing runoff waste on local beaches. Their target could be to ultimately have zero runoff waste. Their metric could look at the amount of runoff coming from their restaurants and onto the beach.

Understandably, metrics for most organizations aren’t that simple to find and calculate. Most organizations have many risks and opportunities they need to track. There are various resources you can turn to for additional guidance, like the GHGP or PCAF.

These are the TCFD’s recommended metrics and targets disclosures:

• Disclose the metrics used to evaluate climate-related risks and opportunities in line with its strategy and risk management process.
• Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas (GHG) emissions and related risks.
• Describe the targets used to manage climate-related risks and opportunities and performance against metrics.

Guidance for All and Supplemental Guidance for Certain Sectors

In addition to these broad recommendations, the TCFD also includes guidance for all sectors to give more context and suggestions for implementation.

Supplemental guidance includes considerations for specific sectors, including energy and transportation. There’s also guidance for the financial and non-financial sectors that climate change affects the most. The updated 2021 TCFD implementation recommendations guidance has detailed information that supersedes the original 2017 document.

How Does the TCFD Define Climate-related Risks, Opportunities, and Financial Impact?

The TCFD identified a set of climate-related risks and opportunities to standardize disclosure information between different reporting organizations. The TCFD encourages organizations to prioritize the categories that are most relevant to them.

Risks

The TCFD divides risks into two categories. One category looks at the risks of transitioning to a low-carbon economy. The other looks at risks as a result of physical shifts due to climate change.

Transition Risks

There are a number of risks that come with transitioning to a low-carbon economy since there are many moving parts involved. For instance, consumer demand for carbon footprint transparency can influence policy change.

These are the four main categories for transition risks:

• Policy and legal, like mandated increased costs for high-carbon activities
• Market risk, like reduced consumer demand for energy-efficient products
• Technology risk, like when new technology makes old processes obsolete
• Reputation, like when consumers lose trust in companies that are slow to disclose their carbon footprint

Physical Risks

Physical risks look at the impact of changes that relate to the tangible outcomes of climate change.

Below are the two main categories of physical risks:

• Chronic risks, like how rising water levels result in eroding land
• Acute risks, like when wildfires impact local water supply, resulting in delayed business operations

Opportunities

Opportunities can also arise for organizations that make strides to reduce emissions. The TCFD identified a few opportunities that organizations can expect:

• Resource efficiency, like switching to LED lighting in owned buildings
• Energy sources, like switching to low-emission sources such as wind or solar
• Products and services, like developing new low-emission products
• Markets, like expanding operations in a new market
• Resilience, like making the production process more efficient to produce fewer emissions

Financial Impact

The TCFD also identifies categories of financial impact to more clearly connect climate-related risks and opportunities to an organization’s financial position. These are the major financial impact categories:

Income Statement

Values in this category focus on how climate-related risks and opportunities affect whether a company is at a net profit or loss during a specified range of time.

• Revenues, like when consumer demand drops because a company’s products generate too many emissions
• Expenditures, like if a business’s supplier is unable to operate as a result of extreme weather

Balance Sheet

Values in this category look at how these risks and opportunities impact an organization’s financial value at a point in time.

• Assets and liabilities, like when several acres of land are destroyed due to a wildfire
• Capital and financing, like when a business needs to invest in R&D to make their products more energy efficient

What Is Scenario Analysis?

Scenario analysis is the practice of recognizing and evaluating what may happen in future scenarios with uncertain conditions. Scenario analyses aren’t meant to be a precise forecast or deliver specific predictions. They’re hypothetical and let organizations see what may happen if certain circumstances occur or if trends continue.

The TCFD recommends conducting scenario analyses to show the strategies’ resilience against different scenarios. This includes the potential impact on an organization’s operations and finances.

These analyses are also another tool to influence strategic planning and inform investors and other stakeholders of how an organization is positioned for potential circumstances.

The TCFD says scenarios should include the following characteristics:

• Plausible and can realistically happen
• Distinctive and either looks at outcomes resulting from unique combinations of circumstances or different outcomes from the same set of combinations
• Consistent with existing trends and developments, unless there’s a logical explanation for inconsistencies
• Relevant and gives insight into potential strategic and/or financial impacts on the organization
• Challenging and puts into question accepted truths and assumptions about the future

Reporting organizations can look to many tools and resources to get started, such as the United Nations Food and Agriculture Organization’s Modelling System for Agricultural Impacts of Climate Change (MOSAICC) and the International Institute of Applied Systems Analysis (IIASA) Scenario Explorer.

What Types of Scenario Analyses Should Organizations Create?

The TCFD recommends doing scenario analyses for a variety of favorable and unfavorable scenarios. At a minimum, they recommend creating a 2°C scenario. They also recommend creating scenarios most relevant to the reporting organization.

There are two types of scenarios your organization can create:

• Qualitative scenarios are best for organizations that are getting started and don’t have much prior experience using quantitative information for similar tasks.
• Quantitative scenarios are best for organizations with prior experience using complex data sets and modeling.

How Can Organizations Develop Effective Scenario Analysis?

To create a scenario analysis, organizations should consider the type of analysis they’ll do, how they’ll analyze the scenario and what tools and data they’ll use.

Getting familiar with existing scenarios can help organizations get started on their own. After getting a base understanding of scenario analysis, the next step is to understand potential climate-related risks and opportunities.

Once identified, organizations can follow these general steps and questions to apply scenario analysis to their risks and opportunities:

1. Ensure Governance Is in Place

• Is scenario analysis part of your organization's strategic planning or risk management process?
• Is oversight assigned to relevant board committees or subcommittees?
• Which internal and external stakeholders should be involved in governance?

2. Assess the Materiality of Climate-related Risks

• What are the current and potential exposures to climate-related risks and opportunities?
• Do they have the potential to be relevant or important in the future?
• Are stakeholders concerned about these risks or opportunities?

3. Identify and Define a Range of Scenarios

• What scenarios and narratives are suitable for the identified exposures?
• What input parameters, assumptions, and analytical choices is your organization using for these scenarios?
• What reference scenarios are you using as a point of comparison?

4. Evaluate Business Impacts

• What are the impacts on input costs, operating costs, revenue, supply chain, business interruption, and timing for each scenario?
• What are your key sensitivities (in other words, your most vulnerable areas of business)?

5. Identify Potential Responses

• Using the results of your evaluation, what are the applicable, realistic decisions your organization can make to manage your identified risks and opportunities?
• What adjustments will you need to make to your strategic and financial plans?

6. Document and Disclose

• How will you document the process?
• Have you communicated the results to all relevant parties?
• Is your organization prepared to disclose key inputs, assumptions, analytical methods, outputs, and potential management responses?

What Are the Principles for Effective Disclosure?

The principles for effective disclosure are characteristics that data should have to make it high quality and useful.

The TCFD says effective disclosure should allow those who are receiving the info to understand how climate change impacts organizations. The following are characteristics that effective disclosure should have:

• Principle 1: Present relevant information
• Principle 2: Complete and specific
• Principle 3: Clear, balanced and understandable
• Principle 4: Consistent over time
• Principle 5: Comparable with other companies in their sector or in a portfolio
• Principle 6: Objective, auditable and reliable
• Principle 7: Provided on a timely basis

The TCFD acknowledges that fulfilling one principle can conflict with another. For example, some assumptions are necessary for disclosures and may be difficult to verify. Organizations are encouraged to meet these principles as best as they can and to find a balance between satisfying each.

Principle 1: Present Relevant Information

Disclosures shouldn’t include information that’s irrelevant, redundant, or generic. Users should have enough information to understand the organization’s strategy. It should also be clear to users that the information can change over time.

Principle 2: Complete and Specific

Information should be comprehensive and include both historical and future-oriented information. Disclosures should look at:

• Exposure to potential climate-related impacts
• Potential nature and size of those impacts
• Organization's strategy, governance, and processes for managing climate-related risks
• Status and progress on managing climate-related risks and opportunities

Principle 3: Clear, Balanced and Understandable

The TCFD says that disclosures should be specific enough for users who need that level of detail, but succinct enough for those who may not be able to understand granular details. Reporters should provide straightforward explanations and definitions for all terms used.

There should also be a balance of qualitative and quantitative information, along with a variety of text and imagery, to make the information easier to understand. Bias should not make its way into any explanation, and explanations should include risks and opportunities.

Principle 4: Consistent Over Time

Organizations should report using consistent formatting, metrics, and language as much as possible so information is comparable over time. There are instances in which information or formatting may need to change based on new findings or the general evolution of climate disclosures. In these cases, organizations should include explanations for changes.

Principle 5: Comparable With Other Companies in Their Sector or in a Portfolio

Disclosures should have enough detail for organizations to compare and benchmark against one another. Information should preferably follow similar formatting across organizations, like how financial documents and other required reports follow similar formats.

Principle 6: Reliable, Verifiable, and Objective

The TCFD says information should be neutral, accurate, collected, and presented in a way that’s verifiable. Evaluating this information should require a similar level of due diligence that financial information goes through.

It’s difficult for future-oriented information to be reliable and verifiable since this type of data requires an organization’s judgment. This particular information should be based on as much objective data as possible, traced back to sources of any assumptions and predictions, and use the best available measurement methodologies.

Principle 7: Provided on a Timely Basis

Organizations should report on this data at least on an annual basis in line with their annual financial reporting. If any disruptive climate-related events happen outside of an organization’s normal reporting cadence, organizations are encouraged to report timely updates when appropriate. Examples of climate-related events include oil spills or severe typhoons.

Who Should Be Involved With Governance and Disclosure?

The following roles and teams under these roles should be involved in both the disclosure and governance processes:

• Chief sustainability officer (CSO) to identify climate-related risks and opportunities from an environmental standpoint, create and implement strategy, and collaborate with CFO and relevant positions
• ESG managers to manage implementation, collect data from relevant teams, and spearhead climate disclosure and related reporting
• Chief financial officer (CFO) to identify climate-related risks and opportunities from a financial standpoint, create and implement strategy, and collaborate with CSO and relevant positions
• Head of accounting to collect data from relevant teams and integrate climate-related data into financial reporting
• IT leads to assist with the technology needed to streamline data collection
• Team managers to directly oversee implementation and progress with direct reports in the organization

What Jurisdictions Currently Require Reporting on TCFD Recommendations?

Jurisdictions including the U.K., Brazil, Japan, and the European Union (EU) currently require reporting on TCFD recommendations in some capacity. Nations in the G20 and G7 also pledged to implement recommendations based on the TCFD framework. TCFD supporters span 95 jurisdictions across the world.

Several other nations are still in the process of implementing mandatory reporting that aligns with the TCFD or has targets for later dates, like Canada.

What Organizations Currently Support TCFD?

More than 3,000 organizations support the TCFD. Supporters believe in the TCFD’s recommendations, commit to implementing them in their own organizations and overall encourage implementation. Industry support is key to adoption since the recommendations are voluntary.

Supporters can participate in forums to discuss challenges they’ve had with implementation and to improve their implementation. The TCFD has no formal requirements for supporters and does not require any payment.

How Does the TCFD Align With Other Initiatives and Organizations?

Many initiatives and organizations have adopted the TCFD framework and have collaborated with the TCFD since its inception. Entities like the Carbon Disclosure Project (CDP) support the TCFD by incorporating their framework into existing disclosure guidance, reporting mechanisms, and platforms. Below are notable organizations that support the TCFD.

United Nations Environment Programme Finance Initiative (UNEP FI)

UNEP FI started TCFD pilot projects in 2017 that included nearly 100 financial institutions around the world. Their goal is to find ways to improve all aspects of climate risk management for the financial industry. UNEP FI provided many resources for participating institutions, including interactive discussions, peer presentations, and training.

Participants also received support from climate risk experts, climate modelers, and others to support implementation. As a result, UNEP FI has created frameworks, guides, and tools to help improve climate risk management and disclosure for this sector.

Carbon Disclosure Project (CDP)

The CDP’s disclosure platform aligned with the TCFD in 2018. The CDP uses the TCFD framework in its disclosure questionnaires to help organizations disclose in line with its recommendations. This standardization helps make information easier to compare and provide decision-useful information to those who request information from the CDP.

Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB)

The CDSB along with the SASB released the TCFD Implementation Guide in 2019 to show organizations how they can implement the TCFD’s recommendations. Their guide uses CDSB framework and SASB standards as a solution for TCFD implementation. Organizations can also find sample disclosures to help them see the four areas of the TCFD recommendations in action.

International Sustainability Standards Board (ISSB)

The ISSB recently started consultation on proposed standards in 2022 that set