Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD)
The G20’s Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) was convened to address concerns that companies are not sufficiently disclosing the impacts that climate change poses to their strategy, businesses and financial plans. Without adequate disclosure markets cannot function efficiently and risks are not appropriately priced.
Broadly climate risks can be divided into:
- Transition risks such as climate policy (e.g. a carbon tax) or technological shifts (e.g. the rise of electric vehicles) which impact demand and costs of supply; and
- Physical risks such as the impacts of more frequent/extreme weather events on assets, operations or supply chains.
The TCFD’s recommendations were launched in June 2017 and presented to the G20 Summit on 7–8 July. The report’s scope covers all companies with listed equity/debt in the G20.
Additionally, to address where concentrations of risk might lie, the scope also includes asset managers and asset owners e.g. pension funds, so covering the whole investment chain. Shareholders and other capital providers are increasingly looking to understand the resiliency of the companies they are invested in or lend to. Major institutional investors have publicly called for companies to make disclosure of climate risks a priority or face shareholder action.
TCFD recommendations and implications
The TCFD structured its recommendations on climate-related disclosures around four thematic areas:
- Governance: extent of board and senior management oversight on the issue;
- Strategy: risks and impacts on strategy, business and forward looking scenario analysis;
- Risk Management: how climate risks are identified, assessed, managed and integrated into existing risk management frameworks; and
- Metrics and Targets: how is performance on climate risk being measured.
The TCFD recommends disclosure in mainstream annual reports. It is a major shift away from sustainability reports where climate issues typically currently reside. This means that functions such as Finance and Investor Relations as well as the Audit Committee need to understand the financial implications of climate change and be in a position to explain whether such implications are material and how this is being governed, managed and disclosed.
Strategy functions will also need to consider how to incorporate such implications into long term plans. The TCFD recommends that companies conduct forward-looking scenario analyses to understand how their businesses will be impacted by climate change.
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