TCFD (Task Force on Climate-related Financial Disclosure)

Setting up TCFD was one of the activities carried out in response to the observation by the G20. G20 had earlier noted that existing measures fail to incorporate the price of climate change into financial markets, given the major effect of climate change globally.

Origin of TCFD

The origin of the TCFD can be traced to 2015. In 2015, the governor of the Bank of England, Mark Carney, stated the need for the quantification of the effect of climate change on the financial performance and value of organizations. He emphasized that if the world waits until climate change can be directly linked to financial outcomes, it would be too late, and the results will be catastrophic.

 The speech given by the governor can be described as one of the occurrences pivotal to the establishment of Task Force on Climate-related Financial Disclosures (TCFD). The task force was set up by the Financial Stability Board (FSB), which was headed at that time by Mark Carney. Members of the task force include Michael Bloomberg, who heads it. The TCFD has a total of 31 members experienced in the use and preparation of disclosures within the constituency of the G20.

TCFD Definition

TCFD is described as a working group whose duties include the setting up of disclosures that are comparable and consistent. They can also be used by organizations to show their commitment to the sustainability of the environment. The effect of climate change is evident across the globe. Measures for mitigating climate change should be strategic and tailored to existing practices. The TCFD hopes to mitigate climate change by effecting regulations that encourage companies to pay better attention to the environment. Disclosures made by the TCFD reflect how climate change affects the activities of a company, rather than following the typical pattern of how a company’s activities affect the environment. The overall aim of these disclosures is to ensure investors appropriately value their investments in terms of risk level.

Roles of the TCFD

TCFD helps organizations in promoting consistency in carrying out these activities. Every Stakeholder in an organization is expected to receive voluntary and consistent climate-related financial risk information. And this is why TCFD was instituted to ensure that the required information will be shared by companies according to established guidelines.

These stakeholders should be able to make important decisions based on the information provided.

It is also the duty of the group to consider risks associated with climate change, which could be transitional, physical, and liability risks. These risks are considered in developing the important components of financial disclosures. With the disclosures created, the task force aims to help companies in understanding the requirements of the financial markets, as regards risk-related information.

Importance of the task force

Overall, the importance of the task force stems from the global impact of climate change. Climate change can significantly affect the activities of an organization. The creation of the task force is a measure of ensuring that the decisions organization makes are properly adjusted to the risks and opportunities of climate change. When stakeholders have access to the required climate-related information, proper estimation of the climate-related risks will be made. Simply put, the activities of the TCDF are important because it enables investors, lenders, and insurers to evaluate the risks associated with different forms of investment appropriately.

With the disclosures created by the TCFD, companies can evaluate the risks undertaken and compare it to that of the suppliers and competitors. The activities of the TCFD thus also help organizations to achieve a competitive advantage. For example, since consumers are increasingly clamoring for low-carbon practices and products, an organization can share its efforts towards producing low-carbon products to stakeholders to improve competitive advantage.

Even with the global call for environmental and financial sustainability, climate reporting still has a small audience. The activities of the task force are thus aimed at widening the audience of climate reporting.  It is also important to mention the level of engagement the task force achieves with stakeholders. This serves as a means of improving findings and measures related to climate reporting.

Recommendations

Recommendations of the group can be classified into categories such as risk management, governance, strategies and metrics, and targets. Disclosures in the different categories are made as follows in regular financial reporting.

• Governance: Efforts made by the government and board to monitor, manage, and assess risks and opportunities related to climate change.
• Strategy: How the risks and opportunities associated with climate change affect the business model of the organization.
• Metrics and targets: Measures and practices established for estimating risks and opportunities associated with climate change.
• Risk management: Measures established for managing climate-related risks and opportunities.  It is noteworthy that the disclosures created by the task force encourage the voluntary and flexible sharing of critical information and are aimed at improving existing processes.

Challenges

The biggest challenge of the activities of the group should be the creation of disclosures that are most applicable to climate-change-related risks and opportunities. Climate change is highly dynamic. The creation of appropriate disclosures related to the ever-changing climate is a challenge in which the TCDF overcomes by proper consideration of financial and non-financial data.

There is also the challenge of the lack of proper participation in related discussions by required parties such as the boards and management of organizations. The involvement of the task force will encourage the impact of disclosure and encourage better standards of reporting.

TCFD trends

The final recommendations of the task force were developed in June 2017. Within a year, the FTSE 100 signatories increased to 23, with a growth of about 100%. Companies that are signatories include a disclosure in annual reports.

ESG Enterprise provides tool to assist with TCFD for ESG assessment and ratings.