The Task Force on Climate-Related Financial Disclosures or TCFD framework is becoming more widely adopted, with over 2,600 supporters globally as of October 6, 2021. TCFD supporters cover 89 countries and jurisdictions and nearly all sectors of the economy, including 1,069 financial institutions. As the framework becomes more widely used, we explore its four pillars as a part of our TCFD blog series.
The TFCD’s recommendations are structured around four pillars:
- Governance
- Strategy
- Risk management
- Metrics and targets
These pillars guide organizations on what information they should report. In this article, we will deep dive into the Strategy pillar of the TCFD’s disclosure recommendations.
What are the TCFD’s Strategy Disclosure Recommendations?
The TCFD’s framework has three specific recommended disclosures around strategy. Under the Strategy pillar, the recommended disclosures ask organizations to describe:
- Climate-related risks and opportunities over the short, medium, and long term
- Impacts of climate-related risks and opportunities on business, strategy, and financial planning
- Overall resilience of their business strategy to different climate scenarios
At its core, these disclosure recommendations are about organizations sharing with stakeholders the potential impact of climate-related issues on their financial performance (e.g., revenues, costs) and financial position (e.g., assets, liabilities). This helps investors and other stakeholders assess the potential financial outcomes of an organization in the short-, medium-, and long-term time horizons.
Let’s take a deeper look into each of these recommendations.
Climate-Related Risks and Opportunities Over the Short, Medium, And Long Term
When organizations report on their identified climate-related risks and opportunities, it’s recommended they include:
- An explanation of what they consider relevant short-, medium-, and long-term time horizons
- A description of the specific climate-related issues for each time horizon that could have a material financial impact on the organization
- An account of the process(es) used to determine which risks and opportunities could have a material financial impact on the organization
- A description of material climate-related issues identified for each sector and geography
Reporting this information provides greater clarity to investors and stakeholders on what climate impacts might have a financial impact on an organization and how that organization determined which impacts were most important to address.
Impacts of Climate-Related Risks and Opportunities on Business, Strategy, And Financial Planning
When organizations report on how climate change has affected their business, strategy, and financial planning, it’s recommended they include:
- A description of the impact on their businesses and strategy in the following areas:
- Products and services
- Supply chain and/or value chain
- Adaptation and mitigation activities
- Investment in research and development
- Operations (including types of operations and location of facilities)
- A description of the impact on financial planning in the following areas:
- Operating costs and revenues
- Capital expenditures and capital allocation
- Acquisitions or divestments
- Access to capital
- If they have made GHG emissions reduction commitments, then they should describe their plans for transitioning to a low-carbon or net-zero economy
- How climate-related impacts inform their financial planning process, what time periods are typically considered, and how risks and opportunities are prioritized
This disclosure recommendation is designed to help investors and other stakeholders to understand how climate-related issues may affect an organization and what that organization is doing to address those impacts.
Overall Resilience of Their Business Strategy to Different Climate Scenarios
When reporting the resilience of their strategy to multiple potential future climate scenarios, it’s recommended that organizations include:
- Where they predict their strategies may be affected by climate-related issues
- How their strategies will adapt to address potential risks and opportunities
- What climate-related scenarios and associated time horizon(s) were considered
This information helps interested parties determine how well prepared an organization is for a variety of different climate-related outcomes. This also helps build confidence among stakeholders in an organization’s ability to handle and adapt to different possible futures.
Why the TCFD Strategy Recommendations Are Important?
The TCFD’s Strategy recommended disclosures were designed to solicit decision-useful, forward-looking information on financial impacts. Organizations that disclose in line with the Strategy recommendations provide information to investors and other users to better assess the potential future performance of the company.
A survey by the Task Force also found that three of the top ten most “decision-useful” types of information organizations can disclose fall under the Strategy recommendation. This shows the importance of these strategy-recommended disclosures to investors and other stakeholders.
Without effective climate strategies and policies in place, a company will struggle to:
- Adapt to different climate scenarios
- Maintain financial performance and position
- Make climate-informed strategic decisions
What are the Benefits of TCFD’s Strategy Recommendations?
Some of the potential benefits for an organization associated with implementing the TCFD’s strategy recommendations include:
- Proactively address investors’ demand for climate-related data in an easy-to-follow framework
- Reduce the number of climate-related information requests received from stakeholders
- Increased awareness and understanding of climate-related issues within an organization
- Better risk management and more informed strategic and financial planning
- More effectively meet and prepare for existing and future disclosure requirements
These are just a few examples of how an organization can benefit from implementing the TCFD’s strategy disclosure recommendations. By disclosing the recommendations laid out under the Strategy pillar, organizations can be better prepared for the future and the different potential financial impacts.
In July 2023, following the publishing of the ISSB Standards, which are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD, the Financial Stability Board announced that the TCFD had completed its work and the IFRS Foundation would take over the monitoring of the progress on companies’ climate related disclosures from the TCFD. Although the work of the TCFD is completed, the TCFD recommendations remain available for companies to use should they choose to.
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