With the SEC’s proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, potentially coming into effect next year, organizations may soon have to disclose certain climate-related information in their annual reports. These proposed disclosure rules are modeled in part on the TCFD framework.
The Task Force on Climate-Related Financial Disclosures or TCFD framework was developed to provide recommendations designed to help companies provide better information to support investors and other stakeholders in assessing and evaluating a specific set of climate-related risks and opportunities. The recommendations are structured around four pillars:
- Risk management
- Metrics and targets
These four pillars are supported by 11 recommended disclosures that guide organizations on what information they should report demonstrating how they assess and manage climate-related risks and opportunities. In this article, we will deep dive into the Governance pillar of the TCFD’s recommendations.
What are the TCFD’s Governance Disclosure Recommendations?
The TCFD’s framework has two specific recommended disclosures around governance. Reporting companies are asked to describe:
- Board oversight of climate-related risks and opportunities
- Management’s role in the assessment and management of climate-related risks and opportunities
These governance recommendations act as guidance for all businesses to report climate-related risks and opportunities, related to their organization’s governance, more effectively through their existing reporting processes. Let’s take a deeper look into each of these recommendations.
Board Oversight of Climate-Related Risks and Opportunities
When organizations report on their board’s oversight of climate-related risks and opportunities, it’s recommended they include:
- Procedures and frequency by which the board and/or board committees are notified about climate-related issues
- Whether the board and/or board committees consider climate-related issues when:
- Reviewing and guiding strategy, major plans of action, risk management policies, annual budgets, and business plans
- Setting the organization’s performance objectives, monitoring implementation and performance
- Overseeing major capital expenditures, acquisitions, and divestitures
- Methods behind how the board oversees progress against goals and targets for addressing climate-related risks and opportunities
Reporting this governance information helps provide greater context on how an organization’s leadership is handling and preparing for the potential eventualities of climate change impacts.
Management’s Role in the Assessment and Management of Climate-Related Risks and Opportunities
When organizations report on management’s role in the assessment and management of climate-related issues, it’s recommended they include:
- Climate-related responsibilities assigned to management-level positions or committees
- Who these management positions or committees report directly to
- Whether management responsibilities include assessing and/or managing climate-related issues
- A description of organizational structure(s)
- Processes by which management is advised about climate-related issues
- How management monitors climate-related risks and opportunities
Disclosing this governance information helps to evaluate whether a reporting organization is appropriately assessing and managing issues associated with climate change.
Why are the TCFD Governance Recommendations Important?
With greater demand for transparency and information beyond standard financial disclosures, reporting governance information demonstrates how an organization’s leadership is addressing the climate crisis and its impacts. This information helps investors and other stakeholders determine if relevant climate-related issues are receiving appropriate board and management attention.
There has been increased attention from investors and other stakeholders on governance and risk management practices in recent years, due to their importance in a company achieving its short and long-term business goals.
Without effective climate governance policies and structures in place, a company will struggle to:
- Make climate-informed strategic decisions
- Manage climate-related risks and opportunities
- Establish and track climate-related metrics and targets
What are the Benefits of TCFD’s Governance Recommendations?
Some of the potential benefits for organizations when they implement the TCFD’s governance recommendations include:
- Greater access to capital by increasing investors’ and lenders’ confidence that an organization’s climate-related risks are appropriately assessed and managed
- More efficiently meeting existing and preparing for future disclosure requirements to report material information
- Better risk management and more informed strategic planning due to increased awareness and understanding of climate-related risks and opportunities within an organization
These are just a few benefits organizations may take advantage of when implementing the recommendations from the TCFD framework. By following the recommendations laid out under the Governance pillar, organizations can improve their disclosure practices and better manage climate-related risks.
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