With more droughts, heat waves, and other extreme weather events happening around the world, many governments are coming to see the need for companies and other organizations within their borders to comprehensively disclose climate-related risks and opportunities.
The Task Force on Climate-Related Financial Disclosures or TCFD framework is commonly used by governments as their basis for developing climate-related disclosure mandates. As of August 2022, over 89 countries and jurisdictions support the framework globally. As the framework continues to gain popularity, we explore its four pillars as a part of our TCFD blog series. The TFCD’s four pillars include:
- Risk Management
- Metrics and Targets
This article explores the Metrics and Targets recommendations and how organizations can benefit from following the TCFD’s guidance.
What Are the TCFD’s Metrics and Targets Recommendations?
The TCFD’s framework has three specific recommended disclosures around Metrics and Targets. Under this pillar, organizations are advised to disclose:
- The metrics used to assess climate-related risks and opportunities
- Scopes 1, 2, and if needed, 3 greenhouse gas (GH) emissions and the associated risks
- The targets used to manage climate-related risks and opportunities and overall performance
At its core, the Metrics and Targets pillar of the TCFD’s recommendations helps investors and other stakeholders understand how an organization is measuring and monitoring its climate-related risks and opportunities. Let’s take an in-depth look at each of the three guidelines.
Metrics Used to Assess Climate-Related Risks and Opportunities
When organizations disclose the metrics they use to assess their climate-related risks and opportunities, it’s recommended they include:
- The key metrics used to measure and manage climate-related risks and opportunities
- The metrics on risks associated with water, energy, land use, and waste management
- Whether and how related performance metrics are incorporated into remuneration policies
- Internal carbon prices and metrics such as revenue from products and services designed for a lower-carbon economy
- A description of the methodologies used to calculate or estimate climate-related metrics
It is also recommended that metrics be provided for historical periods to allow for trend analysis and forecasting.
This disclosure recommendation is designed to provide stakeholders with data to better assess the organization’s potential risk-adjusted returns and provide a basis for comparing an organization against others in its industry.
GHG Emissions and Related Risks
When disclosing their Scope 1, 2, and 3 GHG emissions, organizations should ensure they:
- Calculate GHG emissions in line with the GHG Protocol methodology
- Provide related industry-specific GHG efficiency ratios
- Share historical GHG emissions data and associated metrics for trend analysis
This recommendation is designed to help standardize how organizations are reporting their Scope 1, 2, and 3 emissions and their related targets. This helps stakeholders validate the accuracy of emissions calculations while allowing them to compare and benchmark an organization against others in its industry or portfolio.
Targets Used to Manage Climate-Related Risks, Opportunities, and Overall Performance
With this disclosure recommendation, organizations are asked to describe their key climate-related targets including:
- GHG emissions, water usage, energy usage, and waste management
- Efficiency or financial goals
- Financial loss tolerances
- Net revenue goals for products and services designed for a lower-carbon economy
In describing their targets, organizations should include the following:
- Whether the target is absolute or intensity-based
- Time frames over which the target applies
- Base year from which progress is measured
- KPIs used to assess progress against targets
- Methodologies used to calculate targets and metrics
Transparency instills confidence. By disclosing their climate-related disclosure targets, metrics, and determination methods, organizations can more easily gain the trust of their stakeholders, demonstrating that they’re appropriately addressing climate-related risks and opportunities.
Why are the TCFD Metrics and Targets Recommendations Important?
The TCFD’s disclosure recommendations around Metrics and Targets are designed to provide investors and other stakeholders with the decision-useful information needed to evaluate how well an organization is performing on its climate-related goals.
Access to the metrics and targets used by an organization allows internal and external stakeholders to better assess its:
- Potential risk-adjusted returns
- Ability to meet financial obligations
- General exposure to climate-related issues
- Progress in managing or adapting to those issues
When organizations disclose this information, it enables stakeholders to properly assess an organization’s climate-related financial risks.
What are the Benefits of TCFD’s Metrics and Targets Recommendations?
Some of the potential benefits for an organization associated with implementing the TCFD’s Metrics and Targets recommendations include:
- More informed financial decision-making
- Greater access to capital
- Increased investor and lender confidence
These are just a few examples of how an organization can benefit from implementing TCFD’s Metrics and Targets disclosure recommendations. By following the guidelines laid out in this pillar, organizations can estimate the impact of their climate-related risks or opportunities on financial performance and position while also helping build a more sustainable future.
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