In March 2022, the Securities and Exchange Commission, or SEC, released its proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors.
Voluntary environmental disclosures have become increasingly common as part of reporting to investors. In fact, many businesses are already reporting on their environmental impact as part of formalized Environmental Social and Governance (ESG) programs that follow frameworks like the Task Force on Climate-Related Financial Disclosures, or TCFD.
But the time to meet our Net Zero commitments is waning, and harmonization has become the name of the game in ESG reporting. While companies could historically choose from a variety of different ESG frameworks and standards, this approach made it difficult for investors to effectively evaluate data between companies for consistency.
In July 2023, following the publication of the ISSB Standards, which are consistent with the four core pillars and eleven 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, and TCFD reports will be compliant with mandatory ISSB reporting, meaning organizations who already implemented TCFD ESG programs will not need to start all over again.
What Is the TCFD?
The TCFD was formed by the Financial Stability Board to develop recommendations around climate-related financial disclosures. The need for these recommendations was identified by G20 Finance Ministers and Central Bank Governors.
Specifically, the goal of the TCFD’s recommendations is to form the basis of a framework that:
- Promotes more informed investment, credit, and insurance underwriting decisions
- Enables investor stakeholders to better understand the presence of carbon-related assets in the financial sector
- Identifies the financial sector’s exposure to climate-related risks
Overall, the TCFD aims to facilitate effective disclosure from reporting companies to investors. While ESG reporting in the past has often been a relatively DIY process, standards and frameworks like TCFD aim to make sure that the data reported is presented in a way that is meaningful to investors and consistent across businesses.
How Does the TCFD Work?
The TCFD’s recommendations and standards aim to provide guidance to all businesses, while also providing sector-specific support. This sector-specific support is divided into two groups:
- Financial Sector Industries
- Insurance Companies
- Asset Managers
- Asset Owners
- Non-Financial Groups
- Materials and Buildings
- Agriculture, Food, and Forest Products
The non-financial sectors have been specifically identified as accounting for the largest proportion of global GHG emissions, energy usage, and water usage.
The guidance documents include a wide variety of TFCD disclosure examples for both financial and non-financial reporting companies, as well as step by step assistance to help businesses ensure their climate-related risk management processes are fully integrated with the company’s larger operational and management practices.
What are the TCFD’s Recommendations?
First published in 2017, the TCFD made recommendations under four pillars:
- Risk Management
- Metrics & Targets
While ESG reporting standards all include a governance portion, the TCFD’s framework has two specific recommended disclosures. Reporting companies are asked to describe both board oversight of and management’s role in assessment and management of climate-related risks and opportunities.
The TCFD aims to provide future-focused disclosures. A simple “state-of-the-environment” report is not sufficient. As a result, under the Strategy pillar, the recommended disclosures ask companies to describe:
- Identified climate-related risks and opportunities over the short, medium, and long term
- Potential impacts of climate-related risks and opportunities for business, strategy, and financial planning
- The overall resilience of their business strategy to a number of different climate scenarios, including limiting global warming to 2°C or lower
This pillar is heavily focused on processes, and in particular how a reporting organization identifies, assesses and manages climate-related risks. The disclosure also asks businesses to describe how these processes are integrated into the organization’s overall risk management, highlighting how ESG reporting and climate-related financial disclosures cannot exist in a silo within the company.
Metrics & Targets
Many organizations, when they think of climate or ESG reporting, often jump straight to metrics and targets, rather than providing a more holistic picture. While the TCFD’s recommendations aim to remedy that, the final pillar does require numerical disclosures, including:
- The metrics used to assess climate risks and opportunities, and how those are in line with the organization’s strategies and risk management processes
- Scopes 1, 2, and (as needed) 3 greenhouse gas emissions and related risks
- The targets used to manage climate risks and opportunities, as well as performance against these documented targets
What Are TCFD’s Principles for Effective Disclosure?
Climate and ESG reporting is an evolving field, with new sectors and companies implementing reporting programs and frameworks every year. The TCFD understands that no standard is a one-size-fits-all solution and so along with its recommendations and guidance documents has also published principles for effective disclosure, to ensure high-quality data reporting over time.
These principles are:
- Principle 1: Disclosures should present relevant information
- Principle 2: Disclosures should be specific and complete
- Principle 3: Disclosures should be clear, balanced, and understandable
- Principle 4: Disclosures should be consistent over time
- Principle 5: Disclosures should be comparable among organizations within a sector, industry or portfolio
- Principle 6: Disclosures should be reliable, verifiable, and objective
- Principle 7: Disclosures should be provided on a timely basis
Companies pursuing TCFD implementation should make sure their reporting follows these principles from the beginning to give investors the confidence they need to make good financial decisions.
Preparing a TCFD Report
There are many TCFD reporting examples available on the organization’s website. A TCFD report can be prepared as a standalone document, or can refer to existing documents like a larger corporate sustainability report, as long as the relevant disclosures are addressed and the principles for effective disclosures adhered to.
Completing an ESG report is more than just building a table with the right standard and disclosure headings and filling in the blanks. The first thing to do is to set the boundaries of your report. This includes both time boundaries (typically a reporting year) and geographic (does the report cover operations for a single facility? All facilities in a single country?).
Once the boundaries are set, you need to look at the disclosure requirements in the context of materiality. Not every organization will need to complete the same disclosures or at least not the same level of detail. Which of the disclosures are relevant – or material – to your business within the boundaries of your report?
Materiality considers both internal and external factors. Sometimes a disclosure may seem less important to the way your organization makes business decisions, but can be critical to how a potential investor weighs ESG performance from one company to the next. Both internal and external considerations need to be incorporated into your materiality assessment.
What’s Included in a TCFD Report?
TCFD reports are meant to be narrative in order to provide a complete picture of the organization’s operations, ESG goals and their performance in achieving these goals. It’s more than just a number crunching exercise.
The typical format of a TCFD-compliant report follows the four core pillars and eleven disclosures. The typical contents of the report might look like this:
- Executive Summary
- Overview of the company
- Key highlights from the report
- Commitment to TCFD recommendations
- Company’s motivation for TCFD reporting
- Definition of boundaries and materiality assessment
- Description of the company’s annual performance, either by revenue, workforce, production rates or other metric of intensity that can be compared year over year
- Governance structure for climate-related issues
- Board oversight and involvement
- Policies and processes for climate risk management, including a clear statement of leadership roles and responsibilities
- Disclosure on executive compensation tied to ESG performance
- How climate risks and progress toward ESG goals are communicated to the board or other leadership committees
- Company’s strategic approach to climate-related risks and opportunities
- Integration of climate considerations into the overall business strategy, and how this integration will impact:
- 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)
- Acquisitions or divestments
- Access to capital
- Key performance indicators related to climate goals in the short, medium and long terms and how these time periods are determined
- Financial performance related to climate risks and opportunities, as well as costs and revenue associated with transitioning to Net Zero operations
- Assessment of each/all strategy’s resilience in different climate-related scenarios based on incremental temperature increases
- Risk Management
- Processes for identification and assessment of climate-related risks, including an assessment of significance
- Defining organization-specific risks related to the follow categories
- Transition risks
- Physical risks
- Resource efficiency
- Energy source
- Products and services
- Risk mitigation strategies and actions taken. This includes how mitigation is prioritized for each risk type
- Contingency plans for severe climate events
- Description of how climate-related risk management is integrated with larger corporate risk management processes
- Additional risk management reporting specific to different sectors including banks, insurance companies, asset owners, and asset managers
- Metrics and Targets
- Disclosure of greenhouse gas emissions data (Scope 1, 2, and 3)
- Explanation of methodology for emissions calculation
- Targets for emissions reduction and timeline including for each of the risk categories described in the risk management section above
- Progress towards previous emissions reduction targets
- How progress is incorporated into remuneration policies
- Historical data for performance metrics and targets so that year-over-year trends can be assessed
The following sections may exist on their own, or may be incorporated into the reporting sections above. Either way, inclusion will provide a more robust report and clearer picture of potential future performance.
- Identification of climate-related opportunities
- Initiatives to capitalize on these opportunities
- Financial impact and potential returns on climate-related investments
- Reporting and Data
- Description of data sources and data quality assurance processes
- Frequency and methods of reporting climate-related data
- Alignment with international reporting standards (e.g., ISSB)
- Engagement with investors, regulators, and other stakeholders on ESG issues
- Feedback received and actions taken as a result of engagement
- Conclusion and Forward-Looking Statements
- Summary of key takeaways from the report
- Commitment to ongoing transparency and reporting improvements
- Forward-looking statements regarding future ESG and climate-related efforts
All in all, enough information needs to be provided to give investors a clear picture of the company’s ESG performance, challenges that may prevent it from achieving its targets or impact financial performance during transition to Net Zero operations, and opportunities for market growth and increased revenue.
Can TCFD Be Integrated With Other ESG Reporting Frameworks?
While many companies choose to follow the TCFD framework and recommendation because of its focus on providing consistent and useful data to the financial industry, since it is no longer a standard that is being updated, it may become necessary to update your reports to also comply with other standards like the ISSB.
If you’re looking for information on other ESG frameworks, read our article: Which ESG Reporting Frameworks Exist in 2023. While there are many similarities in these, they are each designed to be applicable to specific industries or particular geographic jurisdiction. Understanding how to integrate a TCFD report with other frameworks and standards can feel complex.
Using a software solution like FigBytes can help simplify that complexity. FigBytes is already designed to be compliant with frameworks like TCFD, ISSB and others and continues to update to make sure you meet reporting requirements year after year.
ESG reporting can be a valuable tool for your organization, leadership, employees and investors, but only if your reporting team doesn’t have to spend the entire year building the report. The real value comes from implementation. Your company can proactively reduce risk and prepare for opportunities in low-carbon markets.
FigBytes can streamline your reporting. It uses approved and validated methodologies to provide comparable emissions data and provides cloud-based data entry so different departments and suppliers can provide the information needed to complete the report.
Having a partner like FigBytes means your ESG team can be confident in the quality of their report, even as standards continue to evolve and harmonize. That confidence means they can focus on implementation and creating value each year. For more information on how FigBytes can help build a TCFD-compliant ESG report or help you manage the shift from TCFD to ISSB, speak with one of our experts today.