As countries grapple with the impacts of climate change, more are recognizing the need for comprehensive reporting of climate-related risks and opportunities across all industries and sectors. The Task Force on Climate-Related Financial Disclosures or TCFD framework is one of the most commonly used frameworks for climate-related disclosures and continues to be used by more countries each year to establish their mandatory reporting requirements.
As the framework becomes more widely adopted, we are exploring each of its four recommended disclosure pillars as a part of our TCFD blog series. The TFCD’s recommendations are structured around:
- Governance
- Strategy
- Risk Management
- Metrics and Targets
This article explores the Risk Management pillar of the TCFD’s disclosure recommendations and how organizations can benefit from implementing its guidance.
What are the TCFD’s Risk Management Disclosure Recommendations?
The TCFD’s framework has three specific recommendations around Risk Management. Under this pillar, organizations are asked to describe:
- Processes for identifying and assessing climate-related risks
- Processes for managing climate-related risks
- How these processes are integrated into the organization’s overall risk management
The Risk Management pillar, at its core, focuses on providing investors and other stakeholders with the necessary information needed to evaluate an organization’s overall risk profile and risk management activities around climate-related impacts.
Let’s take a closer look at each of these three guidelines.
Processes For Identifying and Assessing Climate-Related Risks
When organizations report on the processes, they use for identifying and accessing climate-related risks, it’s suggested they include:
- Whether they considered existing and emerging regulatory requirements related to climate change (e.g., limits on emissions)
- Processes for assessing the potential size and scope of identified climate-related risks
- Definitions of risk terminology used or references to existing risk classification frameworks used
This disclosure recommendation is designed to help investors and other stakeholders evaluate how an organization thinks about and determines its potential climate-related risks.
Processes For Managing Climate-Related Risks
When reporting on the processes they implement to manage climate-related risks, organizations are recommended to describe:
- The decision-making process to mitigate, transfer, accept, or control those risks
- Processes for prioritizing climate-related risks
- How materiality determinations are made within their organizations
Reporting this information provides greater clarity to stakeholders on how an organization is managing and mitigating its risk.
How These Processes are Integrated into the Organization’s Overall Risk Management
With this recommended disclosure, organizations are asked to describe how they integrated their processes for identifying, assessing, and managing climate-related risks into their overall risk management. Again, this guidance aims to promote transparency with stakeholders.
Organizations that report these disclosures are more apt to earn their stakeholders’ trust and increased confidence in their ability to tackle different potential climate-related scenarios.
Why are the TCFD Risk Management Recommendations Important?
The main reason to disclose risk management processes is to provide context to stakeholders for how an organization identifies and addresses its most significant climate-related risks.
The descriptions of the processes an organization uses to identify, assess, and manage risks provide stakeholders with some confidence that the organization has formulated a comprehensive approach to addressing its climate-related risks that also considers its strategic and financial plans.
Without effective climate-related risk management strategies and policies in place, a company will struggle to:
- Adapt to different climate scenarios
- Manage climate-related risks and opportunities
- Make climate-informed strategic decisions
What are the Benefits of TCFD’s Risk Management Recommendations?
Some of the potential benefits for an organization associated with implementing the TCFD’s Risk Management recommendations include:
- More informed strategic planning, decision-making, and better risk management due to increased awareness and understanding of climate-related risks within an organization
- Greater access to capital by increasing investors’ and lenders’ confidence that an organization’s climate-related risks are appropriately identified, assessed, and managed
- Increased awareness and understanding of climate-related risks within an organization
These are just a few examples of how an organization can benefit from implementing the TCFD’s Risk Management disclosure recommendations. By following the guidance laid out in this pillar, organizations can minimize the impacts of their climate-related risks while preparing for a more sustainable future.
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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