TCFD – Task Force on Climate-Related Financial Disclosures


Overview of what TCFD is

TCFD was established by the Financial Stability Board (FSB).  TCFD is industry-led and designed to develop climate-related financial disclosures.  Disclosures would include financial impact of climate-related risks and opportunities.  Objective is to better inform investors, lenders, insurers and other stakeholders.  In other words, all things financial (up and down) as it relates to climate. The recommendations by TCFD are now supported by 1,000 orgs worldwide with trillions of $ in assets, under management.

Four thematic areas that represent core org elements:

Note: These four areas are designed to inform on another.

Governance

The organization’s governance (management structure) and climate-related risks and opportunities.

Strategy

Actual and potential impacts of climate-related risks and opportunities on the org’s business, strategy and financial planning.

Risk Management

Processes used by the org to identify, assess, and manage climate-related risks.

Metrics and Targets

Metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Task Force on Climate-related Financial Disclosures (overview):

There is a 38 page document that covers in detail TCFD – need for climate-related financial disclosures

The need for climate-related financial disclosure

As more information is made available, which demonstrates the link between climate-change and financials, organizations recognize this is not just a long-term issue to postpone, but now realize this issue is impacting today.

Bank of England Carney focuses on three things: changes in climate policies; new technologies; growing physical risks.  Need to reassess the value of every financial asset.  Concern (to lenders) is that if they invest in activities that may not be viable long-term will likely be less resilient to the transition to a lower-carbon economy.  Investors will likely experience lower returns.

There’s also a concern that present valuations do not adequately factor in climate-related risks because of insufficient information.  Key is for lenders to have adequate information on how companies are planning for a lower-carbon economy.  This is a global issue, so all companies (globally) need to have good (and shareable) data.

-Between 2017 and 2019, natural catastrophe losses intensified by climate change – $640B.

-Value at risk as a result of climate change to manageable assets by 2100 – up to $43T.

Potential financial implications of climate change

AOF: Rise in natural catastrophes (more storms per year) and chronic environmental shifts.

Storms, droughts, wildfires, other extreme events, changing weather patterns — all yield a macroeconomic shock or financial loss.

Climate change (eg rising sea-level affecting credit secured by coastal real estate) could lead to unanticipated financial loss and impact the global financial system.

AOF: Transition to a low-carbon economy.

A rapidly changing policy or consumer preference can affect the value of assets and lead to fast losses.  If there is an abrupt adjustment towards a low-carbon economy there may be financial risks.

Elevated credit spreads, greater precautionary savings, and rapid pricing readjustments can affect the economy because of climate-related financial risks.

-Climate change is a financial risk

-Climate-related risk is non-diversifiable and will have a financial impact on many orgs.

The task force on climate-related financial disclosures

-FSB (Financial Stability Board) established the Task Force on TCFD to develop recommendations for more effective climate-related disclosures

-G20 Finance Ministers and Central Bank Governors asked the FSB to review how the financial sector can take account of climate-related issues.

-FSB interested in promoting more informed investment, credit, insurance underwriting decsions

-FSB focused on enabling stakeholders to understand better the concentrations of carbon-related asset in financial sector.  Also, focus on financial system’s exposures to climate-related risks.

Demand for climate-related financial disclosure

-TCFD recommendation started in 2019. Since then, demand for climate-related disclosures have increased significantly

-Climate Action 100+ – implementing TCFD recommendations by some of the world’s largest corporate greenhouse gas emitters (to strengthen their climate-related disclosures) 370 investors invested more than $35T in assets under management.

-Large asset owners and asset managers have an important role to play in influencing the organization in which they invest.

-Because of new reporting requirements (European non-financial reporting directive 2014/95/EU, stress testing, and reg guidance) transparency is important now.

Climate-related risks and opportunities

-Risks (Transition):

Policy and Legal

Technology

Market

Reputation

-Risks (Physical):

Acute

Chronic

-Opportunites

Resource Efficiency

Energy source

Products and services

Markets

Resilience

The TCFD recommendations (published in 2017 report)

-Task force drew on member expertise, significant stakeholder engagement, and existing climate-related disclosure regimes

Governance

Strategy

Risk Management

Metrics and Targets

Key: Power of voluntary engagement with private sector complementing public sector regulations.

Key: TCFD developed global standards that are now being used by a significant number of corporations around the world.

TCFD recommended disclosures

-The key features of the 4 recommendations are:

Adoptable by all orgs

Strong focus on risks and opportunities related to transition to lower-carbon economy

Designed to solicit decision-useful, forward-looking information on financial impacts

Disclosure under the strategy and metrics and targets recommendations in financial filings is subject to a materiality assessment, although all organizations are encourage to disclose publicly if practicable

Guidance on implementing the TCFD recommendations

-In 2017 the Task force developed an annex report for guidance

-It’s all about helping orgs with a strategy on short, medium and long-term approaches to climate change (risks and opportunities)

Sector-specific supplemental guidance

How identified climate-related issues affected their businesses, strategy and financial planning

Focus on: products and services; supply chain and/or value chain; adaptation and mitigation activities; investment in research and development; operations (including types of operations and locations of facilities)

Task force recommends all organizations with public debt or equity implement its recommendations

Financial sector industries to focus on (banks; insurance companies; asset managers; asset owners)

Non-financial groups to focus on (energy; transportation materials & buildings; agriculture, food and forest products)

Implementing the TCFD recommendations

-Implementing the TCFD recommendations generally includes the following considerations:

Managing climate-related issues (internal processes; collecting necessary data and metrics)

Existing and future reporting requirements (reviewing various reporting)

Reporting capabilities (develop processes and capacity to report info under TCFD recommendations)

Materiality (all orgs encouraged to report in line with the governance and risk management recommendations regardless of materiality)

Placement (determining the appropriate placement of disclosures)

Ongoing collaboration and improvement (working groups, workshops, knowledge sharing with peers and investors is helpful)

Benefits of implementation

-Some of the potential benefits of task force recommendations:

Easier or better access to capital

More effectively meeting existing disclosure requirements

Increased awareness and understanding of climate-related risks and opportunities

Proactively addressing investors demand for climate-related information

Select resources on the TCFD recommendations

-Various resources include:

TCFD website – fsb-tcfd.org

TCFD knowledge hub – tcfdhub.org

WBCSD Preparer forums – world business council for sustainable development

UNEP FI reports on climate-related risk and scenario analysis – UN Environment programme financie initiative

Other resources – UN PRI, CDP, CDSB, SASB

TCFD supporters

-There are 1030 supporting orgs for TCFD – public and private sectors

-80 industries; 50 countries; seven national governments

Overview of TCFD 2019 status report

Overall, really good progress being made, and a lot more work to do.

Good start and collaboration.

Examples of public sector developments

-Australia – ASIC

-Canada –

-Chile – CMF – green finance

-European Union – Non-financial reporting directive 2014/95/EU

-France – article 173 mandatory climate-related reporting by investors

-Japan – METI, MoE, JFSA

-Malaysia – Climate change and Principle-based taxonomy

-New Zealand – captured entities will be required to implement TCFD

-United Kingdom – good support and incorporation of TCFD

-Global Commission on adaptation – report calling on the world’s largest developed economies to align disclosure practices

-Network for greening the financial system (NGFS)

REF – https://www.theclimateservice.com/tcfd

 

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