TCFD Recommendations: An Update on Climate Disclosures

It was recently reported, on 8 September 2021, that investors managing USD 2.3 trillion in assets called for standardised climate and environmental disclosure from more than 1,000 privately held portfolio companies.  The investors, who joined a growing chorus advocating for improved disclosures around environmental issues, requested the private companies to provide such data through the non-profit disclosure platform, CDP, which provides a mechanism for climate disclosures that align with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).  The TCFD recommendations were published in June 2017, and have accelerated the focus on climate disclosures by providing the leading framework for disclosures relating to the financial impacts of climate-related risks.

But what are the TCFD recommendations, and how can companies prepare for reporting in compliance with them?

The TCFD Recommendations in Brief

The TCFD was created in 2015 by the Financial Stability Board (FSB), an international body that monitors, and makes recommendations about, the global financial system.  In creating the TCFD, the FSB’s aim was to develop, and encourage, consistent climate-related financial risk disclosures for use by companies, financial institutions, and investors in providing information to stakeholders.

In June 2017, the TCFD published eleven recommendations (TCFD Recommendations), which provide a foundational framework for companies to report on environmental and climate change information.  In particular, companies are encouraged to disclose the actual and potential impacts of climate change on their businesses, as well as their processes for identifying and managing climate-related risks and opportunities.  The TCFD Recommendations are structured around four thematic areas:

1. Governance: Disclosing the company’s governance around climate-related risks and opportunities;
2. Strategy: Disclosing the actual and potential impacts of climate-related risks and opportunities on the company’s businesses, strategy, and financial planning where such information is material;
3. Risk Management: Disclosing how the company identifies, assesses, and manages climate-related risks; and
4. Metrics and Targets: Disclosing the metrics and targets used to assess and manage relevant climate-related risks where such information is material.

The Rise in Prominence of the TCFD Recommendations

Over the past few years, there has been an increasing realisation, amongst businesses and society at large, that in addition to potentially devastating environmental and human costs, climate change causes highly significant financial losses.  Partially as a result of this, companies have come under rising pressure from a range of stakeholders (but particularly investors) to voluntarily adopt the TCFD Recommendations.

The trend has been, and is being, augmented by national governments increasingly taking steps to mandate climate disclosures utilising the TCFD Recommendations.  According to a July 2021 FSB Report on Promoting Climate-Related Disclosures, 18 jurisdictions have adopted, or are planning to adopt, frameworks aligned with the TCFD Recommendations.  For example, Switzerland recently published proposals to develop a binding means of implementing the TCFD Recommendations for Swiss companies.

The move towards the adoption of ‘comprehensive’ climate risk management regimes (discussed in our Climate Disclosure and Risk Management: Global Approaches report) will necessitate increased, and increasingly complex, reporting and accounting; challenges that will require significant preparation.

Preparing for Climate Disclosure

Best-in-class companies are already applying the below strategies to not only produce robust TCFD‑aligned disclosures, but to preserve and create value by appropriately managing climate-related risks and opportunities:

1. Integrating climate into corporate governance structures by clearly defining climate-related roles and responsibilities of the board, senior management and dedicated climate or sustainability committees;
2. Adopting climate-related policies, action plans and targets to ensure group-wide alignment on climate initiatives and disclosing those policies, plans and targets to the public;
3. Building climate-related organizational capacities through stakeholder engagement initiatives, trainings and handbooks;
4. Incorporating climate factors into commercial contracts, due diligence processes and procurement practices;
5. Benchmarking climate governance, strategy, risk management and disclosures against peers and industry best practices;
6. Analysing and responding to climate-related regulatory and legislative developments, including with respect to mandatory carbon disclosures, climate risk management requirements and “green claims”; and
7. Assessing climate-related disclosures in the context of increasing litigation risk, including potential claims under securities laws and consumer protection laws.

Familiarity with these recommendations, and understanding how they can most effectively be implemented within individual businesses, will be increasingly important for companies.

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