TCFD Framework: The Ultimate Guide to TCFD Climate Disclosures

The Task Force on Climate-related Financial Disclosures (TCFD) and the TCFD framework have gained significant attention in recent years. Over 4000 businesses around the globe have adopted its guidelines.

As CFOs, CSOs, and business professionals, it is crucial to understand the importance of TCFD climate disclosures and the impact they have on companies. In this comprehensive article, we will cover the TCFD framework, how it works, its effect on businesses, and the data required to disclose carbon emissions.

What is the TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led initiative established by the Financial Stability Board (FSB) in 2015. Its primary objective is to develop a set of voluntary, consistent disclosure recommendations that companies can use to inform investors and other stakeholders about their climate-related financial risks and opportunities.

The ultimate goal of the TCFD framework is to promote transparency and enable better decision-making in capital allocation.

First and foremost, TCFD standards and recommendations apply to financial institutions such as banks, insurance companies, asset managers, and asset owners. With the increasing demand and necessity for carbon disclosure frameworks, however, they are now used across different industries and sectors.

In its own words, the TCFD recommendations are:

• Adoptable by all organizations
• Included in financial filings
• Designed to solicit decision-useful, forward-looking information on financial impacts
• Strong focus on risks and opportunities related to transition to lower-carbon economy

TCFD Standards: The Four Core Elements

The TCFD framework includes four thematic areas with 11 recommendations for climate-related financial disclosures: Governance, Strategy, Risk Management, and Metrics and Targets. Each represents a part of an organization’s operations and the answers should provide clarity for investors and regulators to assess the reporter’s climate-related risks and opportunities.

Let’s go through all of them and see what questions to ask yourself before submitting your TCFD disclosure.

You can use these to make sure your report is compliant.

Governance

This element focuses on the organization’s governance structure concerning climate-related risks and opportunities. Companies should disclose the board’s oversight of climate-related issues and the management’s role in assessing and managing these risks and opportunities.

Questions to ask:

• How is the board’s oversight of climate-related risks and opportunities disclosed?
• What is management’s role in this?

You should show how you and your company’s leadership prioritize and manage climate-related tasks. Give concrete steps and measures you follow, like audits, budgets, committees, and processes. Mention how sustainability and climate are represented in your organizational chart, for example through a CSO and their department.

Strategy

Organizations should disclose the actual and potential impacts of climate-related risks and opportunities on their businesses, strategy, and financial planning. This includes short-, medium-, and long-term timeframes.

Questions to ask:

• Have you identified climate-related risks and opportunities over the short, medium, and long term?
• What is their impact on your business, strategy, and financial planning?
• What is the resilience of your organization’s strategy to different climate-related scenarios (especially to the 2°C and 1.5° ones)?

Here it is important to consider how your strategies might be affected by climate-related risks and opportunities. Consider financial performance like revenue and costs, operations like availability of resources, and other aspects and how they are impacted.

Show that you are prepared and have budgeted for those risks.

Risk Management

Companies should disclose how they identify, assess, and manage climate-related risks. This includes integrating climate-related risks into their overall risk management processes.

Questions to ask:

• How do you identify and assess climate-related risks?
• How are these risks managed within your organization?
• Are there processes in place to integrate climate-related measures into your overall risk management?

Climate risks are now very real and should be part of every company’s overall risk management strategy. Which of these risks are material and why, and which ones aren’t?

Metrics and Targets

Organizations should disclose the metrics and targets they use to assess and manage climate-related risks and opportunities. This includes Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and any related targets.

Questions to ask:

• What metrics are you using to assess climate-related risks and opportunities?
• Have you disclosed all scope 1, 2, and 3 GHG emissions and their associated risks?
• How do you track climate targets and progress toward them?

You can’t disclose what you don’t know. Or as we like to say:

You can’t reduce what you don’t measure.

Scope 1 and 2 are required by the TCFD, whereas Scope 3 emissions, so all indirect GHG emissions along your value chain, are optional. However, the TCFD (and we at Reegy) highly encourage your organization to disclose all relevant scope 3 emissions.

Not only is this important to give an accurate picture of your organization’s climate risk, but it also helps you uncover opportunities to reduce costs and boost performance.

Our Reegy Eco Hub makes measuring and tracking all types of GHG emissions super easy and fast. With just a few clicks, you can already start quantifying your impact on the environment and effortlessly prepare disclosure data.

Besides emissions, what are your goals and targets toward Net Zero and climate neutrality?

How TCFD disclosure works

TCFD provides a framework that companies can adopt and implement to evaluate and disclose climate-related risks and opportunities. Companies should follow a five-step process to effectively integrate TCFD recommendations into their financial reporting.

1. Assess materiality of climate-related risks and opportunities.
2. Implement governance and risk management processes.
3. Identify, assess, and manage climate-related risks and opportunities.
4. Establish metrics and targets.
5. Disclose information in financial filings or other public reports.

Why you should use the TCFD framework

The growing recognition of climate-related risks and opportunities has led to increasing pressure to disclose climate-related financial information. Climate disclosures according to TCFD can improve your investor relations, yield a high ROI and helps you manage and understand your own risks and opportunities.

Here are some benefits your company will gain from implementing TCFD recommendations and voluntary disclosure best practices:

Understand your climate-related risks and opportunities

The ultimate goal of all climate disclosures is for the world to reach Net Zero and help reach the 1.5C target from the Paris Agreement.

Using the TCFD framework and guidance can increase your understanding of climate-related risks, detect opportunities and see how you may be affected by climate change.

Enhance risk management and strategic planning

Managing risk is at the heart of a company’s governance and ESG efforts. Climate risk plays a big role in this and can have significant impacts on your operations.

Using TCFD disclosures, you can actively manage this risk and create a strategy to tackle it.

Strengthen investor confidence and access to capital

80% of all large-scale investors now factor ESG ratings into their investment decisions.

Therefore, using TCFD recommendations can improve investor relations and give you access to new capital.

Attract environmentally conscious customers, investors and employees

Climate change affects us all. Customers are no longer satisfied with just the cheapest alternative and want companies to prove their climate actions and efforts.

The same holds true for employees as more and more people wish to work in companies that protect our environment.

Speaking of which, join us at Reegy and let’s make an impact together!

Comply with evolving regulations and reporting requirements

Let’s face it, most companies start their Net Zero journey because they are required to. That’s not a bad thing though and regulations and requirements have come a long way since the first release of the GHG Protocol in the early 2000s.

TCFD standards are now worked into many new climate and corporate responsibility frameworks around the globe. By starting to disclose your emissions according to TCFD, you can get a headstart and even re-use your data for other reporting standards.

Where to disclose carbon emissions according to the TCFD?

The TCFD recommends including all climate-related financial disclosures in the organization’s annual public financial filings. Depending on your country and region, this may be tied to different regulations and laws but should always be comprehensive and transparent.

There is no specification on where to disclose carbon emissions according to the TCFD. For practical purposes, it makes most sense to include them in your annual financial reports and filings.

Data Required to Disclose Carbon Emissions

To comply with TCFD recommendations on metrics and targets, companies need to disclose their entire scope 1 and 2 GHG emissions data. Scope 3 is voluntary but highly encouraged.

Scope 1: Direct GHG emissions from sources owned or controlled by the company (e.g., emissions from company-owned vehicles or manufacturing processes).

Scope 2: Indirect GHG emissions from the generation of purchased electricity, heat, or steam consumed by the company.

Scope 3 (if appropriate): Other indirect GHG emissions that occur in the company’s value chain (e.g., emissions from the production of purchased goods or services, business travel, and waste disposal).

Reegy’s carbon accounting module can help you track and disclose your carbon emissions easily.