In 2015, the Financial Stability Board established The Task Force on Climate-related Financial Disclosures (TCFD) to help businesses disclose climate-related risks and opportunities in their financial reporting. Then, in 2017, the TCFD issued its final recommendations for companies across four areas: governance, strategy, risk management, and metrics and targets.
Recommendations in the area of governance:
TCFD recommends that businesses disclose how their board of directors and senior management oversee climate-related risks and opportunities. Through governance structures and processes, they should also integrate climate-related risks and opportunities into their overall risk management. Additionally, TCFD recommends disclosing the following:
- The oversight role of any board committee responsible for climate-related risks and opportunities.
- How they engage with shareholders and other stakeholders on climate-related issues.
- How executive compensation is linked to climate-related risks and opportunities.
- Board members and senior management’s qualifications and expertise on climate-related issues.
- How they consider the potential impacts of climate-related risks and opportunities on their business models and strategies.
- The company’s policy for identifying and managing conflicts of interest related to climate-related issues.
Concerning strategy area:
Disclosing how climate-related risks and opportunities are factored into their overall strategic planning. This includes disclosing how their businesses are positioned to transition to a low-carbon economy and adapt to physical climate risks. TCFD also suggests revealing the following:
- The resilience of their strategies, considering different climate-related scenarios, including temperature increases and the associated economic and financial impacts.
- Any potential impact on their strategies due to technological developments, evolving consumer preferences, and changing policies related to climate change.
- Any key performance indicators (KPIs) related to their climate-related strategies, such as targets for reducing greenhouse gas emissions, investments in low-carbon technologies, or adaptation measures to address physical climate risks.
- How they manage any climate-related opportunities from their strategic planning, including options for developing new products or services, changes in supply chain dynamics, or shifting consumer preferences.
- Material risks and opportunities arise from transitioning to a low-carbon economy, including policy and legal developments, market and technology changes, and reputational risks.
Recommendations in the area of risk management:
Identifying, assessing, and disclosing climate-related risks and opportunities. They should also reveal how they manage these risks and opportunities, including scenario analysis and stress testing. TCFD also suggests announce:
- Approach to assessing and managing climate-related risks and opportunities, including the methods and models used to evaluate different scenarios, the time horizon of the assessments, and any assumptions made.
- How climate-related risks and opportunities are incorporated into their enterprise risk management frameworks and decision-making processes, including how they inform capital allocation, investment decisions, and strategic planning.
- Their risk management strategies and practices consider the physical, transition, and liability risks associated with climate change.
- How they monitor and manage their exposure to climate-related risks and opportunities through stress testing, scenario analysis, and other risk management tools.
- Any external data or information sources to inform their risk management processes, including climate-related data, benchmarks, and scenario analyses.
About the area of metrics and targets:
The TCFD recommends that businesses disclose the metrics and targets to assess and manage climate-related risks and opportunities, including revealing how they measure and evaluate greenhouse gas emissions and their targets for reducing them.
- Disclose any climate-related metrics and targets used to assess and manage their exposure to climate-related risks and opportunities, including metrics related to greenhouse gas emissions, energy use, water consumption, waste generation, and other environmental impacts.
- Disclose any progress towards meeting their climate-related metrics and targets, including any challenges encountered and how they plan to overcome them.
- Disclose any key performance indicators (KPIs) related to their climate-related targets, including any financial impacts, such as cost savings, revenue generation, or risk reduction.
- Disclose any plans to set new or updated climate-related targets and how companies will integrate them into their overall strategy and risk management processes.
- Disclose any external standards, frameworks, or certifications used to inform their climate-related metrics and targets and how they are aligned with best practices and evolving regulatory requirements.
To sum it up,
By implementing TCFD’s recommendations, businesses can enhance accountability and transparency around climate-related risks/opportunities. This builds trust with stakeholders, including investors, customers, and regulators. Additionally, it positions them well to navigate the low-carbon transition.
Moreover, businesses can understand/communicate potential climate impacts on operations, supply chains, and markets. They can identify/capture opportunities, mitigate risks, and enhance long-term financial performance.
Furthermore, these recommendations improve understanding/management of climate risks/opportunities, resilience, adaptability, and long-term financial performance. They help meet evolving regulatory requirements, demonstrate commitment to sustainability and responsible practices.
Lastly, tracking/communicating progress on climate goals enhances transparency/accountability, identifies improvement areas, demonstrates commitment to sustainability, and boosts reputation among stakeholders.
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