Financial heavy-weights Michael Bloomberg, the founder of Bloomberg LP, and Mark Carney, former governor of the Bank of England, spearheaded the initiative [1]. Larry Fink, CEO of BlackRock, the world’s largest asset manager, warned it would become a requirement for BlackRock’s investments [2]. Now, the Canadian federal government is making it a requirement for companies that seek funding under the Large Employer Emergency Financing Facility (LEEFF), which will provide bridge financing for large Canadian employers impacted by the COVID-19 pandemic [3].

The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD or Task Force) is reshaping corporate risk disclosure. We detailed the growing momentum behind sustainability reporting in our last blog post [4]. We concluded that sustainability reporting is no longer optional for publicly traded companies and there is coalescence around two disclosure standards: TCFD and SASB (the Sustainability Accounting Standards Board). In this post, we take a closer look at the TCFD. What is it? What does it say? And how can my company comply?
 

What is the TCFD?

Financial policymakers have become increasingly concerned that inadequate information about risks can lead to the mispricing of assets. This will inevitability lead to asset price corrections and sudden losses in asset values. The impacts can potentially result in severe financial instability. During the 2007/2008 financial crisis this is exactly what happened. The FSB was set up in 2009 to prevent this type of financial instability and received endorsement from the Heads of State and Government of the largest and most powerful nations in the world [5].

In 2016, the G20 Finance Ministers and Central Bank Governors became concern that climate change is a risk that could potentially lead to financial instability. The view was that climate-related risks are one area with inadequate and inconsistent disclosure standards. Precipitous changes in energy use and the revaluation of carbon-intensive assets, may give rise to concerns regarding an abrupt correction in asset values and financial stability. Given these concerns, FSB chair Mark Carney was tasked with reviewing how the financial sector can take account of climate-related issues. Carny established a Task Force at the 2015 United Nations climate change meetings in Paris to begin work with businesses and investors on the issue. The Task Force, chaired by Michael Bloomberg, was asked to develop voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material climate-related risks.

Following a public comment period, on June 29, 2017 the TCFD released its final recommendations report and supplemental materials including:

1. Recommendations on disclosing climate-related financial information;
2. Guidance on how to implement the recommendations; and
3. A technical supplement for developing scenario analysis.

What does the TCFD say?

Between the recommendations report, annex, and technical supplement, there is over 200 pages of material. There is excellent content here for companies and individuals looking to become experts in TCFD reporting, but the purpose of this newsletter is not to replicate that text. Here we provide a snapshot of the most relevant aspects of the TCFD.  

The Task Force structures its recommendations around four key areas (see Table 1). There is a section asking for details on the organization’s governance practices, the impact that climate changes could have on the company’s strategy, the processes used to manage risk, and metrics/targets use to assess and manage climate risk. There is nothing more to it than that. It really is that straight forward.

Table 1 - Recommendations for Climate-Risk Disclosure [6]

Governance - The organization’s governance around climate-related risks and opportunities	Strategy - The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material	Risk Management - The processes used by the organization to identify, assess, and manage climate-related risks	Metrics and Targets - The metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material
Describe the board’s oversight of climate-related risks and opportunities.	Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.	Describe the organization’s processes for identifying and assessing climate-related risks.	Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.
Describe management’s role in assessing and managing climate-related risks and opportunities.	Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.	Describe the organization’s processes for managing climate-related risks.	Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
	Describe the resilience of the organization’s strategy, taking into consideration different scenarios, including a 2°C scenario.	Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.	Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.

How can my company comply?

Hopefully you are feeling a little more confident in your understanding of the TCFD framework. While the framework is relatively short and simple, the process of building a TCFD-aligned disclosure is more complex. The questions, if answered thoughtfully, will strike as the heart of your company’s risk management and capital allocation processes. The process may even bring to light significant oversights in you company’s strategic plans. That’s no reason to get discouraged. In fact, it is an exciting prospect. You could be the individual that sets your organization on course for a more resilient future. 

Here we outline some of the potential areas where you, the sustainability manager, should take note as you walk your organization through the process of building a TCFD-compliant disclosure.

What is a climate-related risk/opportunity?
The Task Force defines specific categories for climate-related risks and opportunities and encourages organizations to evaluate and disclose those that are most pertinent as part of their financial statement preparation and reporting processes. The main climate-related risks and opportunities that organizations should consider include transition risk (including policy, legal, technology, markets, and reputation) and physical risk (including acute and chronic). A full list of climate-related risks and potential financial impacts is provided in Appendix A.

How do I do scenario analysis?
One of the Task Force’s key recommendations is to disclose potential impacts of climate-related risks and opportunities on an organization’s businesses, strategies, and financial planning under potential future scenarios. The Task Force recommends organizations use a 2°C scenario (i.e. aligned with the Paris climate agreement) as well as two or three other relevant scenarios. A technical supplement is provided to assist organizations in undertaking and using climate-related scenario analysis. We recommend not getting too bogged down in developing your own scenarios. There are some great third-party scenarios out there, such as the International Energy Agency’s World Energy Outlook [7], that are a great place to start.

What is a material risk?
The principle of materiality for disclosure of climate-related strategy and metrics and targets can be ambiguous. The TCFD’s draft recommendations were originally met with strong criticism for failing to define materiality. IHS Markit, in a report funded by oil companies including BP, Chevron, and Total, warned the recommendations “could obscure material information and create a false sense of certainty around the financial implications of climate-related risks” [8]. In its final recommendations, the TCFD addressed this criticism head on. For large reporting companies (i.e. those that have annual revenue greater than USD $1 billion), the report recommends  that when information related to strategy and metrics and targets is not deemed material, that the information is disclosed in other official company reports (e.g. Corporate Responsibility Report) rather than in financial filings. Large reporting companies are also recommended to conduct more robust scenario analysis to assess the resilience of their strategies. For sustainability managers, if is best to work closely with your financial disclosures team to determine was constitutes a material financial risk.

How can I align this with my existing sustainability disclosure?
A lack of standardization has historically been a huge issue with climate-related financial data. There is now coalescence around the TCFD framework. If you are using other sustainability standards in your corporate disclosure, now is the time to think about migration to the TCFD framework. The TCFD even helps you with the task of migration by mapping recommendations with other reporting guidance (e.g. CDP, GRI). For more detail on this see Appendix B.

What support do I need?
To build a robust TCFD-aligned report, we suggest sustainability managers take the following steps:

• Ensure your organization has the proper risk management and governance processes in place. Climate-related risk is not unlike the other diverse risks your business faces. Seek to integrate climate-risk into your company’s existing risk management framework.
• Get familiar with the TCFD disclosure guidance. The TCFD offers supplemental guidance depending on the sector. This includes financials; energy; transportation; materials and buildings; and agriculture, food, and forest products. Make sure you understand the questions that are applicable to your organization.
• Going through the strategy and risk management guidance analysis could reveal organizational gaps. A sustainability manager that can champion the need to integrate risk-analysis with investment decision-making will show their worth. The goal is to make investments and build an organization that is resilient under a variety of future policy scenarios. Who can argue with that?
• Robust disclosure requires good data. Have the right tools in place to measure and track key climate-related metrics. This could include:
  • GHG emission by category: Scope 1, 2, and 3
  • GHG emissions by type: CO₂, CH₄, N₂O, etc.
  • GHG emissions by source: Combustion, venting, flaring, fugitives, etc.
  • GHG emission by business unit or geography
  • GHG emissions by product on an absolute and intensity basis
• Data allows for risk to be measured. Targets allow for risk to be managed. Think about how your organization will manage climate-related risks and opportunities and how you will show progress against targets.

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References
[1] https://www.fsb-tcfd.org/about/#
[2] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
[3] https://pm.gc.ca/en/news/news-releases/2020/05/11/prime-minister-announces-additional-support-businesses-help-save
[4] https://mailchi.mp/a409e3edfd48/sustainability-in-the-spotlight-is-your-company-ready
[5] https://www.fsb.org/history-of-the-fsb/
[6] https://www.fsb-tcfd.org/publications/final-recommendations-report/
[7] https://www.iea.org/reports/world-energy-outlook-2019
[8] https://www.ihs.com/Info/0417/climate-financial-risk.html

 
Appendix A - Climate-Related Risks and Opportunities and Potential Financial Impacts
 

Type	Climate-Related Risks	Potential Financial Impact
Transition Risks	Policy and Legal Risks
	Increased pricing of GHG emissions Enhanced emissions-reporting obligations Mandates on and regulation of existing products and services Exposure to litigation	Increased operating costs (e.g., compliance costs) Write-offs and early retirement of existing assets due to policy change Impaired assets Increased insurance premiums Fines and judgments
	Technology
	Substitution of existing products and services with lower emissions options Unsuccessful investment in new technologies Upfront costs to transition to lower emissions technology	Write-offs and early retirement of existing assets Reduced demand for products and services Upfront research and development (R&D) expenditures in new and alternative technologies Upfront capital investments in technology development Upfront costs to adopt/deploy new practices and processes1
	Markets
	Changing customer behavior Uncertainty in market signals Increased cost of raw materials	Reduced demand for goods and services due to shift in consumer preferences Increased production costs due to changing input prices (e.g., energy, water) and output requirements (e.g., waste treatment) Abrupt and unexpected shifts in energy costs Changing revenue mix and sources Re-pricing of assets and speed of re-pricing (e.g., fossil fuel reserves, land valuations, securities valuations)
	Reputation
	Shift in consumer preferences Stigmatization of sector Increased stakeholder concern or negative stakeholder feedback	Reduced demand for goods/services Reduction or disruption in production capacity (e.g., shutdowns, delayed planning approvals, interruptions to supply chain) Impacts on workforce management and planning (e.g., employee attraction and retention) Reduction in capital availability
Physical Risks	Acute	Reduction or disruption in production capacity (e.g., shutdowns, transport difficulties, supply chain interruptions) Impacts to workforce management and planning (e.g., health, safety, absenteeism) Write-offs and early retirement of existing assets (e.g., damage to property and assets in “high-risk” locations) Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants) Increased capital costs (e.g., damage to facilities) Reduced revenues from lower sales/output Increased insurance premiums and potential for reduced availability of insurance on assets in “high-risk” locations
	Increased severity of extreme weather events such as cyclones and floods
	Chronic
	Changes in precipitation patterns and extreme variability in weather patterns Rising mean temperatures Rising sea levels