Sustainability guidance and reporting frameworks play an important role to promote transparency between organizations and their stakeholders.
There’s no shortage of guidance and reporting frameworks; this crowded landscape is often referred to as the ‘alphabet soup’ of ESG.
In this blog – we examine the Task Force on Climate-related Financial Disclosures framework and its role in the ESG ecosystem.
What is the TCFD framework?
TCFD, or Task Force on Climate-related Financial Disclosures, was created by the Financial Stability Board to improve and increase reporting of climate-related financial information. TCFD is a guidance framework that helps companies disclose climate-related financial risks to investors, lenders, and insurers. TCFD recommendations are structured around the governance, strategy, risk management, and metrics and targets, and helping stakeholders make decisions on how to allocate capital and create strategic short, medium, and long-term plans.
When was TCFD created?
The Task Force was created in December of 2015 after the G20 Finance Ministers asked the Financial Stability Board to evaluate the connection between climate-related issues and the financial sector. The FSB is an international body that makes recommendations to the global financial system, so the push towards climate-related finance was significant.
Now under the guidance of Michael Bloomberg, as Chairman, the TCFD is made up of 31 Task Force Members across the G20, and represents a global perspective on finance.
How is TCFD structured?
Broken into four pillars, TCFD addresses disclosure requirements related to:
- Governance: How does the organization’s governance structure address climate-related risks and opportunities?
- Strategy: What is the tangible material impacts of climate-related risks and opportunities on the whole business, including strategy and financial planning?
- Risk Management: How does the organization define, assess, and manage climate-related risks?
- Metrics & Targets: What are the measurements in assessing material climate-related risks and opportunities?
Who is using TCFD?
Over 1,600 companies and organizations in almost 80 countries and 6 continents – which represent nearly $16 trillion in market capitalization – endorse or have already adopted TCFD.
While the landscape of reporting frameworks is vast and nuanced, it is worth noting that prominent asset managers such as Blackrock explicitly encourage reporting in line with SASB and TCFD guidelines.
In addition, the UN’s Principles for Responsible Investment (PRI), the world’s largest ESG guidance framework, has endorsed TCFD-aligned reporting since 2020.
How does TCFD cover Environment, Social and Governance metrics?
TCFD is explicitly designed to address climate risks, falling squarely within the ‘E’ of ESG reporting. However, this framework does touch on the S of Social and the G of Governance as well. The Task Force’s four pillars of disclosure requirements do reference Governance, through the lens of climate risks and opportunities. Similarly, TCFD is relatively silent on social components of ESG reporting. However, because TCFD’s reporting structure allows for disclosures to be written by the company with little guidance on language, companies could choose to disclose topics such as climate justice or operational resiliency if they desire.
What’s the difference between SASB and TCFD?
Like TCFD, SASB is also an ESG guidance framework for financial stakeholders such as investors, insurers, and debt holders. However, SASB focuses on quantifying and reporting the outward environmental impacts and risks of an organizations performance across 77 different industry standards, while TCFD addresses how climate change might impact the organization’s ability to create value.
How does TCFD fit in the future of ESG reporting?
Calls are now growing for a global standard in corporate reporting. With an eye towards reducing the reporting burden on companies, the Corporate Reporting Dialogue was convened by the International Integrated Reporting Council (IIRC) to strengthen cooperation, coordination and alignment between key standard setters and framework developers.
Members of the Corporate Reporting Dialogue consist of CDP, GRI, SASB, the Climate Disclosure Standards Board (CDSB), the International Accounting Standards Board (IASB), and the International Organization for Standardization (ISO) with the Financial Accounting Standards Board (FASB) as an observer.
Back in December Janine Guillot, Head of the Sustainability Accounting Standards Board (SASB) told Barron’s that ESG reporting standards ‘could converge within 12 to 24 months’.
While the future of this global standard that is currently proposed and strongly endorsed is unclear, TCFD is sure to continue to play a critical role in climate-related disclosures.