The Task Force on Climate-related Financial Disclosures (TCFD) has published its first set of recommendations, which focuses on voluntary, decision-useful, climate-related disclosures required as part of mainstream financial filings.
These recommendations are expected to support organisations in identifying and disclosing the kind of information investors, lenders and insurance underwriters require in properly assessing and pricing the climate-related risks and opportunities.
Key areas of the recommendations are focused on four main themes namely governance, strategy, risk management and metrics and targets.
In governance the TCFD recommends that companies describe the board’s oversight of climate-related risks and opportunities as well as the management’s role in managing these risks and opportunities.
Under strategy companies are recommended to describe the climate-related risks and opportunities the organisations have identified over the short, medium and long term and how they impact upon their business, strategy and financial planning. Companies are also expected to describe how different scenarios could potentially impact upon their business, strategy and financial planning.
In risk management, recommended disclosures include description of the processes organisations use to identify, assess and manage climate-related risks and how these process are integrated into the organisation’s overall risk management.
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In metrics and targets, companies are recommended to disclose the metrics they use to assess climate-related risks and opportunities in line with their strategy and risk management processes. TCFD recommends companies to disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions, and related risks. Companies are also recommended to describe the targets they use to manage climate-related risks and opportunities and the performance against targets.
These recommendations are adoptable to any type of companies across sectors and jurisdictions and are designed to be included in mainstream and financial filling.
The recommendations have been welcomed by a number of stakeholders globally. Richard Howitt, chief executive of the International Integrated Reporting Council (IIRC), said that by only extending the horizon of the disclosure, combating the climate change can be achieved.
“The IIRC believes implementation of the Task Force recommendations can be a major step towards ending the fragmented approach to the management, measurement and disclosure of climate-related financial risks,” he said.
Investors need a complete picture of value creation to price in future risks and opportunities, and genuine action to combat climate change can only be achieved if it makes sense in capital markets, Howitt added.
While welcomed by the CDP (formerly Carbon Disclosure Project), its CEO, Paul Simpson, however questioned whether these disclosure should become mandatory.
“The next step will be for the G20 governments to consider whether such disclosure should become mandatory over time,” he asked adding that the recommendations have the potential to further ‘normalize’ climate information in companies mainstream financial filings.
“Nearly 6000 companies disclosed through CDP this year representing some 60% of global market capitalization. However, many companies have yet to align business strategies with the requirements of the Paris agreement and the TCFD recommendations on scenario analysis will enable better information for investors to assess this risk.” Simpson added.
Richard Samans, chairman of the Climate Disclosure Standards Board (CDSB) said the task force recommendations were setting a new corporate governance norm where company management will be compelled to rigorously account for its strategy against climate change-related risks,
While these recommendations are seen as important lever in expediting the transition to a lower-carbon economy, Peter Bakker, President and CEO for World Business Council for Sustainable Development (WBCSD) proposed that recommendations should encourage transparent and uniform climate disclosure standards which would then support to differentiate and reward more sustainable companies. “The public consultation period is an important opportunity for our members to be part of the process, and we will work with them to get involved.” Bakker added.
Related article: FSB’s TCFD: In the name of sustainability