In 2017, the Task Force on Climate-Related Financial Disclosure (TCFD) published the famous recommendations that companies can use for climate-related financial disclosure. Now, over 1,700 companies, governments, and organizations have expressed support for the recommendations but have called for implementation guidelines. This post is a comprehensive guide on TCFD reporting, digging deeper into what it is, the main recommendations, challenges, and how to overcome them.
TCFD was formed in 2015 by the Financial Stability Board (FSB), which was established earlier in2009 after the global financial crisis, to help promote financial stability. The TCFD’s target is promoting reporting the impacts companies have on the climate. It targets to achieve this through the disclosure of climate-related information alongside the financial reporting standards.
It is based on the view that better reporting can help companies include climate-related opportunities and risks in their planning and management processes. Then, the market will be able to funnel investments to sustainable solutions.
The TCFD reporting framework is hinged on consistent disclosure recommendations, which companies should use to capture climate-related risk exposure to different stakeholders, including lenders, investors, and insurance underwriters. By promoting transparency and consistency in reporting climate-related financial data, economies can easily assess the implications of the respective firm on climate change.
Before looking at the TCFD reporting recommendations and principles, it is important to ask the big question, “What are the advantages?” Here are the common benefits, highlighting why your company should not be left behind.
· Provides a Clear Framework for Outlining Environmental Sustainability and Governance Impacts
For most companies, the idea of sustainability reporting is welcome, but selecting a good framework is never easy. TCFD reporting was designed to provide an easy-to-apply yet comprehensive framework for companies. By providing the management of companies with the chance to identify challenges and opportunities for their organizations, it becomes easy to navigate them towards sustainability.
· Helps to Improve Visibility of Climate-Related Reporting
Through TCFD reporting requirements, it becomes easy to give climate-related issues more focus. At the company level, stakeholders are able to see and appreciate the efforts to address climate change. The reports also help governments and other stakeholders to craft more eco-friendly policies for a better planet.
For example, the London Stock Exchange requires the listed companies to indicate whether they have provided the disclosures in line with TCFD reporting recommendations.
· Helps Support Companies that are Crafting Climate-Focused Solutions
The focus on addressing climate-related issues is becoming a common theme among many stakeholders, including customers, investors, and governments. TCFD reporting recommendations can help your company rethink the planning process, helping you to adopt more sustainable and resilient solutions.
· An Excellent Way to Improve Access to Capital
When a company redefine sits operation model in line with TCFD recommendations, investors and lenders gain confidence and are willing to direct more resources to the organization. This easy access to more capital may be all a company needs for rapid product development, expansion, and marketing for greater success.
· Businesses are Able to Meet Investors ESG Expectations
With more stakeholders demanding to know and get associated with eco-friendly companies, TFCD reporting provides them with the required info on a company's operations. Therefore, they can see, review, and make the decisions whether the efforts are what they would want. If you follow TCFD's recommendations, your company stops being a source of damage for the environment but is an important cog in addressing the issue. This is what investors want to see.
These are only a few of the benefits that come with TCFD reporting. The list can be a lot longer, including the satisfaction of knowing that your effort is helpful in making the globe a better place.
To achieve high-quality disclosures which can help stakeholders to understand an organization’s impact on global climate, TCFD recommends that companies should consider the following seven principles:
· Disclosures should be specific and complete.
· The disclosure on the report should provide relevant information.
· Climate-related disclosure should be balanced and understandable.
· Your disclosure should be consistent over time.
· The disclosure from your firm should be comparable to other companies in the same portfolio or industry.
· The disclosure should be objective and verifiable.
· The disclosure on the report should begiven on a timely basis.
How do you go about implementing TCFD reporting in a company? TCFD has 11 disclosure recommendations that companies should focus on, and they are further broken down into four main categories to make implementation easier; risk management, strategy, governance, and metrics and targets.
1) Governance Recommendation
In TCFD reporting, companies need to do two things. One, they should describe their boards' oversight on climate-related opportunities and risks. This means a closer assessment of the different structures of an organization to highlight major risks and opportunities.
The second thing that should be clearly brought out in the report is the role of the management in assessing and managing the identified risks and opportunities. The management must be involved and committed to pursuing the available opportunities and addressing the challenges.
2) Strategy Recommendation
According to this recommendation, you should capture the risk and opportunities about climate that were identified by the company. They should also be broken down into short, medium, and long-term for easier tracking.
Also, you should describe the implications of climate-related opportunities and risks on the company's operations, strategy, and financial planning. Make sure to capture both the positive and negative information for the report to be consistent and factual.
Still, on strategy recommendation, you should describe the company's strategy, factoring in the varying climate scenarios, such as a 2°C or lower scenario.
3) Risk Management Recommendation
According to this recommendation, you need to describe the company's processes for pinpointing and reviewing the climate-related risks. The aim here is to ensure that your team can easily identify the challenges related to the environment so that strategies for addressing them are installed.
Furthermore, the report should capture the company’s processes for managing climate-related risks. If you notice that the machines in the manufacturing unit are releasing a lot of emissions, what strategies does the company have for addressing them? Is it installing scrubbers, changing the fuel, maintenance, or installing new machinery?
On risk management, the last item demonstrates how the process for noting and managing climate-related risks is embedded into the organization's management. For example, does your company have a specific unit for ESG reporting and pushing the implementation to other departments, or is the task delegated to one of the existing departments?
4) Metrics and Targets Recommendation
Under this recommendation, there are three items, which you should factor in your report.
First, you are required to demonstrate the metrics that the company used to assess the risks and opportunities. These should be in line with the company's strategy and risk management processes. The focus is on demonstrating that the information captured is correct and reliable.
Furthermore, you need to disclose scope 1, scope 2, and, where applicable, scope 3 greenhouse gas emissions risks.
Finally, the report should highlight the targets that the company uses to manage the risk and opportunities. You might want to consider these as key performance indicators for the company, in line with the short, medium, and long-term goals of addressing climate-related issues in the company.
TCFD reporting is a relatively new discipline and a shift towards addressing the challenges brought about by climate change. As more governments and authorities join the efforts to make reporting part of their requirements and stakeholders demand accountability, the bar for sustainability has been raised higher. This is why adopting TCFD recommendations is so crucial for your company. However, several challenges remain on the road to the full implementation of TCFD reporting.
· Although an important tool for promoting sustainability, TCFD reporting is still voluntary. This means that although many companies have adopted it, there are many others that are yet to. Because the reporting comes with some costs, those not reporting are likely to have an undue advantage, such as selling their products at lower prices on the global market.
· Climate change is global. When trying to identify and measure risks, especially the future ones, many companies find it pretty challenging. For example, it might be difficult to follow back on all supply chains, especially those running globally, to force them to take actions for sustainability. This makes addressing climate change slow.
· The impact of short-term data vs. long-term implications. Because climate forecasting that is used today is not perfect for lack of historical data, quantifying the potential impacts in different scenarios is not easy. This could impact the decisions that are made to craft strategies for sustainability.
Implementing TCFD reporting is very important for businesses to enhance their understanding of climate-related opportunities and risks. Therefore, it can be an excellent idea to ingrain reporting into your company management for easier application, just like other management operations. You should also consider using appropriate sustainability management software from Diginex's to automate the process and integrate it into the company’s management system.
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