Climate Change Finance

Understanding TCFDs – Carbon Calculated

The corporate climate conversation in 2021 keeps on returning to a dominant acronym: TCFD. We thought it would be a good idea to lay out a quick refresher on what those letters stand for, where they come from, and what impact they may have in your business. 

The Task Force on Climate-related Financial Disclosure (TCFD) was set up in late 2015 by the G20 Financial Stability Board to consider the physical, liability, and transitional risks and opportunities posed by climate change and how they will affect the financial performance of companies. It made its first recommendation in 2017.

The TCFD developed recommendations for voluntary and consistent climate-related financial disclosures. To date, the recommendations have attracted support from over 240 organisations and 150 financial institutions.

The recommendations include guidance for companies to ensure they adequately and consistently disclose their climate-related risks and opportunities and set out the strategies they have put in place to reduce their emissions, mitigate climate-related risks and capture opportunities (if they are there to be had). Various climate-change scenarios are used to identify the different risks and opportunities and these are aligned with ranging degrees of global warming, typically from 1.5 degrees Celsius to 6 degrees. 

The thinking is that investors and other members of the public have a right to know about the risks that a company faces related to climate change. Furthermore, financial markets need clear, comprehensive, high-quality information on the impact of climate change, climate-related policy, and emerging technologies that will have an impact on that company’s ability to operate. 

There are 4 key aspects to the TCFD:

  1. Risk and opportunity assessment – how to effectively evaluate climate-related risks and opportunities to your company, its suppliers, and competitors.
  2. Capital allocation – how to make better-informed decisions on where and when to allocate your capital.
  3. Strategic planning – how to better evaluate risks and exposures over the short, medium, and long term.
  4. Governance – disclosing the organisation’s internal governance structures around climate-related risks and opportunities.

One of the most significant recommendations that the TCFD has come up with so far, is a framework that companies can use to effectively disclose climate-related risks and opportunities. This framework includes:

Strategy – Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses strategy, and financial planning, where such information is material.

Risk Management – Disclose how the organisation identifies, assesses, and manages climate-related risks.

Metrics & Targets – Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

The TCFD is a great example of different market players starting to understand, and demand reporting on, how climate change will affect stakeholder value in a company. Such focus and analysis is to be welcomed. 

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