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A Guide to TCFD Recommendations

By 
Keslio Team
5
 minute read  
|  
March 19, 2024
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Background on TCFD

Sustainability reports and disclosures have evolved over time, addressing the needs of the company and its stakeholders, and the changes occurring in the environment, society, and the way businesses operate. Standards and frameworks direct businesses towards sustainable endeavors through detailing operations and practices and uncovering areas that can be further improved on. Sustainability reporting not only allows companies to review and improve their business practices, but it also provides stakeholders a view on the companies they are engaged with.

Certain frameworks span overall sustainability disclosures and also have industry-specific standards and reporting guidelines. With climate change impacting businesses, disclosing risks and opportunities stemming from climate change is becoming a key disclosure stakeholders look for in reports and is also becoming a mandatory requirement for sustainability reports in certain countries and industries. To standardize reporting climate risks, the Financial Stability Board (FSB) launched the Task Force on Climate-Related Financial Disclosures (TCFD) in 2017.

TCFD Disclosures and Recommendations aim to bring climate risk assessments and disclosures into conversations to create better informed decisions and strategies. Climate-related risk disclosures will also give clarity for financial institutions and investors when it comes to allocating capital and giving value to assets.

TCFD Recommendations

The TCFD framework discloses climate risks and opportunities through four thematic areas that cover key elements in a business. These are governance, strategy, risk management, and metrics and targets, with metrics and targets being the innermost element encompassed by business governance. 11 TCFD Recommendations, which list down certain disclosure standards that fall under the core element, then support the areas, connecting them all together to create stronger strategies in risk management and sustainability.

Governance

Governance disclosures cover the company’s governance over their climate risks and opportunities. Disclosures include the board’s oversight of the company’s climate-related risks and opportunities. Companies are also recommended to disclose the role of management in climate risk assessment and management. Reporting on sustainability governance then paves a way towards transparency, accountability, and commitment towards mitigating climate risk.

Strategy

Strategy recommendations inform stakeholders about the impacts of climate-related risks and opportunities on the business, covering strategy and financial planning. In this section, companies are asked to list down their short, medium, and long-term climate-related risks and opportunities and how these affect the business. Resiliency also plays a role in TCFD Recommendations. Reports that follow the TCFD framework should also include the strength or resiliency of their strategies by considering different climate-related scenarios.

By reporting the impact of climate change on a business and the company’s capacity to bounce back and recover from climate-related scenarios, stakeholders like investors and financial institutions would be able to create stronger data-driven decisions in allocating resources and capital.

Risk Management

Risk management then details how a business identifies, assesses, and manages climate-related risks and how these are integrated into their overall risk management. Processes on how these risks were identified are disclosed in this segment. Recommendations also include reporting processes or strategies a company undertakes to manage climate-related risk.

Metrics and Targets

After covering overall climate-risk governance, strategy, and risk management plans, the TCFD recommends disclosing metrics and targets related to their climate-related risks and opportunities. Metrics and targets aligned with the business’s identified risks and strategies to address these risks are listed. In addition, the TCFD recommends businesses disclose their greenhouse gas emissions, categorizing them into Scope 1, Scope 2, and if applicable, Scope 3.

Sustainability Reporting using TCFD

Sustainability reporting can be challenging at first, especially when using a new framework. To guide companies, the TCFD has issued resources that businesses can refer to on how to create clear and strong sustainability reports. In this guide, the TCFD elaborates on each recommendation and what information should be included.

While the 11 recommendations give general guidance in TCFD reporting, certain industries and sectors have specific disclosures that may be applicable to their business operations. The TCFD also presents supplementary information on industry-specific recommendations. Industries or sectors with additional guidelines include the financial sector, and non-financial sectors such as energy, transportation, materials and building, and agriculture, food, and forest products.

The TCFD also supports businesses in enhancing their sustainability journey by sharing case studies on how other companies apply TCFD recommendations. For sustainability practitioners, online courses are also offered by the TCFD, which includes courses on TCFD reporting, climate-related risk assessment and management, and financial management and climate-related reporting for accountants.

Sustainability reporting using the TCFD Recommendations has grown over the years and gained traction worldwide. When reporting climate-related risks and disclosures, the TCFD lists seven fundamental principles that must be observed:

  1. Disclosures should present relevant information
  2. Disclosures should be specific and complete
  3. Disclosures should be clear, balanced, and understandable
  4. Disclosures should be consistent over time
  5. Disclosures should be comparable among organizations within a sector, industry, or portfolio
  6. Disclosures should be reliable, verifiable, and objective
  7. Disclosures should be provided on a timely basis

By practicing these principles and understanding how to apply the TCFD recommendations, sustainability and climate-related reporting becomes an integral part of a business’ strategy, risk management plan, and resiliency.

Future of Climate-related Disclosures and the IFRS Foundation

The TCFD Recommendations have evolved over time and 2023 posed great changes for climate-related reporting. In October 2023, it was announced that the TCFD disbanded. The FSB announced that climate-related disclosures will now be monitored by the International Financial Reporting Standards (IFRS) Foundation.

The impact of the TCFD Recommendations in sustainability reporting still remains alive and present. The IFRS Foundation has incorporated and further enhanced the TCFD Recommendations into the ISSB Standards through the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Companies can still make use of the TCFD Recommendations as it can also be a stepping stone towards integrating the ISSB Standards into their reports. The TCFD’s legacy survives within the IFRS S1 and IFRS S2; complying with these standards still aligns the business with the TCFD Recommendations.

The ISSB has integrated the TCFD into their standards. Additional changes were made for climate-related risk disclosures, including industry-specific metrics and targets, disclosures on a company’s use or planned use of carbon credits, and details on their financial emissions. The IFRS deems these changes to still be consistent with the TCFD yet they have also added additional requirements, guidance, and details on the 11 recommendations.

Climate-related disclosures have become a vital part in sustainability reporting as it addresses the company’s impact towards the environment and enables them to take further actions towards sustainability. The TCFD Recommendations played a key role in establishing globally-accepted standards and its legacy and impact is seen in the updated ISSB Standards and in the increase of sustainability reporting policies, and the rise of businesses and organizations that integrate climate-related disclosures in their operations. This evolution has steered change in the way businesses approach sustainability reporting, simplifying the complex journey towards sustainability.

References:

  1. TCFD Implementing Guide, 2021
  2. IFRS Foundation, Comparison: IFRS S2 Climate-related Disclosures with the TCFD Recommendations, July 2023

At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.

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