One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. To carry out this function, financial markets need accurate and timely disclosure from companies. Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.
The Financial Stability Board (FSB) created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change.
Given its remit from the Financial Stability Board, the TCFD is committed to market transparency. In the TCFD’s view, the success of the TCFD recommendations depends on widespread adoption by companies in the financial and non-financial sectors.
Through widespread adoption, financial risks and opportunities related to climate change will become a natural part of companies’ risk management and strategic planning processes. As this occurs, companies’ and investors’ understanding of the potential financial implications associated with transitioning to a lower-carbon economy and climate-related physical risks will grow; information will become more decision-useful; and risks and opportunities will be more accurately priced, allowing for the more efficient allocation of capital.
In 2017, the TCFD released climate-related financial disclosure recommendations designed to help companies provide better information to support informed capital allocation.
TCFD disclosure recommendations are structured around four thematic areas that represent core elements of how companies operate: governance, strategy, risk management, and metrics and targets. The four recommendations are interrelated and supported by 11 recommended disclosures that build out the framework with information that should help investors and others understand how reporting organizations think about and assess climate-related risks and opportunities.
Since the publication of the TCFD recommendations, the FSB has asked the Task Force to continue its work—promoting adoption of the TCFD framework, providing further guidance, supporting educational efforts, monitoring climate-related financial disclosure practices in terms of their alignment with the TCFD recommendations, and preparing annual status reports.
The TCFD recommendations on climate-related financial disclosures are widely adoptable and applicable to organizations across sectors and jurisdictions. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.
The recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
The TCFD recommendations summarized below are fully described in the TCFD recommendations report.
The Task Force developed four widely adoptable recommendations that are supported by key climate- related financial disclosures—referred to as recommended disclosures. In addition, there is guidance to support all organizations in developing disclosures consistent with the recommendations as well as supplemental guidance for specific sectors and industries.
The Task Force developed supplemental guidance to assist preparers in the financial sector and non- financial industries potentially most affected by climate change and the transition to a low-carbon economy (referred to as non-financial groups).
This graphic shows the recommendations (Governance, Strategy, Risk Management, and Metrics and Targets) and recommended disclosures (a, b, c) for which supplemental guidance was developed for the financial sector and four non-financial groups.
Since the Task Force issued its final recommendations in June 2017, it has monitored climate-related financial disclosure practices and sought to identify and address implementation challenges raised by preparers. In this regard, the Task Force has published guidance on specific topics intended to help address identified challenges and better support implementation, as described below.
The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities (2017) provides information on types of climate-related scenarios, the application of scenario analysis, and the key challenges in implementing scenario analysis to support an organization’s disclosure of the resilience of its strategy, taking into consideration different climate-related scenarios.
Guidance on Scenario Analysis for Non-Financial Companies (2020) provides practical, process- oriented ways for organizations to use climate-related scenario analysis and ideas for disclosing the resilience of their strategies under different climate-related scenarios.
Guidance on Risk Management Integration and Disclosure (2020) describes considerations for organizations interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations.
Guidance on Metrics, Targets, and Transition Plans (2021) describes recent developments around climate-related metrics and users’ increasing focus on information describing organizations’ plans for transitioning to a low-carbon economy. The guidance also describes a set of cross-industry, climate- related metric categories (described in Appendix 2: Cross-Industry, Climate-Related Metric Categories) that the Task Force believes are applicable to all organizations.)
As part of the Task Force’s work to monitor and promote organizations’ adoption of its recommendations, it has periodically published guidance to support preparers in their implementation efforts (see Section A.5. Summary of Additional Supporting Materials). In October 2021, the Task Force published Guidance on Metrics, Targets, and Transition Plans, which includes seven metric categories (Table A2.1) the Task Force believes are generally applicable to all organizations.137 Importantly, the seven metric categories are not additions to the Metrics and Targets recommendation as they relate to metrics that have been part of the Task Force’s guidance for all sectors since the release of its 2017 report.
The Task Force is highlighting these specific metric categories because they are important proxies for measuring climate-related risks and opportunities, form the basis for estimating climate-related financial impact, and are important inputs into investment, lending, and insurance underwriting decisions. While these metric categories are relevant across organizations, they may be operationalized differently to reflect industry-specific risks and opportunities. More information regarding the cross-industry, climate-related metric categories can be found in the Guidance on Metrics, Targets, and Transition Plans.
While some organizations already disclose metrics consistent with the cross-industry, climate-related metric categories, the Task Force recognizes others—especially those in the early stages of disclosing climate-related financial information—may need time to adjust internal processes before disclosing such information. In addition, some of the metric categories may be less applicable to certain organizations. For example, data and methodologies for certain metrics for asset owners (e.g., impact of climate change on investment income) are in early stages of development. In such cases, the Task Force recognizes organizations will need time before such metrics are disclosed to their stakeholders.