Overview:

The Task Force on Climate-related Financial Disclosures (TCFD) is a framework aimed at helping companies understand and more consistently disclose the impacts of climate change on their financial performance. This information is intended to help investors and other stakeholders accurately price climate-related risks and opportunities and more efficiently allocate capital.

The TCFD was established in 2015 by the Financial Stability Board (FSB) and was formally adopted as part of the ISSB in 2024. The framework is based on eleven recommendations under four pillars: Governance, Strategy, Risk Management, and Metrics and Targets.

Strategy

The Strategy questions are designed to prompt companies to reflect on how they might be affected by climate risks in two main categories – physical (acute and chronic) and transition risks (policy/legal, technology, market, and reputation), as well as the opportunities that may arise from the impacts of climate change (see Table 2 for descriptions and possible impacts). The guidance asks for a “description” (e.g. “a description of the specific climate-related issues potentially arising in each time horizon (short, medium, and long term) that could have a material financial impact on the organization”), which can be a qualitative account of how the company views and acts on these risks and opportunities. The idea here is to start simply, providing all companies the opportunity to reflect on these issues without the need for significant technical expertise.

Table 2: TCFD physical and transition risks and opportunities.

Advancing disclosures - scenario analysis

This qualitative approach applies to most of the questions, though the TCFD also encourages more technical responses for some questions. For example, whilst a qualitative description of scenario analysis (Strategy question C.) is accepted to explain overall trends and relationships for many companies, a quantitative approach using analytical modelling techniques is recommended for companies with more exposure to climate-related issues - see Table 3 for TCFD’s guidance.

Table 3: TCFD Strategy question C. on scenario analysis.

Scenario analysis aims to provide investors and other stakeholders with more information about how a company is planning for different possible future states, and what actions they are taking to mitigate the risks and take advantage of the opportunities posed by future climate conditions. A range of scenarios are recommended, including 1.5°C and 2°C Paris aligned scenarios (in which global temperatures are kept below the recommended rise of 1.5°C or 2°C above pre-industrial levels) as well as other scenarios relevant to specific jurisdictions (e.g. a scenario aligned with a country’s Nationally Determined Contributions (NDCs)) and a worse-case scenario (in which global temperatures rise to 4°C or more). The key point here is that while a qualitative approach may provide a sense of how a business may need to change due to future conditions, a quantitative assessment will provide a more robust and measurable assessment of the possible risks and impacts which in turn can be used to inform a company’s strategy and decision-making much more accurately. It will also help investors to understand a company’s strategic approach to climate risk and compare companies across portfolios.

Metrics and Targets

On Metrics and Targets, companies are asked to disclose how they measure and monitor risks and opportunities. TCFD has defined seven metric categories – see Table 4 – with suggested units and considerations as to why these elements should be included. It also recognises that some organisations may find it difficult to gather this information (e.g. due to difficulties sourcing data from third-party fund managers), and asks that such organisations “provide qualitative and quantitative information, when available” including descriptions of metrics and methodologies, e.g. used to calculate targets. The purpose of this section is to help establish a company’s risk exposure and inform investors and stakeholders how they are managing those risks.

Latest changes and direction of travel

Support for the TCFD is growing rapidly and becoming a standard expectation for larger companies. Since January 2021, the UK’s largest companies have been required to state whether they disclose against the TCFD in their annual reports, and if not, explain why not. It is mandatory for UK listed companies with more than 500 employees and for UK private companies with more than £500m annual turnover and more than 500 employees to disclose against the TCFD recommendations. This follows the UK’s announcement at COP26 in November 2021 to become a net zero aligned financial centre.

The TCFD now also applies to FCA-regulated asset managers at both the entity (how the firm assesses climate risks and opportunities in managing or administering investments on behalf of clients and consumers) and portfolio levels (a set of consistent and comparable disclosures for products and portfolios including a core set of climate-related metrics).

How to get started with the TCFD

The TCFD’s reach is expanding rapidly and whether companies are in jurisdictions where disclosure is mandatory or not, there is increasing pressure to consider and report against TCFD. This trend is only increasing. So, what can you do to make a start?

Make a public commitment by pledging support to TCFD.
Prepare for reporting by assessing the TCFD recommendations, including definitions and concepts (e.g. physical and transition risk), and requirements for disclosure (e.g. data, metrics, scenario analysis, targets).
Prepare to conduct scenario analysis, initially considering how you’d respond qualitatively but with a view to later investigating quantitative techniques.
Assess resources – do you have internal resources and systems available to source and evaluate data (e.g. GHG emissions) or would external assistance be required?
Consider next steps – if you’ve already reported against the TCFD recommendations, how can you advance your ambitions (e.g. by setting targets and developing a climate action plan).

To find out more about what you need to know to ensure your business is working towards TCFD compliance, please get in touch.