How to implement the TCFD recommendations: a step-by-step guide
For sustainability practitioners, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) remove a pain point by establishing a single vocabulary of climate risks and opportunities and harmonizing the landscape of climate reporting.
The recommendations are gaining steam: The September TCFD status report showed the force has support from 513 organizations (including 457 companies). However, it is time to move our discussion from whether to implement the recommendations to how companies should do so.
For the status report, the TCFD carried out artificial intelligence (AI) analysis of reporting from 1,700 companies, in addition to human analysis of 200 leading companies whose reporting includes the word "climate." This analysis revealed that:
- Most companies disclose some climate-related information, but financial implications often are not disclosed.
- Disclosures are made in various company reports, including financial filings, annual reports and sustainability reports.
- Larger companies and European companies disclose more related to the recommendations, but few companies overall implement climate resilience strategies, use different climate-related scenarios, or disclose processes for identifying, assessing and managing climate risk or integrating it into overall risk management.
- Disclosures vary by industry, with each industry providing stronger or weaker disclosures on specific recommendations.
While the status report analysis is helpful in assessing the status of implementation on yes/no basis, it does not answer the practical question of best practice inclusions. It also reveals what is challenging about implementing the recommendations: Those recommendations that imply organizational change are, not surprisingly, the hardest to implement.
If the objective of the TCFD recommendations is to improve disclosures related to even the hardest recommendations, practical advice is also essential. For this reason, we examined the examples provided in the status report and companies’ disclosures to formulate the straw best practice inclusions below for each of the 11 recommendations.
For each TCFD recommendation, we suggest what should be disclosed, if applicable to the organization. By beginning with those recommendations for which they already have programs or policies in place, companies can take an iterative approach and resolve challenges over time.
Governance (a): Board oversight
- Clear description of who has ultimate accountability for management of climate risks
- Clear description of roles and responsibilities on climate change
- Experience of board members on climate change
- Specific board committees overseeing climate risks and membership and cadence of meetings
- Climate-specific structures/committees in place (if any) and related decision-making processes
- Methodology for and amount of incentives to promote management of climate-related risks at board level
Governance (b): Management’s role
- Management responsibilities on climate issues, beyond broader sustainability or ESG responsibilities
- Specific ESG functions or committees and climate-specific functions or committees, as well as their scope of concern
- Processes used by management to review climate-related issues and translate them into strategic decisions
- How risk management and sustainability functions collaborate on climate-related risks and opportunities
- Methodology and incentives to promote management of climate-related risks by management
Strategy (a): Climate-related risks and opportunities over the short, medium and long-term
- Risks categorized according to the TCFD typology (physical risks categorized as acute or chronic; transition risks categorized as regulatory, market, technology or reputation)
- Relevant climate opportunities, in addition to risks
- Time horizons used (short, medium and long term) and link to business strategy or sustainability strategy goals
- Distinction between risks to operations and those to the portfolio or supply chain
Strategy (b): Impact on business, strategy and financial planning
- Processes used to determine which climate-related risks and opportunities are material
- Lines of business impacted by climate-related risks or opportunities
- Overarching goals and estimated costs and impacts, committed capital expenditure and how investments have evolved
- Links between climate-related risks and opportunities and business and sustainability strategy
Strategy (c): Resilient strategy and scenario analysis
- Scenarios analysis conducted primarily as an opportunity to improve strategic resilience and explore climate vulnerabilities (and not a reporting exercise)
- A broad range of climate risks and opportunities, including both physical and transition risks
- Scenarios grounded in climate science that capture business specifics and focus on the key uncertainties for the company/sector
- Data from diverse sources to reduce the risk inherent in any single projection
- Relevant internal stakeholders consulted to shape scenarios
- Regular review of scenarios as part of business processes
- Methodology and key quantitative/qualitative assumptions for scenario analysis, as well as the impact of scenarios on the business
- How company strategy has been made more resilient through scenario analysis
Risk management (a): Processes for identifying and assessing risks
- Risk assessment frameworks and criteria for assessment
- Major issues or categories of issues
- Use of internal carbon price, if relevant
- Monitoring of physical climate risks, if relevant, and preferably at local level
- Participation in relevant industry initiatives
Risk management (b): Processes for managing risks
- Centralized climate risk management processes in a single location
- How the risk register is developed (from materiality) and how climate is reflected (combined with other risks, as its own specific risk, or broken down into different climate-related risks)
- How the most material risks are prioritized
Risk management (c): Integration into overall risk management
- How climate indicators are integrated into projects and business decisions
- Processes of engagement with investee companies on climate-related risks and metrics
- How climate is considered adequately (and potentially separately) in enterprise risk management processes, alongside other ESG risk factors
Metrics and Targets
Metrics and Targets (a): Metrics
- Key information on metrics disclosed in mainstream financial reports
- Metrics and targets complemented with context of a specific project or target, as relevant
- Most decision-useful metrics as identified with investors
- Financial metrics used if available
Metrics and Targets (b): Scopes 1, 2 and 3 emissions and related risks
- Scope 3 calculations, including downstream emissions (use of sold products)
- Reference methodologies and standards used to measure emissions
- Consistent use of absolute and/or intensity metrics, to enable understanding of progress against targets
- Risks that relate to your largest sources of emissions
Metrics and Targets (c): Targets
- All basic features of a target (base year, target year, greenhouse gases and geographies in scope)
- KPIs for climate targets and progress over time (data from last three years if available)
- Targets aligned to metrics and including most important scope 3 categories
- Links between management remuneration and specific targets