Everything you need to know about the Task Force on Climate-related Financial Disclosures

With a few weeks left until the official release of the draft set of recommendations for companies to disclose climate-related financial information, we round up the main questions that will help you understand what they mean and why this matters.

What is the TCFD?

During last year’s climate negotiations in Paris, Mark Carney, Governor of the Bank of England and Michael Bloomberg, former Mayor of New York, announced the creation of a new task force, which would help investors understand their financial exposure to climate risk and help companies disclose this information in a clear and consistent way.

The Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) is a market-driven initiative, set up to develop a set of recommendations for voluntary and consistent climate-related financial risk disclosures in mainstream filings. Companies will therefore be better guided in providing information to investors, lenders, insurers, and other stakeholders. 

What is new about the task force?

Climate and sustainability reporting requirements, frameworks and guidelines have been around for over a decade. But the reporting landscape is still fragmented, and reporters, investors and regulators are often struggling to navigate it. This results in inconsistent information that is not fit for use by investors and others.

The financial impacts of climate-related risks are often overlooked, mostly because of the differences in disclosure requirements, different perceptions of what is considered material to companies and because of the difficulties in measuring climate risk.

Before developing the CDSB reporting framework, we mapped the existing standards, requirements, guidance and other reporting provisions that influence corporate climate change reporting. The result of our research was that currently there are over 400 such provisions - as Mark Carney stressed in his speech about the “tragedy of the horizon”.

With the Task Force, the challenges and opportunities surrounding climate reporting will be brought in the spotlight. By bringing together industry experts from all over the world, the work of the TCFD will define an overarching set of recommendations for voluntary reporting, reflecting what the financial markets actually need to evaluate the financial impacts of climate risk and take action.

Finally, while the work of the TCFD builds on existing work, it represents an opportunity to bring climate-related financial reporting to a wider audience, beyond the sustainability sector.

Who is involved in it?

There are 31 members in the TCFD, all chosen by the Financial Stability Board to include both users and preparers of climate disclosures from across the G20. The full list of the members is available on the TCFD website.

Has the Task Force made any progress?

Earlier this year, the TCFD released its Phase 1 report. It outlined some of the key areas towards identifying the current challenges in the reporting environment, setting the objective of climate-related financial information, the type of information reporters will have to provide and where they should report it.

The report was then open to public consultation, and some of the comments are expected to be integrated in the Phase 2 report. CDP and CDSB joined the consultation and issued a joint response.

What does the future hold for climate-related financial reporting?

Given that the TCFD’s aim is to provide recommendations on how to report climate-related financial information in mainstream filings, a key step in that direction is to understand how its recommendations fit within existing requirements for disclosure in financial statements.

For example, certain assets may be adversely impacted by climate change through increased legislation, which may bring additional liabilities to the balance sheets of companies.

There are existing financial reporting standards that could also be applied to reporting climate-related financial information in mainstream filings. For example, the CDSB reporting framework has adopted financial reporting standards developed by the International Accounting Standards Board on materiality, and also looked at how to use these to report on matters such as carbon asset stranding risks.