Navigating the technicality of the over 200 pages of the report is a daunting task. This factsheet presents the answers to 20 questions we know will be crucial to understand why the work of the Task Force matters and how organizations can implement the recommendations.
With the release of the draft recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, we are likely to see conversations about climate risk and disclosure finally moving outside the climate sphere and entering the financial world.
Launched at COP21 in Paris, the Task Force has been working with businesses and investors for one year to understand what the private sector needs to evaluate climate change as a material financial risk and explore the opportunities that derive from a low-carbon economy.
But navigating the technicality of the over 200 pages of the report is a daunting task. This factsheet presents the answers to 20 questions we know will be crucial to understand why the work of the Task Force matters and how organizations can implement the recommendations.
1) What materials has the TCFD issued?
On 14 December 2016, the Task Force issued three documents: the recommendations on disclosing climate-related financial information, the annex, which provides guidance on how to implement the recommendations, and the technical supplement, which provides details on the need for all organizations to develop scenario analysis.
2) What are the recommendations and how are they structured?
There are four main recommendations focusing on four thematic areas of disclosure: governance, strategy, risk management, metrics and targets.
These four thematic areas are accompanied by:
- Eleven recommended supporting disclosures – three supporting disclosures are recommended for each of the thematic areas, except governance which has two supporting disclosures;
- Guidance for all sectors – explains what sort of information companies should report in response to the recommended supporting disclosures;
- Supplemental guidance for specific non-financial and financial sectors – elaborates further on how different sectors should respond to the recommended supporting disclosures;
- Illustrative metrics for non-financial sectors – further elaborated in the annex.
Recommendation 1: Governance – The Task Force encourages organizations to disclose their governance around climate-related risks and opportunities. Supporting disclosures should describe:
- The board’s oversight of risks and opportunities;
- Management's role in assessing and managing risks and opportunities.
Recommendation 2: Strategy – the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning
Supporting disclosures should describe the:
- Risks and opportunities the organization has identified over the short, medium and long-term;
- Impact of these risks and opportunities on the organization’s businesses, strategy and financial planning;
- Potential impact of different scenarios, including a 2-degree scenario on the organizations’ businesses, strategy and financial planning.
Recommendation 3: Risk management – how the organization identifies, assesses and manages climate-related risks.
Supporting disclosures should describe the:
- Processes used for identifying and assessing climate risks;
- Processes for managing climate risks;
- How the processes in a and b are integrated into the organization’s overall risk management.
Recommendation 4 : Metrics and targets - Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Supporting disclosures should:
- Disclose the metrics used to assess risks and opportunities in line with strategy and risk management processes;
- Disclose Scope 1 and 2 and if appropriate Scope 3 GHG emissions and the related risks;
- Describe targets used by the organization to manage risks, opportunities and performance against targets.
3) What are the key features of the recommendations?
The Task Force highlights four key features that characterize the recommendations. In particular, they are designed to:
- Be adoptable by a wide range of organizations including companies, investors and other financial actors, such as banks, insurance companies, asset owners and asset managers across sectors and jurisdictions;
- Define the information that should be included in mainstream financial filings;
- Call on companies to disclose decision-useful information for investors and other interested parties;
- Focus on the risks and opportunities associated with the low-carbon transition.
4) What are climate-related risks and opportunities?
The TCFD highlights that climate change and the transition to a low-carbon economy does not represent a mere financial risk, but also opens numerous business opportunities. The two categories are split in two sections, one dealing with climate risk and the other dealing with opportunities.
The recommendations refer to two main categories of risk related to:
- Transition to a low-carbon economy, including:
- Policy and legal risks associated with GHG emissions pricing and reporting, exposure to litigation and regulation of product and services;
- Technology risks arising from substituting existing products and services with lower emission options, unsuccessful investment in new technologies and the upfront costs of transitioning to lower emissions technology;
- Market risks due to changing consumer behavior, uncertainty in market signals and increased cost of raw materials;
- Reputational risks due to changing consumer preferences, stigmatization of sectors, increased stakeholder concern or negative feedback.
- Physical impacts of climate change, including:
- Acute risks from extreme weather events;
- Chronic risks from changes in precipitation patters and extreme variability in weather, rising mean temperatures and rising sea levels.
The recommendations refer to five main categories of opportunity:
- Resource efficiency, including the use of more efficient modes of transport, more efficient production and distribution processes, more efficient building, greater use of recycling and reduced water usage and consumption;
- Energy sources that have lower emissions, support policy incentives and that promote energy security and the emergence of new technologies;
- Products and services that reduce emissions, help adapt to climate change, offer insurance risk solutions, innovate and shift consumer preferences;
- Markets, including access to new markets and types of assets that are positioned for transition to the lower-carbon economy and that are maximized through collaboration with governments, development banks, entrepreneurs, community groups and developing countries;
- Resilience through work with supply chains, capacity building, improved contingency planning, participation on renewable energy and energy efficiency programs, use of resource substitutes, diversification of resources, etc.
5) What are the financial impacts of climate-related risks and opportunities?
The recommendations show how each climate-related risk and opportunity has an associated financial impact. For example, the policy and legal risks within the “transition risk” category can lead to increased operating costs associated with pricing of GHG emissions and emissions reporting obligations.
Other examples include the reduction in demand for certain goods, products and services resulting from technology, markets and reputational risks and the reduction in capital availability associated with reputational risk.
The recommendations state that the financial impacts of climate risks and opportunities can manifest themselves in companies’ income statements and balance sheets. Therefore, under the heading “income statement,” organizations are asked to consider disclosing the:
- Potential positive and negative impact on their future revenues of changes in climate related policies, technology and market dynamics, including the potential impacts of carbon pricing; and
- Extent to which their cost structure/expenditure is sufficiently flexible to respond to cost and demand changes in the market as a result of climate risks and opportunities.
Under the heading “balance sheet,” organizations are asked to consider disclosing:
- An indication of the climate related profile of their assets and liabilities, particularly long-lived assets and reserves and focusing on existing and committed future activities and decisions requiring new investment, restructuring, write-downs or impairment; and
- How their capital allocation plans relate to climate risks and opportunities and whether those plans are sufficiently flexible to respond to changing risks and opportunities.
We suggest reading the annex to have a better understanding of how those financial impact categories are to be used in the process of disclosure. The supplemental guidance and metrics, particularly for non-financial sectors, tend to follow the “revenues, expenditure, assets/liabilities and capital” headings.
6) How do the recommendations apply to particular sectors?
The recommendations and supporting disclosures apply to all sectors. Supplemental guidance elaborates on how particular industries in the financial and non-financial sectors respectively are expected to respond to those recommendations. Sector-specific guidance aims to target the financial sector and 12 industries that account for the largest proportion of GHG emissions, energy and water usage.
Non-financial sector industries are organized into four main groups, as listed below. They have been selected based on three factors most likely to be affected by both transition and physical risk (such as GHG emissions, energy usage and water usage).
- Materials and Buildings;
- Transportation and Agriculture;
- Food and Forest Products.
The financial sector focus is on banks, insurance companies, asset managers and asset owners (including private and public sector pension plans, insurance companies, endowments and foundations). Disclosures by the financial sector are designed to foster an early assessment of climate related risks and opportunities, improve the pricing of climate risks and lead to more informed capital allocation decisions.
The TCFD says that these disclosures might also provide a source of data that can be analyzed at a systemic level to facilitate authorities’ assessments of the materiality of any risks posed by climate change to the financial sector and the channels through which this is most likely to be transmitted.
7) What’s in the Annex?
The annex is not intended to create additional disclosure requirements beyond the four thematic areas, nor is it intended to be exhaustive. The first three sections largely replicate material in the main document but also add how the recommendations are aligned with existing frameworks.
The annex includes supplemental guidance for the financial sector, explaining when each industry is expected to provide information in addition to the recommendations and supporting disclosures.
Supplemental guidance does not apply in all cases. For example, there is no supplemental guidance for the financial sector under the governance recommendation.
By contrast, all financial sector industries have additional requirements under the risk management supporting disclosure and the metrics and targets supporting disclosure. This section references other frameworks with which supplemental guidance is aligned. For example, guidance for banks is aligned with the Enhanced Disclosure Task Force’s recommendations on Enhancing the Risk Disclosures of Banks and SASB’s Accounting Standard for Commercial Banks.
The annex also provides supplemental guidance for non-financial sectors. Again this is not applicable in all cases, as we can see in the case of supplemental guidance on governance supporting disclosure, which only applies to the energy sector.
8) What types of metrics are included in the Annex?
The annex includes specific illustrative metrics for the non-financial sectors (section E, tables 2, 4, 6 and 8), but no similar tables or metrics are provided for the financial sectors. They are asked to describe the metrics they use for assessing and managing climate-related risks and opportunities or their impact.
The non-financial sector metrics are organized according to five climate-related categories (low-carbon alternative, energy use/efficiency, water, reserves/assets and GHG emissions) and four financial categories (revenues, expenditures, assets/liabilities and capital).
Therefore, each suggested metric is assigned a climate related category and a financial category. The metrics in the tables are also cross referred to metrics in existing frameworks, such as CDP, GRI and SASB.
The TCFD stresses that neither the guidance nor the metrics are intended to be exhaustive and examples of metrics are provided for illustrative purposes only. Organizations are encouraged to define their own metrics and targets that address the key disclosure areas, and the metrics provided are to be considered as general indications. Organizations are also encouraged to define and provide additional metrics tailored to their particular risks and opportunities and to do so through engagement with key stakeholders including investors to identify metrics.
9) Are there disclosure principles?
The recommendations include 7 principles for effective disclosures, stating that disclosures should be:
b. Specific and complete
c. Clear, balanced and understandable
d. Consistent over time
e. Comparable among companies within a sector, industry or portfolio
f. Reliable, verifiable and objective
g. Provided on a timely basis
More detailed information on the principles appears in Appendix 6 of the recommendations.
10) Which organizations are affected? Who should disclose?
All financial organizations, (including banks, insurance companies, asset managers and asset owners), and non-financial firms with public debt or equity. However others are encouraged to implement the recommendations too.
11) Where should information be reported?
Ultimately the Task Force’s goal is to have climate-related information disclosed in mainstream reports or other public documents. However, while companies are developing their approach to the recommendations, the TCFD recognizes that disclosure through other channels – such as a website or sustainability report – may be used as a stepping stone towards disclosure in mainstream filings.
Asset owners and asset managers are encouraged to report to their beneficiaries and clients through existing means, as well as through public avenues of disclosure.
12) Why mainstream financial filings?
The TCFD believes that climate change related risks are material risks for many organizations and the recommendations should therefore be useful in complying more effectively with existing disclosure obligations.
Furthermore, they hope that disclosure in mainstream filings will:
- Foster shareholder engagement and broader use of climate related financial disclosures;
- Help ensure that more appropriate controls govern the production and disclosure of required information;
- Help users access current information in a timely way as mainstream financial filings require publication at least annually.
13) What is the relationship between the recommendations and existing reporting regimes?
The Task Force has drawn on existing climate-related disclosure regimes and specifically references where there is alignment with their recommendations, particularly in the annex.
The Task Force expects that organizations will still be able to use existing processes when disclosing climate information in financial filings based on the recommendations.
However, it is evident that they hope existing disclosure regimes will come into closer alignment over time in order to reduce burdens for reporting entities, address fragmentation and provide greater comparability of information for users. Existing regimes are therefore encouraged to align with the recommendations.
14) Is there more work to be done on the recommendations?
In Section E of the main report, the Task Force lists four areas “where further research, analysis and methodological and standards development may be useful.”
- Relationship with other reporting initiatives. The Task Force notes the concern organizations express about the administrative burden, time, cost and effort required to respond to multiple disclosure frameworks and mandatory reporting requirements. They therefore encourage work on alignment and adoption of the recommendations.
- Data quality and financial impact. The Task Force suggests that further work could be done on closing gaps in emissions measurement methodologies, providing robust and cost-effectively tools for quantifying the potential impact of climate risks and opportunities at the project or asset level, while addressing uncertainty about the time, place and magnitude of climate impacts.
- Reporting GHG emissions associated with investments. This work stream would be particularly aimed at asset owners and asset managers concerned about reporting emissions related to their own or their clients’ investments. The Task Force also hints at the wider question of whether asset owners and managers should necessarily interpret GHG emissions as a risk metric.
- Scenario analysis. The Task Force recognizes that using scenario analysis in relation to climate risks and opportunities is a new practice that will take time to evolve, including the development of infrastructure such as accepted methodologies, data sets and tools for the evaluation of physical risks and industry specific guidance for preparers and users of climate-related scenarios.
15) Are there any gaps in the recommendations?
In Section E of the main recommendations document, as well as identifying further work that needs to be done on four issues, the Task Force refers to six contentious issues they have considered but that arguably leave some questions unanswered. Two of those issues are explored here:
- Timeframes - The recommended disclosures solicit information that is primarily forward-looking. However, the Task Force has not specified time frames for the short, medium and long-term because the timing of climate-related impacts on business will vary. The Task Force acknowledges the difficulties associated with timeframes, but it is not one of the areas they have identified for further work. Instead, they recommend that “preparers define the timeframes according to the life of their assets, the profile of the climate-related risks they face and the sectors and geographies in which they operate”.
- Materiality – The Task Force states that some of their recommended disclosures are “line item disclosure” and might involve an assessment of materiality. However, there does not appear to be any clear indication of precisely which recommended disclosures are “line items”, but the implication is that the term applies to the metrics. To the extent that recommended disclosures do require a materiality assessment, the Task Force says that organizations should use the process they would normally apply to other risks affecting their business and consistent with their financial filing requirements.
16) What review, sign-off and assurance processes (if any) does the Task Force expect to apply to climate disclosures?
Given that disclosures are to be included in mainstream financial reports or other public documents, the Task Force states that the governance processes should be similar to those used for existing public financial disclosures and would likely involve review by the chief financial officer and audit committee as appropriate.
Principle 6 states that disclosures “should be defined, collected, recorded and analyzed in such a way that the information reported is verifiable to ensure it is high quality. For future-oriented information, this means assumptions used can be traced back to their sources. This does not imply a requirement for independent external assurance however, disclosures should be subject to internal governance processes that are the same or substantially similar to those used for financial reporting.”
17) Do the recommendations apply on a “comply or explain” basis?
The recommendations do not directly answer this question. The task force recommends that all financial and non-financial organizations with public debt or equity implement its recommendations. In a footnote associated with this statement, the following text appears on page 13 “In the case a recommended disclosure is not made, the task force encourages preparers to provide the rationale for omitting the disclosure.”
18) Who is the reported information for?
Investors, asset managers and asset owners and their beneficiaries so that they may better understand the performance of their assets, consider the risks of their investments and make more informed investment choices.
19) What guidance is given on scenario analysis?
Supporting disclosure under the “strategy” recommendation provides that organizations should “describe the potential impact of different scenarios, including a 2-degree C scenario, on the organization's businesses, strategy and financial planning.”
The Task Force recognizes that organizations are at different levels of experience in using scenario analysis. However, the recommendations call on all organizations to consider applying a basic level of scenario analysis in their strategic and financial planning and risk management processes and disclosing the resulting potential impacts and related organizations responses. Organizations that are significantly affected by transition are encouraged to consider undertaking more rigorous qualitative and quantitative scenario analysis.
The Task Force recommends the selection of more than one set of scenarios for the purposes of analysis, so that a reasonable variety of future outcomes – both favorable and unfavorable – are considered.
In addition to the 2-degree C scenario (which should be used in all cases), two or three other scenarios most relevant to the organization’s circumstances should be used, such as scenarios related to Nationally Determined Contributions (NDCs) and business as usual. Reference is also made to the Technical Supplement, which provides more information on scenario inputs, analytical assumptions and choices and assessment and presentation of strategic and financial impacts.
20) What happens next?
Organisations have submitted their responses to the TCFD consultation, which are now being taken into consideration. The Task Force will release the final version of the report in June 2017, and will present it to the G20 in July 2017.