Climate change is not only going for long term shift in temperature and weather patterns, but also is going to have financial impact on organizations decision. World is moving towards low carbon economy. Climate related risk and opportunities needs to be identified and managed to minimize its impact on organization. To understand climate change click here, With this article we are trying to present a brief on TCFD : Task Force on Climate-related Financial Disclosures
The Switzerland-based Financial Stability Board (FSB) on recommendation of G20 Finance ministers and central governors established the TCFD in 2015. It was established with a goal to bring transparency on Broad disclosure related to climate-related financial risks. TCFD, is now a global organization responsible to develop a set of recommendation on climate-related disclosures that companies and financial institutions can use to better inform investors, shareholders and the public of their climate-related financial risks.
TCFD issued a ‘Final Report’ detailing 11 voluntary recommendations, known as the TCFD framework. The focus of TCFD is to help companies and financial institutes on structured reporting of impact and strategy an organization has on the global climate. It helps companies and firms to make climate-related disclosures more consistent and therefore more comparable.
TCFD Framework :
TCFD recommends to identify risk and opportunity with climate change, prepare strategic risk management planning , Develop action plan, set objective, prepare metric and target to mitigate climate related risks and provide insight on financial impact and position of company over a period of time. framework also suggests four core elements of discloser with various recommended disclosure under these core elements.
Risk and opportunities :
Identification of risk and opportunities are important to understand organizational preparedness towards climate change. Risk can be categories as Physical and Transition risk.
Physical risk describes the potential for physical damage and financial losses because of increased exposure to climate hazards. The physical effect of climate change can create significant financial costs for companies, The physical risk is further categorized as Acute and chronic risks. Acute physical risk causes damage immediately eg risk arises due to increased severity of extreme whether such as cyclones and floods. Chronic risk causes damage over a period of time like change in precipitation, extreme weather patterns, rising mean temperature and sea levels.
Transition risks relates to the risks associated with transitioning to a lower-carbon economy, which may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Transition risk can further be categorized as policy and legal risk, Technology risk, market risk and reputation risk,
As world is transiting to low carbon economy, it also brings various opportunities for improving financial position and create positive financial impact. TCFD has categorized opportunities in five categories like Resource efficiency, energy source, product and services, markets and resilience. Organization should all opportunities available prepare structured plan to grab opportunities.
Core Elements of Disclosure and recommendation :
TCFD defines four element for discloser, Governance, Strategy, Risk Management and Metric & Targets and shown below
In Governance, organization is expected to provide boards oversight on climate related risk and opportunities. This helps investors to understand seriousness of firm towards climate change. Management role in assessing and managing climate related risk and opportunities is also essential discloser requirement under governance.
In Strategy, organization has to identify risk and opportunities over shot, medium and long term. After identification impact of risk and opportunities on the organizations business, strategy and financial planning to be described. This helps understand investors to understands business impact of climate change on the organization. Organization is also expected to describe the resilience of organizations strategy taking consideration different climate related scenarios including 2 Deg C or lower scenario.
In Risk management, Organization explains the process for identifying and assessing climate related risks, plan for managing climate related risk. Under this element organization also describe how process of identifying, assessing and managing risks are integrated into organizations overall risk management.
In Metric and target, Organization becomes more specific to its business and disclose metric used to assess climate related risk and opportunities inline with its strategy and risk management process. Organization must disclose scope-1, Scope-2 GHG emission and if appropriate scope-3 emission and associated risk. organization is expected to set target to manage risk and opportunities and communicate on the performance against target. For understanding emission you may click here, for energy and carbon emission calculation click here
TCFD : Task Force on Climate-related Financial Disclosures is one of the important framework. Organization should use it for assessing climate related risk and opportunities at its various sites and operations. The risk and opportunities to be reviewed periodically and undated accordingly.
for TCFD critical References and guidelines :