What is TCFD & IFRS S2?
The Task Force on Climate-related Financial Disclosures (TCFD) was an industry-led task force established in 2015 to identify the information needed by investors, lenders, and insurance underwriters to assess and price climate-related risks and opportunities. The goal was to develop voluntary, consistent climate-related financial disclosures that would be useful in understanding material risks related to climate change
In 2017, the TCFD released its final report and asked the ISSB to incorporate the TCFD disclosure into its standards. The Financial Stability Board released the IFRS S1 and S2 standards. The IFRS S2 standards incorporate all of the TCFD recommendations and disclosures. Complying with the IFRS S2 implies compliance with TCFD, but the IFRS S2 has some additional requirements.
Ultimately, better disclosure will lead to more informed decision-making which will enable more stable, resilient markets with less abrupt price adjustments, and facilitate a smoother transition to a low-carbon economy.
Key Features of TCFD
- Linking financial and non-financial information: TCFD focuses on the financial impact of climate change and reflects these impacts in the income statement, cash flow statement and balance sheet of the organization.
- Risks and opportunities: The recommendation has a strong focus on risks and opportunities related to the transition to a low-carbon economy.
- Time horizons: TCFD recognizes that while some climate change impacts are already visible, the timeframes of climate change impacts are further in the future than usual business planning horizons. TCFD encourages companies to consider short, medium and long-term impacts of climate change
- Scenario analysis and forward-looking disclosures: TCFD highlights scenario analysis as a strategic tool that can help companies consider the potential future outcomes of potential future scenarios of climate change transitions.
- Financial filings: TCFD recommends that companies disclose any material impacts from climate change in the financial filings.
What are the recommendations of the TCFD?
The TCFD recommendations describe the information organizations should disclose to help stakeholders understand the risks and opportunities to which the organization are exposed and how the organization plans to address them.
The recommendation focus on four thematic areas or core elements:
- Governance: Organizations should disclose the governance around climate-related risks and opportunities, including the role an organization’s board plays in overseeing climate-related issues, as well as management’s role in assessing and managing those issues.
- Strategy: Organizations should disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning over the short, medium and long term.
- Risk Management: Organizations should disclose the processes used to assess and manage climate-related risks and how the process is integrated into the overall risk management process in the organization.
- Metrics and Targets: Organizations should disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities. Metrics and targets used by an organization allow investors and other stakeholders to better assess the organization’s potential risk-adjusted returns, ability to meet financial obligations, general exposure to climate-related issues, and progress in managing or adapting to those issues.
TCFD Disclosures
Governance
TCFD considers the following information for the board’s oversight of climate-related risks and opportunities:
- the processes and frequency by which the board and/or board committees (e.g., audit, risk, or other committees) are informed about climate-related issues.
- whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk management policies, annual budgets, and business plans as well as setting the organisation’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures, acquisitions, and divestitures.
- how the board monitors and oversees progress against goals and targets for addressing climate-related issues.
In addition, it is helpful to disclose the process and control systems used to inform the board and the approval process for climate-related governance processes.
When disclosing information about the role of management, organisations should consider including the following information:
- whether the organisation has assigned climate-related responsibilities to management-level positions or committees; and, if so, whether such management positions or committees report to the board or a committee of the board and whether those responsibilities include assessing and/or managing climate-related issues,
- description of the associated organisational structure(s),
- processes by which management is informed about climate-related issues, and
- how management (through specific positions and/or management committees) monitors climate-related issues.
- how are management held accountable and provided incentives for implementing climate-related policies.
Strategy
When considering the risks and opportunities identified by the organization in relation to climate change, organizations should provide the following information:
- time horizons including short-, medium-, and long-term as relevant to the organization’s assets or infrastructure and climate-related issues for each time horizon (short, medium, and long term) that could have a material financial impact on the organization, and
- a description of the process(es) used to determine which risks and opportunities could have a material financial impact on the organization.
- a description of their risks and opportunities by sector and/or geography, as appropriate.
Organizations should consider the impact of climate change on the following areas:
- Products and services
- Supply chain and/or value chain
- Adaptation and mitigation activities
- Investment in research and development
- Operations (including types of operations and location of facilities)
Organizations should also consider including in their disclosures the impact on financial planning in the following areas:
- Operating costs and revenues
- Capital expenditures and capital allocation
- Acquisitions or divestments
- Access to capital
If climate-related scenarios were used to inform the organization’s strategy and financial planning, such scenarios should be described. Organizations should describe how resilient their strategies are to climate-related risks and opportunities.
Organizations should consider discussing:
- where they believe their strategies may be affected by climate-related risks and opportunities;
- how their strategies might change to address such potential risks and opportunities; and
- the climate-related scenarios and associated time horizon(s) considered.
Risk Management
Organizations should describe their risk management processes for identifying and assessing climate-related risks. An important aspect of this description is how organizations determine the relative significance of climate-related risks in relation to other risks.
Organizations should also consider disclosing the following:
- processes for assessing the potential size and scope of identified climate-related risks and
- definitions of risk terminology used or references to existing risk classification frameworks used.
- their processes for managing climate-related risks, including how they make decisions to mitigate, transfer, accept, or control those risks
- their processes for prioritizing climate-related risks, including how materiality determinations are made within their organizations.
- how their processes for identifying, assessing, and managing climate-related risks are integrated into their overall risk management.
Metrics and Targets
Organizations should provide the key metrics used to measure and manage climate-related risks and opportunities, including metrics on climate-related risks associated with water, energy, land use, and waste management, where relevant and applicable. Where relevant, organizations should provide their internal carbon prices as well as climate-related opportunity metrics such as revenue from products and services designed for a lower-carbon economy. Metrics should be provided for historical periods in a comparable way to allow for trend analysis. In addition, where not apparent, organizations should provide a description of the methodologies used to calculate or estimate climate-related metrics.
Organizations should provide their Scope 1 and Scope 2 GHG emissions and, if appropriate, Scope 3 GHG emissions and the related risks. GHG emissions should be calculated in line with the GHG Protocol methodology. GHG emissions and associated metrics should be provided for historical periods to allow for trend analysis.
Organizations should describe their key climate-related targets such as those related to GHG emissions, water usage, energy usage, etc. Other goals may include efficiency or financial goals, financial loss tolerances, avoided GHG emissions through the entire product life cycle, or net revenue goals for products and services designed for a lower-carbon economy.
In describing their targets, organizations should consider including the following:
- whether the target is absolute or intensity based,
- time frames over which the target applies,
- base year from which progress is measured, and
- key performance indicators used to assess progress against targets.
Organizations should provide a description of the methodologies used to calculate targets and measures.
Importance of TCFD Disclosures
The four core elements of the TCFD disclosures are the elements that map to elements considered in business strategy and planning. This should help sustainability organizations integrate the climate-related disclosures into business strategy and planning.
Since climate change will have financial impacts on the business, the board and management will be accountable for the long-term resilience of the company to climate change. Organizations need to disclose how their governance body is involved in assessing, managing, and overseeing climate-related risks.
The World Economic Forum provides some guiding principles and questions companies can use to set up effective governance for climate-related impacts.
- Does the board consider climate change risks? If so, to what extent? Are climate considerations incorporated into strategic planning, business models, financial planning and other decision-making processes?
- Do climate change impacts inform the boards decisions and can the board explain their decisions?
- Are climate change risks address in internal performance reviews and independent performance audits?
- What is the climate competence of the board and what steps are being taken to ensure the board is educated on climate-related risks and opportunities
- Is the company’s management provided with climate-related incentives and/or compensation?
IFRS S2 and TCFD
TCFD completed its work and asked the ISSB to incorporate the disclosures into their standards. The Financial Standards Board published the IFRS S2 – Climate Related Disclosures in Jul 2023.
The requirements in IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. Companies that apply the ISSB Standards will meet the TCFD recommendations, and so do not need to apply the TCFD recommendations in addition to the ISSB Standards.
There are additional requirements in IFRS S2. These include the requirements for companies to disclose industry-based metrics, to disclose information about their planned use of carbon credits to achieve their net emissions targets and to disclose additional information about their financed emissions.
Companies can continue to use the TCFD recommendations should they choose to do so, and some companies may still be required to use the TCFD recommendations.
For details on the difference between TCFD and IFRS S2 review this document provided by the IFRS organization.
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