TCFD reporting playbook for more consistent climate disclosures

As climate-related risks surge to become a top concern of organisations globally, more companies and institutions have sought to report their exposures to climate risks. But one common problem persists in the sustainability and climate reporting landscape — a lack of consistency.

A review of TCFD reports last year also found that the increase in disclosures is still insufficient in meeting investors’ needs, and reported information lacks clarity on climate-related issues’ potential impact on companies.

A new Task Force on Climate-Related Financial Disclosures (TCFD) playbook, a joint initiative by the Institute of International Finance (IIF) and United Nations Environment Programme Financial Initiative (UNEP FI) with the support of accounting firm EY, seeks to remedy that for TCFD practitioners. One among many sustainability reporting standards and frameworks in the market, the TCFD framework has seen wide adoption by financial institutions such as banks, asset managers, and insurers, globally.

The guide includes recommendations into the TCFD’s four overarching areas — governance, strategy, risk management, and metrics and targets — and the baseline disclosures, advanced considerations, and open questions for each of the disclosures in the framework.

The TCFD’s recommended disclosures are structured to include the following topics in the overarching areas:

• Governance
  • Board oversight.
  • Management’s role.
• Strategy
  • Climate-related risks and opportunities.
  • Impact on organisation’s business, strategy, and financial planning.
  • Resilience of organisation’s strategy.
• Risk management
  • Risk identification and assessment processes.
  • Risk management process.
  • Integration into overall risk management.
• Metrics and targets
  • Climate-related metrics aligned to strategy and risk management process.
  • Scope 1, 2, 3 greenhouse gas metrics and related risks.
  • Climate-related targets and performance against targets.

Global banks such as Citi and UBS that have pledged various commitments to contribute to a sustainable and low-carbon economy align part of their sustainability reporting to TCFD’s framework. According to the report, as of September 2020, 1,440 public- and private-sector organisations are signatories of TCFD, with combined assets of more than $118 trillion.

The report also identified three priorities to improve the quality and consistency of TCFD disclosures:

• Broaden the scope from “carbon-related” (energy and utilities sectors) to “climate-sensitive” sectors that may be affected by physical risks as a result of the transition to a low-carbon economy.
• Develop industry standards for metrics to quantify climate-related risks. These metrics are intended to help investors and other stakeholders in decision-making and need to be comparable. The TCFD or regulators may develop guidance on such metrics.
• Include progress on climate-related targets and commitments. Recent climate-related goals and commitments by companies will need to be tracked in TCFD reports to ensure progress on these targets.

The document is intended to be a first step towards the bigger aim of developing standardised templates for TCFD disclosures. Future work by IIF and UNEP FI will aim to harmonise delivery of quantitative date in a consistent format.

The report’s release is happening against the backdrop of heightened interest and effort to seek consistency in sustainability reporting. Last month, the International Federation of Accountants (IFAC) called for the creation of a new sustainability accounting standards board under the IFRS Foundation. Five other global organisations — the International Integrated Reporting Council, the global not-for-profit CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, and the Sustainability Accounting Standards Board — issued a joint statement to announce their collaboration to establish global consistency in sustainability reporting.

In this sustainability reporting landscape, accounting and finance professionals will play key roles in helping organisations use and implement existing and developing frameworks, support decision-making on sustainability issues, and help integrate sustainability risks into strategy, finance, and operations.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.