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Climate-related financial disclosures: what businesses need to know

Companies need to identify and quantify the impact climate change will have on their businesses in the near and distant future.
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A company’s action or inaction on climate change may have significant financial implications. Investors want transparency into the effects of climate-related events and trends relating to both physical and transition risk on a company’s financial performance.

This is where reporting is vital. Disclosures help investors consider the risk-return profile of companies. The Task Force on Climate-related Financial Disclosures (TCFD) recommended disclosures allow stakeholders to evaluate a company’s exposure to climate-related risks and appropriately consider them in valuations.

Companies will need to identify and quantify the impact climate change will have on their businesses in the near and distant future. They will also need an understanding of the change in risk profile caused by the low-carbon transition itself. Without a clear view of this horizon, and an indication of a company’s resilience, the ability to secure capital could be heavily impacted.

The TCFD’s recommendations provide a comprehensive framework for presenting activities and commitment to low-carbon practices. As well as demonstrating good corporate strategies and investability, it can also help your organization prepare for the challenges. Take note of any holes and gaps in your reporting — this insight will be invaluable for understanding your risk and planning for the road ahead.

TCFD’s 4 pillars and associated recommended disclosures

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  • Board oversight of climate-related risks
  • Management's role in assessing and managing climate-related risks 
  • Risk identification and assessment process for identifying climate-related risks
  • Risk management process for managing climate-related risks
  • Integration of a and b into the company's overall risk management processes 
  • Climate-related risks and opportunities identified for the short, medium, and long term
  • Impact of climate-related risks on the organization's businesses, strategy and financial planning
  • Resilience of the company's strategy with consideration of different climate-related scenarios 
  • Climate-related metrics in line with strategy and risk management process
  • Scopes 1, 2, and 3 greenhouse gas (GHG) metrics and the related risks
  • Climate-related targets used to manage climate-related risk and performance against targets 

Guidelines for disclosures

The TCFD has developed a set of guidelines to help companies articulate their disclosures. Known as the Fundamental Principles for Effective Disclosure (FPEDs), disclosures should be:

  1. Relevant
    Information overload is not the goal. The risks you report should be meaningful to your unique positioning.
  2. Specific and complete
    Outline not only how you identify and measure risks, but also how you plan to manage and report them.
  3. Understandable
    Risk information should include a balance of qualitative and quantitative narratives, providing deeper insight where necessary.
  4. Consistent
    Standardizing climate-related disclosures is essential to understand how your company evolves. If your process changes, offer clear reasons why.
  5. Comparable
    Being able to create market-wide benchmarks is one of the TCFD’s primary goals. Look toward leaders within your industry for your own disclosures.
  6. Objective
    Any metric or qualitative report included should be unbiased and easily verifiable by those interested.
  7. Timely
    The risk landscape is ever-changing. Staying up to date with these developments will allow your investors to better grasp the state of your company.

By knowing and applying your FPEDs, it will be easier to implement, track, and update your own processes as needed.

Lastly it is important to remember that the potential benefits for a TCFD-aligned organization can include:

  • Generating data-driven, forward-looking information on financial impacts.
  • Fostering shareholder engagement and the broader use of climate-related financial disclosures.
  • Promoting a more informed understanding of climate-related risks and better decision-making processes to investors and others.