TCFD Transition Risk: What You Need To Know

‍The Task Force on Climate-Related Financial Disclosures (TCFD) is a global initiative that aims to help companies disclose climate-related financial risks and opportunities. 

The TCFD was established in 2015 by the Financial Stability Board (FSB) and its recommendations have become widely adopted by companies and investors alike. 

Here's what you need to know about TCFD transition risk.

‍

Who is concerned ❓

The Task Force on Climate-Related Financial Disclosures (TCFD) is gaining momentum, with over 1,600 companies and organizations from nearly 80 countries now adopting its standards. These companies represent a market capitalization of almost $16 trillion.

The TCFD has also received support from the G7 countries, with the United States, France, Germany, United Kingdom, and Japan agreeing to make TCFD-aligned reporting mandatory. In the UK, premium listed companies are required to follow TCFD recommendations by April 2022. In the United States, the SEC's 2022 proposal for the standardization of climate-related disclosures is based on TCFD standards.

In addition, the United Nations' Principles for Responsible Investment (PRI), the world's largest ESG guidance framework, has approved TCFD-aligned reporting since 2020. This demonstrates the increasing importance of climate-related financial disclosures and the growing recognition of TCFD as a leading framework for such disclosures.

TCFD and SASB: what is the difference between them? 🔥

• TCFD focuses on climate-related risks and opportunities, it was established by the Financial Stability Board (FBS)
• TCFD provides a standardized approach for companies to disclose their climate risks and opportunities, 
• TCFD aims to improve the comparability and consistency of climate-related financial disclosures, 
• SASB covers a broader range of sustainability issues. It is an independent nonprofit organization.
• SASB provides industry-specific sustainability reporting standards.
• SASB aims to improve the relevance and reliability of sustainability information for investors.
• SASB also includes non-financial disclosures related to sustainability issues.

What were the "TCFD Pilot Projects"? ⚡

The TCFD conducted a series of pilot projects in 2016 and 2017 to test the implementation of its recommendations. These pilot projects involved a diverse range of companies from different sectors and geographies, and the feedback from these projects was used to refine the TCFD recommendations.

Project 1 🌿

One example of a TCFD pilot project is the Bank of England's Climate Biennial Exploratory Scenario (CBES). The CBES involved a stress test of the UK banking system under different climate scenarios, and the results were used to assess the financial risks associated with climate change. The CBES was based on the TCFD recommendations and helped to demonstrate the practical application of these recommendations.

Project 2 🏫

Another example of a TCFD pilot project is the Climate-Related Financial Disclosures in the Real Estate Sector project, which was led by the Urban Land Institute (ULI) and the Center for Climate and Energy Solutions (C2ES). The project involved a group of real estate companies that tested the implementation of the TCFD recommendations in the real estate sector. The project helped to identify key challenges and opportunities for real estate companies in disclosing their climate-related financial risks and opportunities.

‍

The TCFD pilot projects helped to demonstrate the practical application of the TCFD recommendations and provided valuable feedback for refining these recommendations. 

They also helped to raise awareness of the importance of climate-related financial disclosures across different sectors and geographies.

What Are the Four Types of Transition Risk? ☢️

The TCFD identifies four types of transition risks that companies may face as they transition to a low-carbon economy:

1. Policy and legal risks: Changes in laws and regulations related to climate change may affect the profitability of certain industries or companies.
2. Technology risks: Changes in technology may disrupt certain industries or companies, such as the shift to renewable energy sources.
3. Market risks: Changes in consumer preferences or investor sentiment may affect the demand for specific products or services.
4. Reputation risks: Companies may face reputational damage if they are perceived as not taking sufficient action to address climate change.

What are the benefits of TCFD standards? ☘️

TCFD standards provide a framework for companies to better understand and manage climate-related risk. Some other benefits of the framework include: 

1. Improved disclosure: TCFD standards encourage companies to disclose more information on their climate-related risks and opportunities, providing investors with better information to make informed decisions.
2. Enhanced risk management: By implementing TCFD standards, companies can better identify and manage climate-related risks and opportunities, reducing potential financial losses and increasing resilience.
3. Increased transparency: TCFD standards increase transparency around climate-related risks and opportunities, which can help companies build trust with stakeholders and enhance their reputation.
4. Better decision-making: TCFD standards provide investors with the information they need to make informed decisions, which can ultimately drive capital toward sustainable investments and away from activities that contribute to climate change.
5. Alignment with global initiatives: TCFD standards are aligned with other global initiatives, such as the Paris Agreement and the Sustainable Development Goals, which help to promote consistency and coherence in reporting.
6. Improved long-term planning: TCFD standards encourage companies to consider the long-term impacts of climate change on their business, which can lead to more robust long-term planning and strategy development.

How do investors use information from TCFD disclosures? 💰

Investors can use TCFD disclosures to assess the climate-related risks and opportunities associated with companies in their investment portfolios. This can help investors make more informed investment decisions, and can also help companies to attract investment from investors who are looking for companies that are taking climate change seriously.

What are the TCFD recommendations?

The TCFD recommendations are organized into four categories:

Governance 👑

Companies should establish governance structures that incorporate climate-related risks and opportunities into their decision-making processes.

‍

Strategy 🧩

Companies should assess the potential impacts of climate-related risks and opportunities on their business strategies and consider a range of scenarios.

Risk Management 🛡

Companies should identify and manage the risks associated with climate change and should disclose their risk management strategies.

Metrics and Targets 🎯

Companies should disclose information about their greenhouse gas emissions, energy use, and other relevant metrics, and should set targets for reducing their emissions and improving their energy efficiency.

How does the Task Force on Climate-Related Financial Disclosures define climate risks and opportunities?

Climate-related risks 🔥

Climate risks refer to the physical, regulatory, and market risks associated with climate change. Physical risks include the direct impacts of climate change, such as extreme weather events and sea level rise. Regulatory risks include changes in laws and regulations related to climate change. Market risks include changes in consumer preferences, investor sentiment, and other market factors related to climate change.

Climate opportunities ☀

Climate opportunities refer to the potential benefits of addressing climate change, such as cost savings from energy efficiency improvements or new business opportunities in the renewable energy sector.

What is an effective TCFD report? 🎀

An effective TCFD report should provide clear and concise information about the company's climate-related risks and opportunities, as well as its strategies for managing these risks and seizing these opportunities. The report should be based on a thorough analysis of the company's operations and should provide specific metrics and targets for reducing greenhouse gas emissions and improving energy efficiency. The report should also be transparent and accessible to a wide range of stakeholders, including investors, customers, and employees.

‍Recommended reading

If you want to learn more about ESG reporting and carbon disclosures, check out our free resources:

• Article: Comprehensive Guide to Setting up Your ESG Strategy
• Article: What is Environmental, Social, and Governance (ESG)?
• Article: What is Net Zero? What it Means and Why it Matters
• Article: Decarbonizing Businesses: A Comprehensive Guide for Global Investors
• Article: What is the GHG Protocol? 

What is 15 ROCK?

15 Rock is a global leader in climate risk management and advisory services. We are fiduciaries to our clients and take that responsibility seriously.

We are heavily investing in our platform and technology in order to provide our clients with the most cutting-edge solutions while also inspiring our employees and supporting our local communities.

Book a call with us to see how 15Rock can help with carbon accounting and how easy it is to measure, reduce, offset, report, and certify all of your emissions in our easy-to-use platform.

‍