Business relationships in difficult times
Task Force on Climate-related
Financial Disclosures (TCFD)
Introduction: Creating robust, internationally consistent disclosures
As highlighted in the Sustainability and business — the call to action; build back better report, we started on a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making, and how to incorporate these issues into internal and external reporting.
This paper is designed as a summary of a specific standard or framework. It is written from the management accounting perspective. As a finance professional, you are likely to encounter one or many of the sustainability frameworks and standards. It is a crowded and fragmented landscape, with slightly different terms, inconsistent language and various measures between the numerous methodologies. Adding to the confusion is whether adoption is voluntary or mandatory, and that some organisations work with combinations of standards and frameworks at the same time. Finally, the approaches to reporting also differ. They range from annual reports, integrated reports, sections on an organisation’s website aimed at a specific audience or a stand-alone sustainability report.
Fortunately, there are several initiatives underway to address this fragmented accounting and reporting landscape. They build a coherent global approach to corporate reporting that encompasses financial and non-financial reporting.1
A framework or a set of standards? The difference
A framework is a set of principles-based guidance for how information can be structured and prepared, and which broad topics should be covered. A set of standards are specific, replicable and detailed requirements for what should be reported for each topic. They are rules-based requirements.
The Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015. This came after the G20 finance ministers and central bank governors requested that the FSB consider the risks inherent in climate change. In 2017, the TCFD released climate-related financial disclosure recommendations to address the need for reliable corporate disclosure of climate-related information.
Recognising that climate risk is material for many organisations, the TCFD encouraged all entities with public debt or equity securities to voluntarily adopt its disclosure recommendations. To ensure the controls and governance over the preparation of climate-risk disclosures, and pointing to existing securities exchange requirements with the ensuing legal obligation to disclose material risks, it encouraged their inclusion in mainstream financial filings. It also recommended that asset owners and managers implement the recommendations, assessing the inherent risks in their portfolios, thereby better informing their investment decisions.
What are the TCFD recommendations?
The TCFD recommendations are a framework structured around four core themes of governance, strategy, risk management, and metrics and targets. Key climate-related financial disclosures support these four overarching recommendations. There are recommendations for all organisations, as well as supplemental guidance for specific sectors.
Governance — The organisation’s governance around climate-related risks and opportunities
Strategy — The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning
Risk management — The processes the organisation uses to identify, assess and manage climate-related risks
Metrics and targets — The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
The key to the recommended strategy disclosures, noted above, is to ‘describe the potential impact of different scenarios, including a 2°C scenario, on the organization’s businesses, strategy and financial planning’. Scenario analysis, a well-established method of assessing or analysing the likelihood of a range of possible future states, is discussed extensively in the TCFD recommendations.
Metrics and targets
For metrics and targets, the recommendations specify that reporting entities ‘disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks’.
Here is a brief summary of the respective GHG emissions categories:
Scope 1: Direct GHG emissions — These emanate from sources that are owned or controlled by the business; principally the result of the generation of electricity, heat or steam — furnaces, boilers, turbines, etc.; processing of chemicals or materials, e.g. cement, aluminum, waste; transportation of materials, products, employees or waste in company-owned vehicles.
Scope 2: Electricity indirect GHG emissions — This category encompasses emissions from purchased electricity used in a company’s equipment or operations; tracking purchased electricity creates the opportunity to evaluate risks and opportunities of alternative sources of electricity.
Scope 3: Other indirect GHG emissions — These are all indirect emissions (not included in scope 2) that are a consequence of the activities of the business, but that occur from sources not owned or controlled by the business for example, materials suppliers, third-party logistics providers, waste management suppliers, travel suppliers, lessees and lessors, franchisees, retailers, employees, and customers.
Financial and non-financial sectors
The supplemental guidance the task force created for the finance sector is focused on banks, insurance companies, asset owners and asset managers, including pension plans and foundations. The specific financial sector guidance was generated based on the belief, on the part of the Task Force, that ‘disclosures by the financial sector could foster an early assessment of climate-related risks and opportunities, improve pricing of climate-related risks, and lead to more informed capital allocation decisions’.
The supplemental guidance the task force created for non-financial sectors was based on the 12 industries that account for the largest GHG emissions, energy usage and water usage, broken down into four sectors based on similarities of climate-related risks as highlighted in the table.
Climate-related risks and opportunities
The TCFD categorises the climate-related risks as transition risks — related to the transition to a lower-carbon economy, and physical risks — related to the physical effects of climate change.
The transition risks include policy and litigation risks, technology innovations that may affect competitiveness in addition to market and reputation risks, as customer and community expectations continue to evolve.
The physical risks include acute risks — those that are event-driven, such as extreme weather events like hurricanes, cyclones, flooding or fires; and chronic risks — and those that refer to longer-term shifts in climate patterns, such as higher temperatures, that may contribute to extended heat waves or sea-level rise.
Climate-related opportunities may stem from a variety of sources, including creating efficiencies and innovations, the development of new technologies and products, the formation of new markets, and the financing infrastructure that will meet the needs of a new economy.
How are the recommendations developed?
The 31-member global task force represents a broad range of financial sector and non-financial sector representatives, a careful balance of users and preparers of climate-related financial disclosures.
In developing its recommendations, the task force considered the ‘existing regimes for climate reporting across the G20 countries’. It found that most requirements were not focused on financial information. It also reviewed the financial filing requirements for public companies across the G20 countries.
The TCFD recommendations include a set of reporting principles. These principles help achieve high-quality and decision-useful disclosures that enable users to understand the impact of climate change on organisations. The principles, taken together, are designed help organisations make clear the linkages and connections between climate-related issues and their governance, strategy, risk management, and metrics and targets.
Principle 1: Disclosures should present relevant information.
Principle 2: Disclosures should be specific and complete.
Principle 3: Disclosures should be clear, balanced, and understandable.
Principle 4: Disclosures should be consistent over time.
Principle 5: Disclosures should be comparable among organisations within a sector, industry or portfolio.
Principle 6: Disclosures should be reliable, verifiable and objective.
Principle 7: Disclosures should be provided on a timely basis.
In connection with the launch of the final recommendations report , the TCFD also issued an ‘Annex’ report guiding the implementations of general and sector-specific disclosure recommendations. In 2020, the TCFD issued follow-on reports, including the 2020 Status, Guidance on Scenario Analysis for Non-Financial Companies, and Guidance on Risk Management Integration and Disclosure.
Also reflecting the collaborative approach with the other sustainability standards and framework providers, the CDSB hosts the TCFD Knowledge Hub, and has partnered with other bodies on creating implementation resources including:
Why are the recommendations needed?
The TCFD recommendations are suitable for all organisations and will help focus them on
Using scenario analysis to access the potential impact of the risks and opportunities of the transition to a low carbon economy on strategy and financial planning.
Consistent adoption leading to effective measurement and improved organisational resilience.
The FSB created the TCFD to improve climate-risk disclosures that could promote more informed investment and underwriting decisions and facilitate the effective allocation of capital in the financial markets. As more information becomes available about the widespread risks and effects of climate-change, the need for a robust and internationally consistent climate framework has become increasingly important. Demand for this information from asset owners and managers is critical to the assessment of risk in their portfolios, and public sector leaders have also begun to become more attuned to the importance of transparency, mandating disclosure requirements for the coming years.
On the public sector front, in November 2020, the U.K. Government announced that it will mandate the implementation of climate risk disclosure using TCFD recommendations across major sections of the U.K. economy by 2025. The New Zealand Cabinet has also proposed a mandatory reporting regime that would require disclosures by certain entities beginning in 2023. With the increasing sense of urgency and expanded awareness, coupled with the recent actions taken to create a comprehensive global approach to business reporting, other jurisdictions may well follow suit.
Who will encounter
Finance professionals working for listed companies are more likely to encounter the TCFD Framework. In particular, those working in financial sector entities seeking to analyse the impact of climate risk on their portfolios; also, those working in the non-financial sector entities deemed to be the biggest contributors to GHG emissions, energy usage and water usage.
If your organisation is using or contemplating the TCFD recommendations, the 2019 CIMA professional qualification syllabus and CGMA competency framework (2019 edition) can help you ask the right questions to identify your potential knowledge and skills gaps.
What’s next from
the AICPA & CIMA?
We will continue to watch the sustainability space and play a central role in its development. We will ensure that the journey towards the development of global standardised comparable ESG metrics and non-financial reporting is not at the expense of closing any future sustainability debate and innovation. Our aim is to achieve a balance of sustainability reporting and assurance alongside data-driven insights so that resilient organisations and finance professionals can address future prosperity, planet and people challenges.
'We believe that we will see profound changes in the next few years in the work of management accounting and public accounting to embed new practices and standards relating to sustainability. The Association will continue to provide education and guidance to all areas of the profession, ensuring that it is ahead of this transformation. It’s truly an exciting time to be an accounting and finance professional'.
Andrew Harding, FCMA, CGMA, chief executive – Management Accounting, at the Association
1 In September 2020, SASB and four other sustainability framework and standards organisations announced their intention to work together to create a comprehensive approach to corporate reporting. The five bodies are, CDP (Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB). (Accessed 16 September 2020).
Also in September 2020, the IFRS Foundation issued a Consultation Paper on Sustainability Reporting, eliciting feedback on the proposed creation of a Sustainability Standards Board under the governance structure of the IFRS Foundation to create global sustainability standards. (Accessed 07 January 2021). In February 2021, the IFRS Foundation Trustees announced their intention to produce a definitive proposal (including a road map with timeline) by the end of September 2021, and possibly leading to an announcement on the establishment of a sustainability standards board at the meeting of the United Nations Climate Change Conference COP26 in November 2021. (Accessed 11 February 2021).
Kenneth W. Witt
Management Accounting & Member Engagement
Association of International Certified
Dr. Martin Farrar
Associate Technical Director
Research and Development — Management Accounting
Association of International Certified
The American Institute of CPAs® (AICPA®)
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