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.
Core themes
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 organisation'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
Appendix 2 to the Implementation Guidance highlights seven specific metric categories included in the Guidance on Metrics, Targets, and Transition Plans. These are not new recommendations, but highlighted because ‘these are important proxies for measuring climate-related risks and opportunities, form the basis for estimating climate-related impact, and are important inputs into investment, lending, and insurance underwriting’.3
The respective seven metric categories, in brief, are summarised as follows:
Scope 1: Direct GHG emissions — These emanate from sources that the business owns or controls; 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.
Climate-related risks and opportunities
Climate-related risks are categorized by the TCFD as transition risks — related to the transition to a lower-carbon economy and physical risks concerning the physical impacts of climate change.
The transition risks Include policy and litigation risks, technology innovations that may affect competitiveness; also 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, including hurricanes, cyclones, flooding or fires; and chronic risks — 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.
Other key metrics
Capital deployment — The amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities indicates the extent to which long-term value creation might be affected.
Internal carbon prices — Organisations may use internal carbon prices to assess financial implications of strategic considerations, investment decisions, performance measurement or risk management.
Remuneration — Remuneration policies linked to climate considerations provide insight into governance, oversight and accountability.
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.
Supplemental guidance for the financial sectors is organised along the lines of four major industry sectors according to the primary activities performed: banks (lending), insurance companies (underwriting), asset managers (asset management), and asset owners, which include pension plans, endowments and foundations (investing).
In addition to the updates to the implementation guidance for all sectors, key updates to the guidance for financial sectors include disclosure of the extent to which their respective business activities are aligned with a well below 2˚ C scenario, added disclosure of GHG emissions from those activities or, for insurance companies, the weighted average carbon intensity, where data and methodologies allow.
