Apr 27 / ESG Matters

What is the TCFD?

Climate change is no longer just an environmental and social concern, but also a business issue due to the increasing frequency and severity of extreme weather events negatively impacting the global economy. In 2021 alone, weather catastrophes caused economic losses of US$329 billion worldwide, which is a 26.5% increase from 2019, according to Statista.

As a result, there is a need for businesses to adopt more sustainable practices and improve their ESG performances, but they require guidance through frameworks and standards such as the Climate-Related Financial Disclosure (TCFD) to strengthen their climate resilience in business and investment decisions.

What is the TCFD?

TCFD, created in 2015 by the Financial Stability Board (FSB), sets recommendations for clear and consistent disclosure of climate-related risks and opportunities. The framework released its recommendations on climate-related financial disclosure in 2017, enabling companies to demonstrate climate change resilience in their business and investment decisions for the financial sector.

The framework includes four core elements: 

  • Governance: Disclosure on the organisation’s governance around climate-related risks and opportunities.
  • Strategy: Disclosure on the actual and potential impacts of climate-related risks and opportunities on the organisation's business strategy and financial planning.
  • Risk Management: Disclosure on the process used by the organisation to identify, assess and manage climate-related risks.
  • Metrics and Targets: Disclosure on the organisation’s metrics and targets used to assess and manage relevant climate-related risks and opportunities.

The Use of Scenario Analysis

Among all disclosure requirements, scenario analysis is vital for organisations in their strategic planning processes to assess the financial impact of climate change. It allows organisations to consider a broader range of assumptions, uncertainties, and potential future states.

However, it is a complex quantitative analysis that poses a challenge for disclosing the resilience of an organisation's strategy. The Task Force recognises that organisations have different levels of experience with scenario analysis and offers guidance for beginners and experienced organisations.

For beginners, the Task Force suggests starting with qualitative scenario narratives or storylines to help management explore the potential range of climate change implications.

As organisations gain experience, they can use quantitative information to illustrate potential outcomes.

For experienced organisations, greater rigour and sophistication in the use of data sets and quantitative models may be necessary. Quantitative approaches can be achieved by using external scenarios and models (e.g., those provided by third-party providers) or developing in-house modelling capabilities.

The Integration of TCFD Recommendations

Integrating TCFD Recommendations in the company requires educating the Board and senior management about TCFD and its implications for stakeholders. Agreements on the scenarios must be set to translate the company's purpose into behaviours, practices, and processes while ensuring board support.

Incorporate the TCFD framework into core business and operations, with metrics and targets defined for corporate resilience under climate uncertainties. TCFD disclosure can lead to better resource allocation and management by changing the board and steering group's mindset.

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ESG Matters 

Founded by one of the sustainability pioneers Dr Glenn Frommer, ESG Matters specialises in ESG data analytics, intelligent sensing technologies and sustainability advisory. Since 2014, ESG Matters has been a creator of digital platform solutions to meet the needs of sustainable impact investing and green financing. Working closely with listed companies, SMEs, and various growing organisations, ESG Matters aims to address the global market through providing business process outsourcing (BPO) services and solutions to achieve the relevant sustainable development goals (SDGs) and building resilience to climate change.

To learn more, visit http://www.esgmatters.asia