The Regulatory Rise of TCFD Reporting


Task force for climate related disclosure Reporting tool software

The Taskforce on Climate-related Financial Disclosures (TCFD) has arguably become the dominant framework for reporting climate data, as evidenced by a number of recent regulatory moves:

The Rise Of TCFD Reporting

  • The United Kingdom now mandates TCFD-aligned reporting requirements for the private sector. 
  • The United States Securities and Exchange Commission (SEC) has proposed requiring publicly traded US companies to disclose climate data based on TCFD recommendations. 
  • Beginning in 2024, all federally regulated financial institutions in Canada will have to report climate data in line with TCFD.  
  • The governments of Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore and Switzerland have announced requirements for climate disclosures informed by TCFD recommendations to be implemented by various timelines. 

What exactly is TCFD?

The TCFD framework is the brainchild of the Financial Stability Board (FSB), the Switzerland-based international body that makes recommendations on the global financial system. Released in 2017, its recommendations aim to help companies release meaningful climate data as the world attempts to transition to a low-carbon economy. 

The taskforce itself is chaired by Michael Bloomberg (founder of Bloomberg LP and former mayor of New York City) and consists of 31 members from across the G20 countries, including executives from Unilever, BNP Paribas, JPMorgan Chase, and BlackRock among others. 

TCFD boasts over 2,000 supporters across the globe, in the form of governments, financial institutions and the private sector. The 1,069 financial institutions that have so far openly supported TCFD together represent USD$194 trillion in assets under management. 

The Four Pillars of TCFD

The framework itself consists of 11 disclosure recommendations spanning four interrelated thematic areas: governance, strategy, risk management, and metrics and targets. With the exception of the last area, these recommendations are largely qualitative in nature, and can be summarized as follows: 

Governance: companies should disclose their management and board’s strategy for monitoring and assessing climate risk (and opportunity). 

Strategy:  companies should identify climate risks and opportunities foreseen over the short, medium and long term; explain the impact of these risks and opportunities on their planning and operations; and assess how resilient their strategy is in various climate-related scenarios (i.e., climate stress tests). 

Risk Management:  companies should explain their process for identifying and managing climate risk and how this process fits into the overall picture of risk management. 

Metrics and Targets: companies should disclose the specific metrics used to inform their climate strategies, including the disclosure of scope 1, 2, and 3 greenhouse gas emissions among other conventional metrics. They should also disclose climate goals or targets and their progress towards them. 

Challenges and Solutions to Implementing TCFD for Private Equity

Although the TCFD report is short and largely qualitative, it nevertheless poses an additional burden to organizations that, at present, face different ESG reporting requirements from their investors with little support or direction on how to implement them. 

Given its relative newness, gathering and comparing climate data remains a major challenge for organizations. The larger the portfolio is, the more difficult it is to capture this data. And given that even large organizations struggle with this, small and medium-sized enterprises have even fewer resources to tackle data collection and analysis. Take, for example, calculating Scope 3 greenhouse gas emissions – i.e. emissions resulting from a company’s supply chain – which are out of the direct control of a company. 

Collecting information on climate risk is also complex because the data is not isolated, but rather a part of an interconnected system. While companies already have a handle on more traditional financial risk, with a standard set of operating procedures, it is not enough to tackle climate data in an isolated fashion. This is why, as part of ESGTree’s TCFD automation tool, we often recommend involvement at the Board level on climate strategy. 

ESGTree's TCFD Tool for Private Equity

To simplify the TCFD reporting process, ESGTree’s cloud-based software boils down the reporting process to 40 simple multiple-choice questions that, upon completion, automatically generate the TCFD report, thereby automating much of the difficult legwork. Based on the responses to the questions, ESGTree is able to provide recommendations and action items on how to improve a company’s climate performance vis-a-vis the four pillars of the framework. 

This is complemented by ESGTree’s automated Carbon Calculator which allows for seamless calculation of carbon emissions by taking in data that companies easily have on hand and providing the figures for 1, 2, and 3 emissions immediately.  

Given the legislative action and international buy-in of TCFD, it is advisable to add TCFD to your climate action plan now rather than later in order to stay ahead of the regulatory curve and minimize transition risk as the world moves towards a lower carbon economy. 

ESGTree’s automated and customizable ESG frameworks help private market investors stay on top of the ESG performance of their portfolio companies. Private equity (PE) and venture capital (VC) firms and other financial institutions rely on ESGTree’s multi-layered platform to collect, analyze, benchmark and report ESG data hassle-free.

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