On June 29, 2017, the Financial Stability Board ("FSB"), an international body dedicated to promoting global financial stability by coordinating the development of regulatory, supervisory, and other financial sector policies, published its Task Force on Climate-related Financial Disclosures' ("TCFD") final report detailing voluntary guidelines for climate-related financial risk disclosures. The TCFD recommends that companies use these guidelines to provide consistent, comparable, reliable, clear, and efficient information to investors, lenders, insurers, and other stakeholders, in disclosing the risks that climate change poses to companies' bottom line financials. One of the TCFD's key recommendations is that organizations consider forward-looking scenarios in assessing climate-related issues and their potential impacts on the organizations' businesses.
The TCFD's final recommendations center on four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets. These four recommendations are supported by "recommended disclosures that build out the framework with information that will help investors and others understand how reporting organizations assess climate-related risks and opportunities."
Under the governance-related guidelines, the TCFD recommends that an organization disclose its governance around climate-related risks and opportunities, including board oversight and management's role in assessment and management of climate-related risks and opportunities.
Under the strategy-related guidelines, the TCFD suggests that an organization disclose material actual and potential impacts of climate-related risks and opportunities on its businesses, strategy, and financial planning. Such disclosure should address the short, medium, and long term, as well as different climate-related scenarios including a 2°C or lower scenario.
Risk management disclosures are to outline how an organization identifies, assesses, and manages climate-related risks, including how processes for identifying, assessing, and managing climate-related risks are integrated into the organization's risk management.
Under the metrics and targets-related guidelines, the TCFD recommends: disclosure of the metrics used to assess climate related-risks and opportunities in line with its strategy and risk management process; disclosure of various categories of greenhouse gases, which are sometimes referred to as Scope 1, 2, or 3 emissions; and disclosure of climate-related targets and performance against those targets.
Several companies across the globe have pledged support for the recommendations. However, there has been some criticism of the final recommendations, including comments that the disclosures should not be voluntary and that some regulators and companies may use the recommendations to avoid compliance with and enforcement of existing laws.
The TCFD, established in December 2015, is composed of 32 members from global banks, insurance companies, asset managers, pension funds, accounting and consulting firms, credit rating agencies, and other nonfinancial companies who were chosen by the FSB to include both users and preparers of disclosures from across the G20's constituency of financial regulatory authorities.
The TCFD presented a Phase I Report on climate-related financial disclosures to the FSB on March 31, 2016, which was open for public comments until May 31, 2016. The TCFD then published interim recommendations in December 2016, which were followed by another public comment period that ran until February 12, 2017. Additional information about the TCFD's recommendation can be found on its website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
