What are the TCFD recommendations?
For years, there has been an increased demand from the capital market for reliable and comparable information from companies on the impact of climate change. For this reason, the G20 Finance Ministers established the Task Force on Climate-related Financial Disclosure (TCFD) in 2015. Since 2017, it has published recommendations to improve and expand climate-related financial reporting and provide investors and other stakeholders with a basis for informed decision-making.
The disclosure recommendations are divided into four thematic areas: Governance, Strategy, Risk Management, and Metrics and Targets and cover the following aspects:
- Governance: corporate governance in relation to climate-related risks and opportunities.
- Strategy: material actual and potential impacts of climate-related risks and opportunities on the company’s business, strategy and financial planning.
- Risk management: how the company identifies, assesses and manages climate-related risks.
- KPIs & Targets: key KPIs and targets needed to assess and manage relevant climate-related risks and opportunities.
The four recommendations are interlinked and are specifically implemented through 11 recommended disclosures. The reported information should focus on climate-related risks and opportunities and is intended to demonstrate how reporting companies assess and manage them.
Where are the TCFD recommendations applied?
Since 2017, the recommendations have continuously been improved and expanded and have become the standard for reporting on climate-related financial information. In the United Kingdom, TCFD reporting is already mandatory for a certain group of larger and listed companies. In 2021, the G7 countries and China have also announced to commit to mandatory TCFD reporting. Similar requirements, based on or even adapted from the TCFD, are also expected to be implemented in the CSRD, the new EU directive on sustainability reporting, which is planned to be adopted before the end of 2022.
How does the CDP questionnaire align with TCFD?
CDP recognizes TCFD’s leadership in guiding climate-related information disclosure and its integration into mainstream financial reporting worldwide. Therefore, in 2018, CDP restructured its Climate Change Questionnaire, adapted to the TCFD recommendations and translated them into specific questions. With this shift, a stronger focus was placed on board oversight, climate risk management and future-oriented scenario analysis. Overall, the 28 TCFD aligned questions are distributed across the Governance, Risks and Opportunities, Strategy, Targets, and Emissions modules of the CDP questionnaire.
How can companies report on the climate-related risks and opportunities in line with the TCFD recommendations?
The consistent categorization of climate-related risks and opportunities and the resulting financial impacts are commonly considered the most essential part of the TCFD recommendations. This focus is also reflected in the CDP questionnaire: the highest scoring questions among those that are TCFD aligned are found in Chapter C2: Risks and Opportunities.
Following TCFD, in this chapter, companies are asked in detail what climate-related risks and opportunities they have identified that may have a substantive impact on their business. This includes disclosing information on risk types and drivers, as well as on the value chain stages and time horizons considered. Furthermore, in accordance with the TCFD recommendations, they are asked to describe the magnitude and likelihood of impacts and to quantify the costs of responding to climate-related risks and realizing opportunities.
In light of these extensive and detailed disclosure requirements, we observe that companies are particularly struggling to identify, report on, and manageclimate-related risks and opportunities. For this reason, we have published a detailed white paper that provides a first orientation on climate-related risk and opportunity disclosure with a special focus on TCFD.
You can download the paper here https://dfge.de/en/climate-risks-opportunities-whitepaper/.
How DFGE can support:
DFGE can support companies in choosing the right TCFD aligned disclosure approach and help decide which factors should be included in their calculations. The process typically involves a gap analysis, a materiality analysis of climate-related opportunities and risks, and a scenario analysis. However, different possibilities can be discussed and DFGE offers modular packages. This way, climate-relevant risks and opportunities can be identified and assessed at an early stage and measures derived. Our aim is not only to offer optimum preparation for participating in CDP, but also for the requirements of EU-CSRD reporting, which will also give high priority to climate-relevant risks and opportunities.
CDP on its alignment with TCFD: https://www.cdp.net/en/guidance/how-cdp-is-aligned-to-the-tcfd
DFGE climate risks and opportunities whitepaper: https://dfge.de/en/climate-risks-opportunities-whitepaper/
EU Corporate Sustainability Resporting Directive: finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
TCFD Recommendations: https://www.fsb-tcfd.org/recommendations/
UK mandatory TCFD reporting: https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law