What are the TCFD Principles for Effective Disclosure?

Since the Task Force for Climate-related Disclosures (TCFD) published its recommendations in 2017, there has been much misinformation and confusion. The TCFD’s recommendations remain voluntary, but there’s no doubt that they are becoming more widely recognised and are helping to frame the development of sustainability, ESG policy, and the inevitable ESG regulation.

The Financial Stability Board (FSB) drafted the TCFD framework as a guide on what to report, and not on how it should be reported. As such, the framework is centred on how any enterprise approaches climate change-induced risks and opportunities and then reports those findings to its stakeholders.

With the drive towards Net Zero and the global acknowledgement that COP26 must deliver meaningful change, it is recognised that actions and policies related to climate issues will continue to evolve. As such, the TCFD’s recommendations focus on the qualitative and quantitative characteristics of financial information so that the reports produced are clear and meaningful, without ‘greenwashing’ and deliberate fluff intended to obscure the risks.

Principle 1: Relevant

The tendency to produce reports which obfuscate the reality is to be resisted. The framework calls for information ‘specific to the potential impact of climate-related risks and opportunities on its markets, businesses, corporate or investment strategy, financial statements, and future cash flows.’

Reporting on irrelevancies can cause material information to be lost in a sea of corporate jargon. Conversely, when investors or other stakeholders perceive a risk which the organisation may regard as minor, the organisation should acknowledge the concern and address it via a specific statement. In so doing, the stakeholders may recognise that the risk has been evaluated.

While bloated reports are discouraged strongly, so too is excessive brevity. There must be sufficient details for stakeholders to evaluate the organisation’s attitude to climate-related risk.

The guidance highlights how climatic events may be gradual, such as a drought which continues to become more severe, or sudden, such as a flood or forest fire. When reporting, the organisation should acknowledge the different time frames and types of impacts.

With the emphasis upon relevant reporting, it must be apparent that boilerplate statements are of no benefit, and since they add no value to the report, they should be removed.

Principle 2: Complete

Not only must disclosures be relevant they must also be both specific and complete. Indeed, the thoroughness of the reporting should deliver comprehensive insight into the organisation’s exposure to potential climate-related impacts; the potential nature and size of such impacts; the organization’s governance, strategy, processes for managing climate-related risks, and its performance with respect to managing climate-related risks and opportunities.

There’s no doubt that the above represents a high hurdle and, by including both historical and future-oriented information the report, the intent is to give stakeholders adequate data for them to make considered evaluation of future financial implications so exposed.

To deliver a complete report, there must be substantial quantitative information, fully defined and its scope identified. So too for forward-looking data which should detail the assumptions upon which it’s based.

Principle 3: Clarity

As noted above, disclosures should be ‘clear, balanced, and understandable’, free of boilerplate and fluff. The audience for any report may range from experts within financial institutions through to other interested by less sophisticated stakeholders. This suggests that granular technical and financial detail should be included, as well as sections which summarise the complexities fairly and concisely. The use of graphics and tables is encouraged.

The report should offer narrative explanation free from bias, and where specialist terms or acronyms are used, they should be explained. Remember, TCFD reports are not just about risk, but opportunity too. As such the narrative style employed must quantify forward-looking statements fairly and offer insight as to how the data and conclusions were established.

Principle 4: Consistent

The organisation’s reports will develop over time due to increased awareness, improved quantitative and qualitative data, and enhanced expertise. While such developments are encouraged, the TCFD expects consistency in the report’s structure.

Principle 4 states explicitly that disclosures should be ‘presented using consistent formats, language, and metrics from period to period to allow for inter-period comparisons.’

Principle 5: Comparable

Much harder to achieve is the TCFD desire to see comparable disclosures across similar organisations to facilitate meaningful comparisons of strategy, business activities, risks, and performance across organisations and within sectors and jurisdictions.

Principle 6: Verifiable

There is no principle of TCFD more important than the demand that reporting disclosures are ‘reliable, verifiable, and objective’. The onus is on the organisation to use the highest quality data as opposed to suppositions and assumptions.

Where judgements and opinions are expressed (as they will be in forward-looking statements), the same rigour as is applied to financial projections should be applied here.

With the bar for adequate reporting set so high, it may be some relief to note that external auditing is not a requirement. Even so, all statements and assumptions should be capable of being tracked back to the raw data and the assumptions upon which those statemtns were based.

Principle 7: Timely

Just as with financial reports, TCFD disclosures should be provided on a timely basis, and certainly no less frequently than annually.

Timeliness can be more than annually since climate-driven events can manifest themselves suddenly (a forest fire, for example). When appropriate, organisations should be prompt in their issuance of interim reports and statements of interest and relevance to their stakeholders.

As the TCFD have explained, the goal is to find an ‘appropriate balance of disclosures that reasonably satisfy the recommendations and principles while avoiding overwhelming users with unnecessary information’.

author avatar
Humperdinck Jackman
Leads the daily operations at ESG PRO, he specialises in matters of corporate governance. Humperdinck hails from Bermuda, has twice sailed the Atlantic solo, and recently devoted a few years to fighting poachers in Kenya. Writing about business matters, he’s a published author, and his articles have been published in The Times, The Telegraph and various business journals.


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