The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related financial risks and opportunities, promoting transparency and accountability in corporate governance. As a derivative of the TCFD, the EU’s Corporate Sustainability Reporting Directive (CSRD) mandates comprehensive ESG, GHG reporting, climate change scenario modelling, and board-level engagement, making these disclosures critical for businesses.

Understanding the TCFD: Task Force on Climate-related Financial Disclosures

What is the TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) is an initiative established by the Financial Stability Board (FSB) to develop a consistent framework for companies to disclose climate-related financial risks and opportunities. Launched in 2015, the TCFD aims to enhance transparency around the impact of climate change on businesses, thereby improving market stability and investor decision-making.

The TCFD framework encourages companies to assess and disclose how climate change could affect their financial performance, considering both the physical risks (such as extreme weather events) and transition risks (such as policy changes and market shifts). By providing clear, comparable, and consistent information on these risks, the TCFD helps investors, lenders, and insurers make more informed decisions and encourages companies to integrate climate-related considerations into their strategic planning.

The TCFD Framework: Key Components

Governance, Strategy, Risk Management, and Metrics

The TCFD framework is structured around four key components: Governance, Strategy, Risk Management, and Metrics and Targets. Each of these components is designed to ensure that climate-related risks and opportunities are thoroughly considered at all levels of the organisation, from the boardroom to day-to-day operations.

1. Governance: The TCFD framework requires companies to disclose the governance structures they have in place for managing climate-related risks and opportunities. This includes detailing the role of the board of directors and senior management in overseeing these issues, ensuring that climate considerations are integrated into corporate governance.
2. Strategy: Companies are encouraged to describe the actual and potential impacts of climate-related risks and opportunities on their business strategy and financial planning. This involves considering different climate change scenarios to understand how various future conditions could affect the company’s operations, financial performance, and long-term strategy.
3. Risk Management: The TCFD framework requires companies to outline how they identify, assess, and manage climate-related risks. This component ensures that climate risks are integrated into the company’s overall risk management processes, helping to mitigate potential adverse impacts on the business.
4. Metrics and Targets: Companies are expected to disclose the metrics and targets they use to assess and manage climate-related risks and opportunities. This includes reporting on greenhouse gas (GHG) emissions and other relevant environmental indicators, as well as setting and tracking progress against specific climate-related targets.

For businesses, especially those in the UK and EU, adhering to the TCFD framework is increasingly becoming a regulatory requirement, as governments and regulators push for greater transparency and accountability in corporate climate disclosures.

The EU CSRD: A Derivative of the TCFD

What is the EU CSRD?

The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation that builds on the foundations laid by the TCFD. The CSRD mandates comprehensive sustainability reporting for a broader range of companies within the EU, expanding the scope and detail of the disclosures required. This directive is part of the EU’s broader effort to ensure that companies are transparent about their environmental, social, and governance (ESG) impacts, particularly in relation to climate change.

The CSRD requires companies to report on a wide range of ESG issues, with a specific focus on climate-related disclosures that align with the TCFD framework. This includes detailed reporting on GHG emissions, climate change scenario modelling, and the governance structures in place to manage climate-related risks. By integrating the principles of the TCFD, the CSRD aims to provide stakeholders with a clear and consistent understanding of how companies are addressing climate-related challenges.

The Relationship Between TCFD and CSRD

The relationship between TCFD and CSRD is one of alignment and evolution. The TCFD provides the foundational framework for climate-related financial disclosures, while the CSRD expands on this foundation, making it mandatory for a wider range of companies and incorporating additional ESG factors. Essentially, the CSRD can be seen as a derivative of the TCFD, broadening its application and integrating it into the regulatory landscape of the EU.

For UK businesses, particularly those operating in or trading with the EU, understanding the TCFD is crucial for compliance with the CSRD. As the CSRD becomes fully implemented, companies will need to ensure that their disclosures meet the more detailed requirements set out by the directive, including those related to climate change and GHG reporting.

The Role of ESG, GHG Reporting, and Climate Change Scenario Modelling

ESG and GHG Reporting

Under both the TCFD and CSRD frameworks, ESG and GHG reporting are critical components of corporate disclosures. ESG reporting involves providing information on a company’s environmental, social, and governance practices, highlighting how these practices impact the company’s financial performance and sustainability. GHG reporting, a key element of ESG reporting, involves measuring and disclosing the company’s greenhouse gas emissions across Scope 1, Scope 2, and, where material, Scope 3 emissions.

For example, a UK-based manufacturing company that exports goods to the EU would need to report on its GHG emissions as part of its broader ESG disclosures. This includes providing data on direct emissions from its operations (Scope 1), indirect emissions from purchased electricity (Scope 2), and emissions from its supply chain (Scope 3). Accurate GHG reporting is essential for demonstrating the company’s commitment to reducing its carbon footprint and managing climate-related risks.

Climate Change Scenario Modelling

Climate change scenario modelling is a key requirement under the TCFD and, by extension, the CSRD. This involves analysing how different climate scenarios—such as a 2°C or 4°C increase in global temperatures—could impact the company’s operations, financial performance, and strategy. Scenario modelling helps companies understand potential risks and opportunities under various future conditions, allowing them to develop more robust and resilient business strategies.

For instance, a UK energy company might use scenario modelling to assess how stricter climate policies, such as carbon taxes or renewable energy mandates, could affect its business. The company would need to consider the financial implications of these scenarios and disclose how it plans to adapt to these potential changes. This information is crucial for investors and other stakeholders who want to understand how the company is preparing for the long-term impacts of climate change.

The Importance of Board-Level Engagement and Corporate Governance

Board-Level Engagement

Board-level engagement is a critical aspect of the TCFD and CSRD frameworks. Both regulations require that climate-related risks and opportunities be overseen at the highest levels of the organisation. This means that the board of directors must be actively involved in setting the company’s climate strategy, monitoring progress, and ensuring that climate risks are integrated into the company’s overall risk management framework.

For UK companies, board-level engagement is not just a regulatory requirement but also a strategic imperative. Companies with engaged boards are better equipped to navigate the complexities of climate-related risks and opportunities, ensuring that these issues are given the attention they deserve at the highest levels of decision-making.

For example, a UK financial services firm might establish a dedicated board committee on climate change, responsible for overseeing the firm’s climate strategy, including GHG reporting, scenario modelling, and compliance with TCFD and CSRD requirements. This level of engagement ensures that the firm’s climate-related risks and opportunities are managed effectively and aligned with its overall business strategy.

Corporate Governance and Accountability

Effective corporate governance is at the heart of both the TCFD and CSRD frameworks. Companies are required to demonstrate that they have robust governance structures in place to manage climate-related risks and opportunities. This includes clearly defining roles and responsibilities, ensuring accountability at all levels of the organisation, and integrating climate considerations into corporate strategy and decision-making.

For example, a UK retailer might implement a governance framework that includes regular reporting on climate-related risks to the board, clear accountability for GHG emissions reduction targets, and regular audits of its climate-related disclosures. By embedding climate considerations into its governance structures, the retailer can ensure that it meets regulatory requirements and positions itself as a leader in sustainability.

Why Choose ESG Pro Limited?

At ESG Pro Limited, we specialise in helping companies navigate the complexities of TCFD and CSRD compliance. Our team of expert ESG consultants provides comprehensive support in GHG reporting, climate change scenario modelling, and board-level engagement, ensuring that your business meets the highest standards of corporate governance.

• Expertise in GHG carbon emissions reporting and compliance with TCFD and CSRD requirements
• Tailored solutions for climate change scenario modelling and risk management
• Strategic guidance to ensure effective board-level engagement and corporate governance

Our team at ESG Pro Limited is committed to helping businesses of all sizes meet their TCFD and CSRD obligations, enhance their sustainability strategies, and build resilience against climate-related risks. With our support, you can ensure that your company is fully compliant with the latest regulations and well-positioned for long-term success.

• Proven track record in delivering successful ESG strategies
• Strategic guidance to align your business with global climate disclosure standards
• Ongoing support to ensure continuous improvement in corporate governance and sustainability