Introduction
In December 2015, 200 countries agreed to strengthen the global response to the threat of climate change by holding the increase in the global average temperature to well below 2°C above pre-industrial levels with efforts to limit the temperature increase to 1.5°C above pre-industrial levels (Paris Agreement). This agreement involved reducing greenhouse gas emissions and accelerating the transition to a lower-carbon economy, by moving away from the use of fossil-fuel energy and related physical assets.
This transition, coupled with rapidly declining costs and increased deployment of clean and energy-efficient technologies could have significant and short term implications for organisations dependent on extracting, producing, and using coal, oil, and natural gas. These significant risks would not only affect these companies, but also most economic sectors and industries. Changes associated with a transition to a lower-carbon economy also present opportunities for companies focused on climate change mitigation and adaptation solutions.
In most G201 jurisdictions, companies with public debt or equity have a legal obligation to disclose material risks in their financial reports. This includes material climate-related risks. Prior to the TCFD being formed, there lacked a standardized framework for disclosing climate-related financial risks, making it difficult for organisations to determine what information should be included in their filings and how it should be represented.
As a result, the Financial Stability Board (FSB) established the TCFD and tasked them with developing climate-related disclosures, that would provide information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities. The 32-member task force was global, coming from organisations such as banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies. These disclosures were intended to:
promote more informed investment, credit (or lending) and insurance underwriting decisions,
foster an early assessment of these risks and facilitate market discipline, and
provide a source of data that could be analysed at a systemic level, to facilitate authorities’ assessments of the materiality of any risks posed by climate change to the financial sector, and the channels through which this is most likely to be transmitted.
The TCFD developed widely adoptable recommendations on climate-related disclosures that are applicable to organisations across different sectors and jurisdictions. These recommendations were centered around four thematic areas that represent core elements of how organisations operate. These four areas are governance, strategy, risk management, and metrics and targets.
The TCFD recommendations and disclosures provide information that helps investors and others understand how reporting organisations assess climate-related risks and opportunities. Whilst investors, lenders, and insurance underwriters are the primary users of these disclosures, they also apply to other financial organizations such as credit rating agencies, equity analysts, stock exchanges, investment consultants, and proxy advisors.
Footnotes
Prior to 2023, G20 comprised of 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Türkiye, the United Kingdom, and the United States) and the European Union. G20 now includes the African Union.↩︎