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Understanding TCFD

Navigating climate uncertainty: Understanding the Task Force on Climate-related Financial Disclosures

Introduction

In today’s world, there is a close linkage between climate change, business world and the financial system. Businesses, investors, and countries are increasingly prioritizing the need for transparent reporting on climate-related risks and opportunities in a bid to becoming climate-resilient and pursue low-carbon opportunities for a sustainable future. These developments have called for recognised a standardized approach to disclosing climate-related financial information. In response to this imperative, the Task Force on Climate-related Financial Disclosures was introduced as a beacon, enabling organizations to navigate the complexities of climate change’s impact on business operations, investments, and financial decisions by empowering stakeholders to make informed choices in an era of climate uncertainty.

What is Task Force on Climate Related Financial Disclosures (TCFD)?

Established in December 2015 by the Financial Stability Board (FSB), the Task Force on Climate-related Financial Disclosures (TCFD) was formed to provide comprehensive climate-related disclosures that could enhance the decision-making processes for investments, lending, and insurance underwriting. The main objective is to allocate capital towards activities that augment and support transition to low emissions, carbon-resilient future.

At its core, the TCFD acts as a framework in providing stakeholders with robust, transparent disclosures related to the concentration of carbon-related assets and its exposure to climate change.  In essence, it sheds light on the risks and opportunities for businesses and financial systems due to the relentless impacts of climate change and allows them to strategize towards low emissions path. The recommendations and disclosures through TCFD framework enable businesses to disclose and communicate the climate risks and opportunities to the intended users such as investors, consumers, providers of capital, insurers, and other stakeholders associated to the business.

What is the Impact of TCFD?

Governments worldwide are moving towards making climate risk reporting mandatory. According to the Ministry of Business, Innovation & Employment (MBIE), many large organizations in New Zealand provide limited or no information on the impact of climate change on their business [1]. Moreover, the lack of consistency in reporting methodologies hampers stakeholders' ability to compare and derive actionable insights. TCFD goes beyond mere compliance; it is a tool to comprehend risks and opportunities, enabling businesses to monitor climate risks through robust governance and a strategy for a low-carbon transition.
 

From a compliance standpoint, disclosing climate risks and opportunities facilitates informed decision-making on capital allocation for capital providers, while also preparing businesses to mitigate climate risks. TCFD enhances the efficiency of financial markets by providing relevant and transparent climate-related disclosures. This information allows capital providers to consider climate factors when investing. For businesses, TCFD recommendations also provide competitive advantages by acting as a strategic tool as described below:

[1] source: https://www.mbie.govt.nz/business-and-employment/business/regulating-entities/mandatory-climate-related-disclosures/

To summarize, TCFD can bring competitive advantage for a business by:
  1. Businesses can attract easier/better financing options from providers of capital such as investors, financial institutions etc. by disclosing climate-related information that is timely, accurate, and material to investment decision making.

  2. TCFD enables businesses to comply with regulatory requirement by disclosing material information on climate-related financial risks.

  3. The business gains knowledge on how physical and transition risks [2] of climate change has an impact on their operations as well as their financial statements. This enables businesses to identify, assess, and mitigate risks.

  4. Businesses can strategize and be prepared to transition to low-carbon future by allocating capital to sustainable avenues.

  5. TCFD also promotes accountability by clearly outlining management and governance body’s responsibility on climate change.

 

[2] Physical Risk refers to direct consequences of climate change on assets, operations such as extreme weather events like cyclone, floods, wildfire, sea levels, changes in temperature and precipitation patters etc. whereas Transition risk refer to transitioning to low-carbon economy that involves policy change, technological advancement and shifts in consumer preferences aimed at reducing carbon emissions.

Disclosure requirements of the TCFD

The Financial Markets Conduct Act 2013 in New Zealand was modified to become the Financial Sector (Climate-Related statements and Other Matters) Amendment Act 2021, which requires some major corporations to file statements pertaining to climate change. These disclosures are referred to as ‘Climate Statement’ which will be included in Climate-related Disclosures register coming into effect in 2024.  As per the release in September 2023, around 200 climate reporting entities in the act must lodge climate statement and these include[3]:

  1. Registered banks, credit institutions, building societies with total assets higher than $ 1 billion.

  2. Managers of registered investment schemes with greater than $1 billion in total assets under management. The disclosures will mandate fund by fund climate-related disclosures.

  3. Licensed insurance companies with $ 1 billion in total assets or gross income from premium exceeding
    $250 million.

  4. Large and listed issuers of equity and debt securities with value greater than $ 60 million. 
    (Note: issuers in growth markets are excluded from the definition of CREs)

TCFD covers four main thematic areas: Strategy, Risk Management, Governance, and Metrics and Targets. These are closely integrated and are often related to one another, rather than acting as separate disclosing requirement.

 

[3] Press release - https://www.companiesoffice.govt.nz/all-registers/climate-related-disclosures/

The following table provides more information on

Disclosure

Disclosure Objective for intended users

Strategy

To understand present and future impact of climate change on business operations in different scenarios and the potential pathway to transitioning to low-carbon operations.

Risk Management

Method to identify, assess, mitigate climate related risks and how these methods are integrated to management processes.

Governance

Accountability of management and governance body on risk identification, quantification, and mitigation measures. Includes both processes of risk management and policies for strategy implementation.

Metrics & Targets

Target setting and measurement of Key Performing Indicators on risks and opportunities. The metrics and targets allow for comparability across sectors and businesses.

Conclusion

The Task Force on Climate-related Financial Disclosures (TCFD) serves as a pivotal instrument fostering resilience and transparency. It has evolved into an indispensable framework for navigating the intricacies of a dynamic environmental landscape, exemplified by nations like New Zealand demonstrating a steadfast commitment to sustainability. Its impact extends beyond national boundaries, shaping and influencing global financial markets and enterprises. In essence, TCFD stands as a beacon, guiding entities worldwide towards a more sustainable and climate-resilient future.

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