Businesses can leverage existing technology to meet the requirements of the TCFD that live on.
Goodbye TCFD. Hello ISSB. Regardless, climate risk disclosure requirements aren’t going anywhere.
Cop28 saw all the drama we’ve come to expect from climate summits, culminating in either a “historic” deal or a missed opportunity – depending on your point of view. The headline was an international agreement to “transition away” from fossil fuels and to speed up action before 2030 with “ambitious” national emissions targets over the next two years.
Away from the headlines and targets, however, there was also stock-taking and housekeeping. Among these announcements during the summit was news from the Financial Stability Board – the international body promoting stability in the global financial system – that the work of the TCFD (the Task Force on Climate-Related Financial Disclosures) was done.
“[T]he work of the TCFD has been completed, with the ISSB's Standards marking the culmination of the work of the TCFD,” came the news.
A Short History of the TCFD
The TCFD was formed in response to the failings of the 2015 Paris Climate Accords by the G20 group of nations and the Financial Stability Board.
Recognising that climate presented systemic financial risks to the economy akin to those revealed by the 2008 banking crisis, the TCFD was tasked with creating recommendations for companies to inform investors about their efforts to address these risks.
As the TCFD put it: “Financial markets need clear, comprehensive, high-quality information on the impacts of climate change. This includes the risks and opportunities of rising temperatures, climate-related policy, and emerging technologies in our changing world.”
The recommendations provide a framework for disclosure across four pillars:
- Governance, disclosing the organisation’s the organization’s governance around climate-related risks and opportunities
- Strategy, detailing actual and potential impacts of these risks and opportunities on the organisation’s businesses, strategy, and financial planning (where material)
- Risk management, disclosing how the organisation identifies, assesses, and manages climate-related risks
- Metrics and targets, telling investors the quantitative and concrete measures for assessing and managing relevant climate-related risks and opportunities, where such information is material.
Initially voluntary, the recommendations have rapidly worked their way into national and international regulatory regimes.
The UK took an early lead, announcing in 2021 that it would become the first to mandate climate-related data disclosures for the country’s largest companies to align with the TCFD recommendations – spreading to all organisations by 2025.
Internationally, standards bodies such as the UN PRI (Principles for Responsible Investment) also require mandatory reporting from signatories.
TCFD and Supply Chains
Crucially, the TCFD recommendations go beyond existing regulations on reporting Scope 1 (direct) greenhouse gas emissions or Scope 2 emissions (from energy consumption). It includes collecting data on Scope 3 emissions (from organisations up and down its value chain), which has been voluntary to date and much more – encompassing all material risks and opportunities.
That includes physical risks (such as flooding and other extreme weather events) and transitional – the policy and legal, technology, market and reputational risks arising from the world’s efforts to tackle climate change.
Again, as the TCFD makes clear, risks should be considered (and disclosed) in terms of not just their effect on the organisation directly, but also where they impact the supply chain. “Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption,” it noted.
Organisations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organisations’ premises, operations, supply chain, transport needs, and employee safety.
That applies equally to transition risks – such as policy and legal issues: “Organisations should assess not only the potential direct effects of policy actions on their operations, but also the potential second and third order effects on their supply and distribution chains,” the TCFD noted.
Gone but not Forgotten: TCFD Requirements Remain
While the TCFD might have been disbanded its recommendations live on; its work has been completed, but for many businesses their work has just begun.
According to the IFRS, the ISSB (International Sustainability Standards Board) Standards – IFRS S1 and IFRS S2 – launched in June 2023, fully incorporate the TCFD recommendations. The standards are, in fact, “the culmination of the work of the TCFD”, according to the FSB.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
References to governance, strategy, risk identification, and performance assessment will be familiar from the TCFD recommendations. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. The TCFD recommendations’ influence is obvious again, with discussion of both physical and transition risks.
The standards are built on the concepts that underpin the IFRS Accounting Standard used worldwide, and the IFRS Foundation will take over the monitoring of companies’ progress on climate-related disclosures.
Consequently, the need to identify, evaluate and report on climate-related risks in the supply chain remains pressing– and not just in the UK.
New Zealand is another mandating disclosures, even ahead of the UK, while TCFD has regulatory backing across jurisdictions, from the European Union and Canada to Japan, Singapore, and South Africa.
SCAIR® and TCFD
There is, however, no need to reinvent the wheel. Much of the analysis required to satisfy the TCFD requirements can be performed by existing risk management technology that is the same or similar to that required for supply chain risk management.
In fact, for those using solutions such as SCAIR®, there is a significant risk of repeating work already done if organisations turn to consultants or others for help with TCFD/IFRS disclosures without first examining the information they already hold.
SCAIR® has long been more than TCFD ready. Watch this video on how SCAIR quantifies the impact of climate change on supply chains.
As part of its general loss estimate algorithms, it can generate mitigated and unmitigated figures across nodes, sites, and entire product portfolios.
Not only does it automatically calculate these figures in greater detail and with more nuance and confidence than consultants will achieve manually; it also does so according to a methodology accepted by the London Insurance Market.
That is a crucial point, given that standardisation and consistency in climate risk disclosures, as well as visibility, have been key aims of the FSB, TCFD and IFRS.
Using SCAIR®, businesses can quickly identify key exposures across different geographies to evaluate transition risks and get the most accurate data on natural catastrophe and climate change-related risks by tapping into Munich Re’s Location Risk Intelligence Suite , one of the most trusted names in location-based Natural Hazards risk intelligence.
With clear – and up-to-date – views on their own exposures through the supply chain, businesses can easily provide the required disclosures to investors, regulators and other interested parties.
More importantly, they can effectively manage the risks – to prepare for the future, whatever happens at the climate summits ahead.