The issue

Is the much championed Taskforce for Climate-Related Financial Disclosure (TCFD) framework effective in galvanising climate action, or does it merely add to the pile of environmental reporting?

Built on four disclosure areas: governance, strategy, risk management and metrics and targets, the TCFD framework seeks to be the catalyst for companies and investors to evaluate the potential scenario impacts of climate change on businesses.

And they are increasingly supporting it as a leading disclosure framework. But, to date, reporting is focused on internal efforts to measure and manage climate-related risk.

Climate ‘governance’, however – a new area for most company boards – demands a fresh perspective, away from the traditional board composition profile. New ways of thinking that lead to effective strategy focused on the long-term will need to be accompanied with granular targets and metrics, able to show performance in a timely manner but with broader and further vision.


In June 2017, the Financial Stability Board (FSB), the G20 backed international body, released the TCFD recommendations. The FSB was established in 2009 to respond to the global financial crash and assess vulnerabilities affecting the global financial system. The organisation is tasked to identify and review, on a timely and ongoing basis and with a macro perspective, the regulatory, supervisory and related actions needed to address any vulnerabilities and their outcomes[i].

Assessing climate change-related risks and how they impact financial institutions is a core FSB priority together with guiding the G20 on climate issues. Natural catastrophes caused billions of losses to financial institutions between 1980 and 2019 and all stakeholders are invested in expediting a coordinated approach to climate change which can enable full participation from global capital markets[ii].

The Taskforce consists of 32 members from across the G20, representing both preparers and users of financial disclosures. It is chaired by Michael Bloomberg, with Taskforce members from the “Big Four” accountancy firms, BHP, ENI spa, Moodys,  S&P, HSBC and Aviva, amongst others.  

What are companies doing?

The TCFD framework is designed to enable better and more effective disclosure and communication for companies and other organisations, and on that level it is working.  Disclosure in line with the TCFD recommendations among global businesses has risen every year since 2017, and climate change considerations are becoming increasingly common in the private sector[iii].

Industries considered most exposed to material climate risk have led with the highest levels of TCFD disclosure. However, with governments looking to adopt TCFD as part of their mandatory framework to disclose on climate-related risk, companies from all sectors and  market capitalisation are stepping up to adopt the voluntary disclosure to be ready for possible mandatory adoption.

How is implementation of the Taskforce for Climate-related Disclosure going?

The 2020 Status Report, the third annual TCFD report, which describes the alignment of companies’ reporting with and support for the recommendations, shows that despite the increased disclosure since 2017 – an average rise of six per cent across the 11 recommended disclosures between 2017 and 2019 – better performance was not evident across the holistic framework. The largest increases related to companies disclosing how they identify, assess, and manage climate-related risk[iv].

Forward-looking assessments of climate risk through climate scenarios are the most pertinent aspect of the TCFD requirements. The ability for investors to identify company “winners and losers” through their ability to transition to a low carbon economy is as essential as the insights that scenarios can give to galvanise corporate behaviour to identify sustainable solutions and opportunities.

Climate scenario analysis should be conducted alongside exploration of science-based targets and net-zero targets. But what constitutes a strong target according to the three dimensions of relevance, ambition, and scenario ‘confidence’, will be the source of much debate to come.

What are investors doing?

Investors are concerned that companies risk overstating financial statements by failing to include the effects of climate change on the balance sheet and asset valuations[v]. With company adopters of TCFD mainly focussing on ‘as is’ risk management and mitigation strategies, visibility of forward exposure is limited. Useful as this information is, investors’ insight into risk management through TCFD is something of an entry level exercise. Companies are slow to report on this essential element and when they do, most favour a descriptive approach to their scenario analysis. Craig MacKenzie, Head of Strategic Asset Allocation at Aberdeen Standard Investments recently criticised the framework, saying that “Aberdeen used TCFD reports to engage companies and that the framework was a good source of questions, but wasn’t very useful for quantitative risk modelling[vi].

In addition, current TCFD disclosures do not allow investors to meaningfully compare companies, according to a recent report by HSBC. The report suggests that disclosures should have a higher descriptive level, checked against an assurance system in order to improve comparability.[vii]

Common Stakeholder issues

Complaints about target setting are a key source of confusion. Net zero target setting amongst companies, investors and governments is at an all-time high, but with a lack of measurement consistency. This is affecting the ability of stakeholders to scrutinise commitments. Language is also a factor in this confusion with “carbon neutrality” and “climate neutrality” often used in the place of the more common “net zero” buzzword[viii].

Amidst mounting concerns about greenwashing in net-zero targets, the financial sector will need to provide guidance and agreed metrics to clarify standards for climate action plans moving forward. Regulators will be key to accelerating market convergence[ix].

Making TCFD reporting mandatory for firms globally, as the UK has done, will be essential to ensure the Taskforce fulfils its mandate from the FSB. The G20 countries have begun initiating work toward net-zero financial systems, but public policy will need to be deployed to ensure a green recovery via greater related spending[x].

What is the core message for companies?

Despite the lag in formalizing responses from TCFD adopters to the four elements of TCFD, financial institutions say they need the information required to create, implement and action net-zero transition plans without delay. This is an impossible task without knowing the transition plans and emissions data of the companies and projects that they invest in.

Companies need a practical understanding of the four core elements of the TCFD recommendations and their specific underlying recommended disclosures in order to deliver on their targets and promises.

related webinars

Climate Scenario Analysis, TCFD Reporting and Net Zero target setting

May 2021 | Companies are increasingly supporting the TCFD as a leading disclosure framework but reporting is merely the outcome of internal efforts to measure and manage climate-related risk. How should climate scenario analysis be implemented by companies and how can they act on the results?

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