Opinion: TCFD – The one ring to rule them all?

Once upon a time, not long ago, there were several rings, or frameworks, for reporting corporate social performance, or ESG performance. There was one for reporting on emissions (CDP), another one only for real estate (GRESB), one for sector-specific reporting (SASB) and several other general reporting frameworks (GRI, CDSB, IIRC, etc). Then in 2015, the then Bank of England (BoE) Governor Mark Carney, along with Michael Bloomberg, created the Task Force on Climate-Related Financial Disclosures (TCFD) in the BoE office in London. The newly forged ring, or the TCFD framework, was unveiled in 2017, and 5 years later in 2022, is setting the rules for all the major sustainability reporting standards and frameworks.

Rhetorical flourishes aside, the TCFD is gradually becoming the nucleus for the mandatory climate disclosures in the EU, UK, Japan, Switzerland and the US, just to name a few jurisdictions. TCFD has also inspired the new framework on nature-related risks reporting – Taskforce on Nature-related Financial Disclosures(TNFD). Here is a look at how all the existing frameworks are aligning themselves to TCFD and how that could lead to the convergence of all the reporting frameworks and to reduce the alphabet soup of ESG reporting, at least on the climate risk management dimension.

The origins of TCFD

In September 2015, Mark Carney, Governor of the Bank of England (BoE) and the Chairman of the Financial Stability Board (FSB) made a speech titled “Breaking the Tragedy of the Horizon – climate change and financial stability”. This speech is considered by some as one of the triggers that set the tone to understand climate risks and devise means to mitigate those risks that could potentially threaten global financial stability. In the speech, Mark Carney outlined the three broad channels through which climate change could affect financial stability – physical risks, liability risks and transition risks (The physical and transition climate risks were later integrated into the TCFD risk assessment framework).

Later that year in December 2015, the Task Force on Climate-related Financial Disclosures (TCFD) was formed by the  Financial Stability Board (FSB). The formation of TCFD coincided with the adoption of the Paris Agreement in the same month by 196 Parties. In 2017, the Task Force issued its recommendations which included companies to disclose on four thematic areas

  • Governance around climate-related risks and opportunities
  • The impact of climate-related risks and opportunities on business strategy
  • The assessment and management of climate-related risk
  • The metrics and targets used to assess and manage climate-related risks

In October 2021, a revised and updated recommendations document was released, which can be accessed here.

Current Status

The TCFD has been publishing its annual status report since 2017, and the latest status report was released in September 2021. The report is rich in data, but three things stand out.

  1. A total of 8 jurisdictions (including EU, UK, Japan and Singapore) now has TCFD-Aligned Official reporting requirements. The US SEC’s proposed rules on climate reporting is likely to have TCFD-alignment.
  2. The number of firms reporting using TCFD recommendations has been increasing manifold, and the number of TCFD supporters stood at 2616 at the time of publishing the report. Standard setting organisations like IFRS, FSB, the alliance (comprising CDSB, SASB, GRI, CDP and IR) and IOSCO have all pledged to align the standards to TCFD.
  3.     Several stock exchanges, including London, Tokyo and Singapore, either require or propose incorporation of TCFD-aligned disclosure into their listing requirements or guidance.

In short, TCFD today is pretty much the go-to standard when it comes to climate related disclosures. But will this scenario last long?

The Future of TCFD

Given its narrow focus on climate related risks, there is a likelihood that TCFD will get subsumed by one of the broader ESG reporting frameworks. As voluntary sustainability reporting is giving way to mandatory reporting, efforts are well underway to harmonize the reporting requirements in different jurisdictions. It is expected that over the next few years, the majority of the jurisdictions will follow either single materiality-based disclosure standards (IFRS) or double materiality-based standards (like the ESRS or European Sustainability Reporting Standards). (Read more about double materiality here and dynamic materiality here). Both these standards are work in progress and are expected to be finalized sometime in 2023.

While the IFRS standards are built on SASB, European Financial Reporting Advisory Group(EFRAG), which sets the European Sustainability Reporting Standards(ESRS), collaborates with the GRI for developing the standards. Both these standards setters have incorporated TCFD in their draft disclosure standards with some additions or modifications. The reconciliation table highlighting the changes for ESRS is available here and the comparison table for IFRS is available here. The US SEC’s proposed rules on climate-related disclosures also have been developed based on the TCFD framework (read here).  

This brings us to the question of how long TCFD will rule them all(frameworks). If all the frameworks have TCFD as the nucleus for their climate related disclosures, will there be a need for a stand-alone TCFD framework? We will get an answer sometime soon.

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