The amount of greenhouse gas or GHG we release into the atmosphere is one of the biggest dangers to all life today. It is what causes global warming and the sinister effects of climate change headlining the news today, like heatwaves and flash floods. And right now, the 2023 flood predictions unsettle farmers in Nigeria's Anambra State since it can reduce their crop yields.
Aside from affecting the agriculture sector, climate change also has various economic repercussions on the global economy. And this prompted the Financial Stability Board or FSB, an international body monitoring the global financial system, to establish the Task Force on Climate-Related Financial Disclosures or TCFD.
The task force creates recommendations that companies may include in their disclosures to help investors, lenders, and insurance underwriters properly assess and price climate-related risks.
And in this article, we'll learn more about the benefits and challenges of implementing these TCFD recommendations.
What are TCFD recommendations?
TCFD recommendations outline all the information companies should include in their financial disclosures. They're structured around four thematic areas that make up the organisational framework, and these areas are:
Governance: Companies should disclose how the management evaluates and handles climate-related risks and opportunities.
Strategy: Disclosure of the impacts of climate-related risks and opportunities on their operations, processes, and financial planning.
Risk Management: Companies should show how they identify, evaluate, and manage their climate-related risks.
Metrics and Target: This is where companies must demonstrate how they assess and manage climate-related risks and opportunities through the metrics and targets they use.
These categories aim to bring transparency to capital markets and standardise how organisations assess and manage their climate impact. When included in financial filings or other reports, this disclosure will help investors price the climate risks properly while supporting the efficient allocation of capital.
The benefits include:
- Increased understanding
Adopting climate-related financial disclosure offers numerous benefits, including an increased understanding of the company's climate-related risks and opportunities.
As part of the disclosure filing, you must be able to identify, measure, and manage environmental impacts, including GHG emissions on your operations and value chain, categorised in scopes 1 (emissions that occur from sources controlled or owned by an organisation), 2 (emissions associated with the purchase of electricity, steam, heat, or cooling), and 3 (those resulting from activities not controlled by the organisation).
As the primary driver of global warming climate change, we must take GHG into big consideration in financial disclosures. By having a comprehensive view of the risks, you can develop and implement better strategies to mitigate the risks. For instance, investing in renewable energy to reduce the use of coal for electricity or creating climate change policies that everyone in your company must follow.
Following TCFD recommendations will give you a bird's eye view of your company's climate-related risks and opportunities.
- Improved financial decision making
Adopting TCFD recommendations can help improve your financial decisions by analysing the current and potential financial impact of your company's climate-related risks and opportunities. You'll be able to identify cost savings, evaluate investments, and plan for the future. Implementing TCFD recommendations can lead to more efficient capital allocation, which can help smoothen the transition of the current economy to a more sustainable one.
- Helps increase global climate efforts
As you know, people are getting more picky today regarding the brands they support, and they now prefer those taking accountability for their emissions and striving for sustainability.
Thus, given the positive image climate disclosure can give, many will be encouraged to adopt this strategy. And as the number of companies joining the cause increases, we will be able to see significant changes in the impact of our climate efforts. We will be more likely to achieve our goals of a sustainable economy.
While TCFD recommendations have many benefits, there are also challenges that you may experience. The overall process of climate disclosure may be one of the biggest challenges for those companies that just started with it.
Many do not have the technological resources to perform carbon accounting, making it difficult to measure their actual emissions and keep up with a comprehensive report. And while TFCD has addressed these concerns by providing supplemental guidance for financial and non-financial groups, the process can still be challenging for many organisations.
TCFD is still new (launched in 2015), and its recommendations may change over time. It can be overwhelming for organisations that have just started adopting climate disclosure. Also, TCFD recommendations are comprehensive and require you to do a bunch of things to get a better overview of your climate-related risks and opportunities, which can be very challenging to keep up with.
Besides carbon accounting, doing scenario analysis alone can be difficult, knowing that you must somehow foresee your climate-related financial impact on certain scenarios.
TFCD recommendations are designed to help us understand the risks and opportunities as we shift to a low-carbon economy. It can work for all organisations across different sectors. And while they have many benefits when mitigating climate change, they also have challenges you must watch out for. Nevertheless, if more and more companies adopt this strategy, the quicker we can achieve our climate goals.