Businesses, investors, and governments are increasingly paying attention to companies’ climate and sustainability disclosures so they can better understand their financial risks and opportunities. To improve the quantity and quality of this information, global standard-setters and regulators are introducing climate and sustainability reporting frameworks and rules.
The European Union’s Corporate Sustainability Reporting Directive (CSRD) and the Task Force on Climate-related Financial Disclosures (TCFD), the world’s leading climate reporting framework, are both intended to improve companies’ disclosure of climate- and sustainability-related risks and opportunities. They are also designed to standardize and harmonize climate and sustainability reporting across companies and jurisdictions.
What is the CSRD?
The CSRD requirements went into effect in the European Union (EU) on January 5, 2023. It mandates about 50,000 companies — both large corporations and all listed organizations — to disclose their sustainability risks and opportunities related to environmental and social issues.
The directive requires companies to report according to the European Sustainability Reporting Standards, which were developed by EFRAG, previously called the European Financial Reporting Advisory Group.
Companies that fall under the new rule will need to start applying it by fiscal year 2024.
Similarities between the CSRD and TCFD
A core similarity between the CSRD requirements and TCFD is that they both call for the robust reporting of companies’ climate-related financial risks and opportunities. The EU CSRD’s text on climate disclosures broadly aligns with the four pillars of the TCFD — governance, strategy, risk management, and metrics and targets.
Both are intended to standardize climate- and sustainability-related disclosures, as well as to promote transparency and accountability in capital markets.
Governance
Both the CSRD directive and TCFD tell organizations to report information on their climate-related governance structures, policies, and processes. The TCFD asks companies to describe their boards’ oversight of climate risks and opportunities, though board oversight is not explicitly mentioned in the EU CSRD’s text.
The TCFD also tells businesses to describe management’s role in assessing and managing their climate risks and opportunities. Similarly, the CSRD requirement says organizations should describe the role of administrative, management, and supervisory bodies when it comes to sustainability-related issues.
Strategy
With respect to strategy, the TCFD provides three recommendations that broadly align with the CSRD. For example, both frameworks ask organizations to consider climate and sustainability risks and opportunities over the short, medium, and long term.
While the TCFD asks organizations to disclose how climate issues affect their businesses, strategy, and financial planning, the CSRD tells companies to report how resilient their business models and strategies are to sustainability-related issues. Further, both frameworks require that companies use scenario analysis to determine their resilience against certain global warming scenarios.
Risk Management
The TCFD’s three risk management recommendations underpin how the CSRD frames sustainability-related risk management. For instance, the TCFD says organizations should disclose their processes for identifying, assessing, and managing their climate-related risks.
Meanwhile, the EU CSRD tells companies to describe their principal sustainability risks, dependencies, and how they’re managing them. It also tells organizations to report their sustainability policies.
Metrics and Targets
Both the TCFD and CSRD requirement tell companies to disclose information on their metrics and targets as they pertain to climate and sustainability risks and opportunities. For example, both frameworks ask companies to report their direct (Scope 1 and 2) and indirect (Scope 3) emissions.
The TCFD and CSRD also ask companies to describe their climate and sustainability targets, as well as their progress toward achieving them.
Differences between the CSRD and TCFD
While the TCFD and CSRD are similar, the CSRD goes beyond the TCFD in a number of ways.
For instance, the CSRD directive encompasses all environmental, social, and governance (ESG) issues, while the TCFD solely focuses on climate concerns. The CSRD also requires companies to disclose additional information on their sustainability-related risks and opportunities, compared to the TCFD framework.
Double materiality
The CSRD regulation adopts a double materiality approach, meaning companies must disclose how sustainability-related risks and opportunities affect their operations and businesses, as well as how their businesses affect various ESG concerns.
A double materiality approach is significant because it recognizes the impacts companies have on the environment and society, as well as the effects that sustainability issues can have on companies’ financial performance. In contrast, the TCFD solely focuses on how climate risks and opportunities affect organizations’ operations and financial bottom lines — an approach known as single materiality.
1.5°C transition compatible
A key difference between the CSRD and TCFD frameworks is that the CSRD includes a requirement for companies to disclose how they align with a 1.5°C global warming scenario. This is based on the EU’s goal of limiting warming to 1.5°C, an ambition set out in the 2015 Paris Climate Agreement.
While the CSRD regulation requires organizations to report their compatibility with a 1.5°C temperature rise, the TCFD only requires companies to test their resilience against a 2°C warming scenario.
Actions to mitigate impact
CSRD reporting requires companies to disclose the actions they’re taking to mitigate their negative impacts on the environment and society. These actions could include how they are planning to reduce their greenhouse gas emissions, as well as potential human rights policies.
On the other hand, the TCFD framework does not ask companies to disclose the actions they are taking to mitigate their impacts on the climate. The TCFD solely focuses on how climate-related risks and opportunities affect organizations’ financial performance and operations.
Strategy implementation
The CSRD asks companies to report on how they plan to implement their sustainability strategies and achieve their related targets. This includes disclosure on how companies are allocating their resources toward sustainability initiatives, as well as their associated investments, research and development, and employee training.
However, the TCFD only asks companies to disclose how they’re identifying, assessing, and managing their climate risks, as well as how their climate risk management strategy is integrated into overall risk management processes.
Preparing companies for effective disclosure
While the CSRD requirement broadly aligns with the TCFD’s recommendations, it goes further in scope and requires organizations to report additional information.
However, if companies already report their climate-related risks and opportunities in line with the TCFD, they will be well-positioned to disclose in line with the EU’s new sustainability directive. Both frameworks aim to promote transparency in capital markets and to help investors and other stakeholders make better decisions.
How Manifest Climate Can Help
Manifest Climate is the leading Climate Risk Planning software that helps organizations accelerate their climate strategies. Our solution leverages data, AI, and climate expertise to assess your disclosures and align them with global reporting frameworks, like the TCFD.
We also help you benchmark your progress against industry peers and climate leaders, and provide data-driven recommendations so your company can develop an effective climate action plan. In addition, our software surfaces comprehensive resources and expert insights on business-relevant climate trends to help your leaders make better decisions and scale organization-wide climate competence. Request a free demo.
