Top 3 Misconceptions About TCFD Climate Disclosures

Top 3 Misconceptions About TCFD Climate Disclosures

May 6, 2020

One of the services Manifest provides is helping companies prepare climate disclosures aligned with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations provide companies with a framework to discuss their climate risks and opportunities under four themes: governance, strategy, risk management, and metrics and targets.

Since the June 2017 release of the TCFD recommendations, there has been a steady stream of movement in the financial institutions to tackle climate risk. More than 1,000 companies are now committed to TCFD reporting and it continues to grow.

We recently authored the CPA Canada report State of Play: Study of Climate-Related Disclosures by Canadian Public Companies – a review of 40 leading Canadian companies’ TCFD disclosure reporting. Through this and other private client work, we’ve compiled the top three misconceptions about the TCFD recommendations.

Misconception #1: A list of Climate Risks shows Proper Climate “Risk Management

The biggest reporting misstep we see in TCFD-aligned reports is a listing of relatively generic climate risks and opportunities with no explanation of the processes used to identify or assess the issues. TCFD recommendations under the risk management theme focus on how an organization thinks about climate change and determines the most relevant risks and opportunities. In other words, the recommendations focus on the process and not just the individual climate impacts. An organization can demonstrate they are taking climate risk management seriously by showing that climate considerations are not a one-time exercise or a checklist, but rather that they are embedded into the organization’s systems, such as risk identification and assessment processes or enterprise risk management.

Misconception #2: Greenhouse Gas Footprint Reduction is a Strategy

Ideally, TCFD-aligned strategy disclosure is fuelled by the outcomes of the risk management process. The strategy section is the location to talk about specific, priority climate-related risks and opportunities that the risk processes have identified, as well as their impact on the organization’s core business. Unfortunately, common missteps we see include companies discussing corporate strategy without links to specific climate issues, and companies discussing plans to reduce their greenhouse gas (GHG) footprint without reference to how GHG footprinting is a risk or opportunity for their business.

The thinking behind TCFD-aligned disclosures is still evolving. By demonstrating how climate change impacts business and financial planning, an organization reveals an advanced depth of research and thinking about climate-related risks and opportunities. Additionally, this type of process is key to focusing thinking at the senior management and board level on developing a resilient corporate strategy in the medium and long-term.

TCFD misconception #3: board governance is hard and complicated

According to the TCFD: 2019 Status Report, reporting on board governance has not been well represented in disclosures. It tied for third lowest type of disclosure reported. Reporting under this TCFD recommendation can be fairly straightforward, but we frequently encounter confusion around the disclosure content. Often, an organization is already involving their board in climate-related issues but not labelling these actions as such: they could be called “responsible investing”, “ESG”, or even plain “risk management”. By looking at the climate-related actions already happening in the company, a company will have the beginnings of board governance disclosure. Simple facts such as how often the board is informed on climate-related issues are a good starting place. For example, many boards are already being briefed on ESG or sustainability items quarterly. Disclosing these details is another sign of the effort and resources that have been allotted to climate thinking.

Growing pains need to quickly translate into improvements

These misconceptions are a symptom of the growing pains that all industries are experiencing as they develop climate-related disclosures. Nevertheless, these are important parts of TCFD-aligned disclosures that must improve quickly. Users of TCFD-aligned disclosures, such as asset owners, need this information to properly inform their investment processes. Without it, engagements with companies and asset managers will remain basic, and investment decisions may be riskier than they appear. For preparers of climate disclosures, such as asset managers, this is an opportunity: detailed disclosures will bolster reputation and climate credibility as preparers show that they are thoughtfully incorporating climate-related financial information into their business.