TCFD Reporting Best Practices

Companies worldwide increasingly recognize the need to address climate change, as each day seems to bring a new extreme weather event, exacerbated by global warming. In concert with the human toll, the floods, fires, and heat put business operations at risk. The Task Force on Climate-related Financial Disclosures (TCFD) provides companies with a framework to identify, assess, manage, and communicate these climate-related risks and opportunities.

In this post, we cover the components of the framework and best practices for TCFD implementation.

What is TCFD?

The Financial Stability Board (FSB) established TCFD in 2015 to provide a standardized approach for companies to disclose climate-related financial information to investors, lenders, insurers, and other stakeholders. Through our work at Toffler Associates, we also see the framework as a way for organizations to evaluate and optimize their business operations to mitigate climate risk and support growth.

Why is TCFD important to my company?

The TCFD framework provides your company a systematic way to think about day-to-day operations, interactions across the supply chain, and long-term strategies through the lens of . By considering the potential impacts of climate change, your company can make strategic decisions considering the risks and opportunities associated with different climate scenarios. This analysis identifies areas in which your company can be proactive to influence positive outcomes for the business, employees, customers, and communities in which your company operates. As an added benefit, companies that follow the TCFD framework promote transparency and accountability.

The TCFD Framework Stands on Four Pillars

The TCFD framework has four main components: Governance, Strategy, Risk Management, and Metrics & Targets. The FSB designed each part to help companies identify and assess the risks and opportunities associated with climate change and to disclose this information to stakeholders.

TCFD Pillar: Governance

Governance includes the role of the board of directors and senior management in overseeing climate-related risks and opportunities, the processes for identifying and assessing climate-related risks and opportunities, and how the company integrates climate-related risks and opportunities into its overall strategy.

TCFD Pillar: Strategy

Strategy considers the actual and potential impacts of climate-related risks and opportunities on a company’s long-term viability. Addressing climate-related risks and opportunities should be integrated and compatible with the company’s overall strategic plan.

To identify the risks and opportunities to the organization, TCFD recommends climate scenario analysis as a tool for understanding how different climate scenarios may impact the company’s business and formulate strategic responses. Using scenario analysis allows a company to understand which scenarios create which risks and opportunities and develop a strategy that is resilient to a variety of risks and positioned to capitalize on opportunities.

TCFD Pillar: Risk Management

Risk management refers to a company’s processes for identifying, assessing, and managing climate-related risks. This includes how the company incorporates climate-related risks into its overall risk management processes, manages physical and transitional risks, and engages with stakeholders on climate-related risks.

TCFD Pillar: Metrics and Targets

Metrics and targets function as a company’s indicators for communicating their progress toward meeting their climate-related goals. Metrics can include, among other items, information about the company’s greenhouse gas emissions, exposure to physical climate risk, and investment in climate-friendly business opportunities.

How to Implement the TCFD Framework at Your Company

Implementing the TCFD framework requires a structured approach to identify and assess climate-related risks and opportunities, engaging with stakeholders on these risks and opportunities, determining how to address them, and disclosing this information in a transparent and meaningful way.

There are many how-to documents on the details of TCFD reporting; however, those details should fall within a broader approach. It’s this broader approach that we cover here.

Step 1: Start defining your TCFD goals.

Depending on a company’s location and applicable laws and regulations, requirements differ for reporting. Knowing what is mandatory and what is optional should be the initial step so a company can be intentional about the scope of reporting it wants to undertake—and the level of effort it wants to commit.

Best Practices

• Identify the scope of the analysis and which parts of the organization will be included. Depending on what is mandating, taking a crawl—walk—run can help an organization build and mature its TCFD reporting capabilities.
• Use a structured approach to evaluate each area of the organization. A structured approach ensures application of the same metrics and assumptions and provides a basis for evolving the process.
• Define your audience to ensure the scope of the TCFD effort aligns with who an organization is trying to inform. Beyond mandatory reporting, it should be clear who the primary targets are for the information. From the Board of Directors to the C-Suite and other company leadership to investors, customers, employees, suppliers, industry associations, and local communities, knowing who is targeted can inform the scope of the effort.

Step 2: Build a coalition of support.

As with any new process, a variety of stakeholders across an organization must provide a level of support to make it effective. Given that climate-related impacts can affect all corners of an organization, it is difficult to effectively meet reporting requirements without leadership support from across the company.

Best Practices

• Start with CEO and C-Suite support to align scope, effort, and expectations. The key here is expectations can’t extend beyond the level of support.
• Work closely with Operations, its generally where the brunt of climate-related risks are felt. Without their involvement, understanding and quantifying their impacts can be challenging and developing mitigation plans will require operational input. This is where a crawl—walk—run approach can help with garnering buy-in.
• Align with the CFO and Risk Management so TCFD reporting isn’t an appendage to established financial reporting and risk management but completely integrated. Quantification of risks and opportunities are currently quantified

Step 3: Conduct climate scenario analysis.

TCFD began as a framework to inform investors about the financial implications of future risks and opportunities — from the present to 2050 and beyond. The TCFD framework includes scenario analysis as a method to analyze a range of futures states and assess the potential financial impact of different climate scenarios on their business.

Best Practices

• Incorporate variables beyond temperature change to identify the full range of risks and opportunities caused by various scenarios. Temperature change and physical impacts are not the only scenario variables to consider. Depending on a company’s industry, locations, customers, and other characteristics, variables such as regulatory changes, customer attitudes, technology advancements, and supply chain vulnerabilities can all drive scenario design.
• Engage cross-functional stakeholders in a TCFD working group to participate in scenario exploration and action planning. Bringing in participants from all functional areas helps those stakeholders recognize the potential impacts to their function, identify more specific risks and opportunities, and align leaders on the need for climate-related actions.
• Don’t overlook opportunities and overly focus on risks. TCFD reporting includes quantifying risks and opportunities. The scenario analysis should rightly look to identify risks to an organization; however, identifying opportunities should also be an emphasis.

Step 4: Quickly convert risks and opportunities to actions.

Once your organization addresses climate-related risks and opportunities, there should be an immediate effort to determine the actions that mitigate the risks and capitalize on the prioritized opportunities.

Best Practices

• Facilitate C-Suite focus and cross-functional participation to ensure climate-related activities are prioritized, resourced, and monitored appropriately.
• Integrate climate-related actions with existing actions plans to avoid turning them into secondary or afterthought activities.
• Link actions to business benefits to reinforce their need. The more climate-related actions can be linked to direct business benefits, the more likely they get the proper focus and attention they require. (This may not be necessary in all organizations; however, to create lasting support for climate-related actions, this is necessary in many organizations.)
• Define targets and metrics aligned to business objectives as an additional way of integrating climate-related activities into normal business operations and monitoring implementation progress.

Step 5: Integrate climate-related activities into existing processes.

Implementation is where the rubber meets the road and real impact happens. Incorporating climate-related actions into normal business operations maximizes their impact and ensures that impact is durable.

Best Practices

• Include quick wins to build momentum and demonstrate leadership commitment to climate-related actions and generate tangible impacts. The positive and influential impact of quick, even small, wins is frequently underestimated.
• Monitor impacts to be able highlight where climate-related actions have provided both climate benefits and business benefits. Where skepticism about climate-related actions may be high, linking impacts to business benefits helps diffuse that skepticism.
• Communicate, communicate, communicate to highlight importance, maintain focus, and demonstrate commitment. In this age of sensitivity to “green washing,” it is important for organizations to show a dedication to substantive actions and impacts.

TCFD Scenario Analysis: The Foundation for Quantifying Risks and Opportunities

Scenario analysis is the TCFD recommended approach for identifying potential climate-related risks and opportunities. With over 25 years of scenario analysis experience with commercial organizations, civilian government entities, and the Department of Defense, Toffler Associates brings a proven approach to defining scenarios, guiding stakeholders through scenario exploration, and using scenarios to develop strategies and define implementation actions.

Toffler Associates’ Alternate Futures^® Scenario Planning methodology identifies drivers of change that, in turn, create a range of possible futures. Related to TCFD, our scenarios approach:

• Incorporates a broad range of futures driven by more than temperature change and greenhouse gas emissions
• Is customized to each company’s specific situation and questions
• Links the implications across scenarios to specific response strategies and action plans

TCFD Case Study

You can see the approach in action in our blog’s recent case study, TCFD Report Becomes a Fortune 100 Company’s 10-year Plan. It’s a great example of how future-focused planning can be a game-changer. In the case study, by looking backward from 2030, a TCFD climate scenario analysis team identified clear-cut initiatives to begin now. The process clarified the importance of many of these recommendations for the company’s future.

Contact us to discuss how our scenario analysis expertise could apply to your TCFD or other climate-related reporting process.