Task Force on Climate-related Financial Disclosures (TCFD)
As of today, financial markets are still failing to acknowledge and properly address the significant risks to their stability emerging from climate change. These risks include
- Physical risks, threatening the destruction of assets, resulting from the impacts of climate change, such as floods, droughts, and extreme weather events.
- Transition risks, from the urgently required transformation of the global economy from relying on fossil fuels to being net-carbon neutral and thus powered entirely by renewable sources of energy.
- Regulatory risks, as a direct consequence of financial regulators impending response to accelerating climate change.
In a ground-breaking analysis, the United Nations Principles for Responsible Investment (UN PRI) determined that the significant delay of an adequate regulatory response to date makes decisive action by financial regulators all but certain in the next few years. Its Inevitable Policy Response project “forecasts a response by 2025 that will be forceful, abrupt, and disorderly because of the delay” (emphasis ours).
Corporations and financial institutions alike therefore urgently need to take action to identify and mitigate their exposure to risks associated with greenhouse gas (GHG) emissions and climate change.
The most advanced framework for quantifying these risks and developing procedures for mitigation and adaptation through scenario-based analysis are the recommendations that were published by the Task Force on Climate-related Financial Disclosures (TCFD).
The Task Force was convened by the Financial Stability Board (FSB) in December 2015 to develop a set of voluntary, consistent disclosure recommendations that companies of all types can use to provide information on their climate-related financial risks to stakeholders including investors, lenders and insurers. To ensure relevance of the recommendations for all industry and market sectors, the Task Force consists of members from a wide range of industries and diverse geographic backgrounds.
After extensive engagement and consultation with the public and key stakeholders, the Task Force published its final report in June 2017. It includes 11 specific recommendations on climate-related financial disclosures around four central themes:
|Governance||The organisation’s governance around climate-related risks and opportunities.|
|Strategy||The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.|
|Risk Management||The processes used by the organisation to identify, assess and manage climate-related risks. Notably, this includes the use of different climate scenarios to analyse their effect on an organisation’s business.|
|Metrics and Targets||The metrics and targets used to assess and manage relevant climate-related risks and opportunities.|
In total, more than 780 organisations, including the world’s largest banks, asset managers and pension funds, are supporting the TCFD. Jointly, these institutions are managing assets with a combined value of USD 118 trillion.
Coming back to the UN PRI’s Inevitable Policy Response, it is important to note that this is by no means limited to regulators in Western markets or developed economies. At a recent regional conference on climate change in Kuala Lumpur, Datuk Nor Shamsiah Mohd Yunus emphasised the risks climate change poses to “the viability of businesses and the living standards of individuals.” In response, she outlined the key steps Bank Negara will take to build Malaysia’s climate resilience – including implementing the TCFD recommendations for Malaysian organisations.
Paia has been using its extensive sustainability and climate change risk expertise to help clients navigate these new challenges in SE Asia since 2003. Please contact us if you would like to know how we can help you implement and use the TCFD recommendations as an integral part of your success strategy.