TCFD Demystified

By Junying Lou

Background and Development

The Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015, following the milestone speech by Mark Carney [1], Governor of the Bank of England and Chair of the Financial Stability Board. During the speech, he explained the grave threat posed by unpriced climate-related risks to global financial stability.

The final report [2] published by the Task Force in June 2017 includes 11 recommended disclosures around 4 core elements: governance, strategy, risk management, and metrics and targets. The disclosures aim to help the target audience, primarily investors, lenders, and insurers, to understand how the reporting organisation assesses and manages climate-related risks and opportunities, to form the basis of informed investment decisions.

Core Elements of Recommended Climate-related Financial Disclosures

Source: TCFD

Since the publication of the final report, TCFD is gaining momentum. As of February 2020, TCFD has over 1,027 supporters, representing a market capitalisation of over $12 trillion [3]. Many policymakers are considering integrating TCFD recommendations into national reporting frameworks. For example, the European Commission issued non-binding reporting guidelines on climate-related information in June 2019 [4], the Australian Securities and Investments Commission updated guidance on climate change-related disclosure in August 2019 to incorporate the climate change risks developed by TCFD into the list of common risks examples that may be relevant to prospectus disclosure and highlight climate change as a systemic risk for the reporting entity [5]. Hong Kong Exchange (HKEX) recently introduced a new climate change disclosure Aspect A4 on a “comply or explain” basis which will apply to financial years commencing on or after 1 July 2020. The issuers will need to disclose their policies on measures to identify and mitigate significant climate-related issues that have impacted or may impact the issuer, and a description of the significant climate-related issues and corresponding mitigation measures [6]. In March 2020, The UK Financial Conduct Authority (FCA) released a consultation paper to propose that all commercial companies with a premium listing on the London Stock Exchange comply with disclosure recommendations issued by TCFD. According to FCA, they intend to publish a policy statement later in 2020 with finalised rule and technical note after the conclusion of the consultation [7].

Managing climate-related risks and opportunities is not only an environmental challenge, but a business one.

When talking about climate-related risks, the first thing that may come to mind is natural disasters, such as hurricanes and heatwaves. TCFD made it clear that climate-related risks encompass a wider range of risks. Aside from physical impacts of climate change (physical risk), organisations also need to prepare for risks related to the transition to a lower-carbon economy (transition risk):


These climate-related risks, if managed skillfully, could be turned into opportunities. Forward-thinking organisations can take this opportunity to transform the business into a lean operation by improving resource efficiency and capitalising on new markets and demands of low-carbon products.

Both climate-related risks and opportunities, as recommended by TCFD, need to be carefully considered and incorporated into financial reporting in the following areas: operating cost and revenue, capital expenditures and capital allocation, acquisitions or divestments, and access to capital.

Scenario analysis: constructing alternative futures to test the resilience of the organisation’s business strategy

Among the recommended disclosures proposed by the Task Force, the scenario analysis is the most unique feature that sets TCFD apart from other reporting frameworks. It is also the disclosure item most companies find challenging.

The world is at a crossroads. We can be looking at very different futures depending on the speed and effectiveness of our greenhouse gas emission reduction effort. For most organisations, their current business strategies are built on the assumption that the future will look similar to today, but with the changing climate, this assumption may not hold anymore. The scenario analysis thus provides an opportunity for decision-makers to peer into the alternative futures and reflect on the resilience of their business strategies in the face of newly identified climate-related risks and opportunities.

TCFD discusses in details the use of scenario analysis to help organisations navigate climate-related risks and opportunities over medium to longer-term in its published technical supplement [8] Organisations are advised to start with an understanding of climate science and global scenarios developed by international organisations like international Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA). Global scenarios can be used to provide a broad context and macro trends for organisations, but organisations need to take matters into their own hands by thinking through how the macro trend, both physical changes in climate and the regulatory, behavioural and technological changes, can potentially impact their direct operations and other players in their value chain to assess the full range of physical and transition risks they are facing.

Even though it is identified that some industries are more vulnerable [9] than others to climate change, all industries will inevitably have to address climate-related risks and opportunities in one way or another. And as highlighted by TCFD, the implementation of its recommendations will be a journey, and companies should start early to continually improve the quality and usefulness of the climate-related disclosures and to fully integrate climate-related issues into their risk management and strategic planning processes. For these reasons, organisations are advised to take early actions to identify and manage the climate-related risks and opportunities to future proof their businesses.

TCFD strategy and implementation is one of Paia’s key expertise and services. Do speak to us if your organisation would like to learn more about how to implement TCFD. You can reach us at

[1] Breaking the tragedy of the horizon – climate change and financial stability – speech by Mark Carney

[2] TCFD: Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)

[3] TCFD: TCFD Supporters

[4] European Commission: Guidelines on reporting climate-related information

[5] Australian Securities and Investments Commission: 19-208MR ASIC updates guidance on climate change related disclosure

[6] HKEX: Consultation Conclusions: Review of the environmental, social and governance reporting guide and related listing rules

[7] FCA: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations

[8] TCFD: Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities (June 2017)

[9] CNBC: 7 industries at greatest risk from climate change

scenario analysis risks opportunities

Applying Scenario Analysis in Climate-related Risks and Opportunities

by Lim Sze Wei & Stefan Ullrich.

Investors are beginning to get on board with the global fight against climate change, a movement that was until recently the territory of non-profit organisations and environmentalists. According to the inaugural Global Climate Index 2017 for Asset Managers by the Asset Owner Disclosure Project (AODP), a majority of 60% of asset owners are now taking action on climate change, while 40% continue to ignore the associated risks and opportunities. The report also found that the world’s top 50 asset managers are well ahead of their asset owner clients in their approach to managing the financial impact of climate change on investment portfolios [1]. Blackrock, the world’s largest investor with US$6.317 trillion [2] assets under management (AUM) has warned that high-level directors could be voted out of companies that are failing to mitigate climate-related risks posed to individual firms [3].

Investors are increasingly paying more attention to companies’ environmental, social, and governance (ESG) issues, urging them to disclose the impacts of climate change on their business and assessing how these topics are managed. It is therefore very likely that shareholders will increasingly demand responses to ESG related topics, specifically climate-related risks, in the near future.

In response to the growing demand for organisations to properly assess, understand and report climate-related risks, and at the request of G20 leaders, the Financial Stability Board (FSB), a body that makes recommendations on the global financial system, established the Task Force on Climate-related Financial Disclosures (TCFD) in December 2015.

In its recommendations for organisations from both the financial and non-financial sectors, published in June 2017, the Task Force concluded that a key forward-looking tool to grasp the complexities of climate change is scenario analysis and recommended that companies explore physical, strategic, and financial risks and opportunities that could emerge from a range of climate-related scenarios, including a 2oC scenario. (Note: An increase of global temperature by more than 2°C has come to be the majority definition of what would constitute intolerably dangerous climate change. The UNFCC Paris Agreement’s key aim is to keep global temperature rise to well below 2°C above pre-industrial levels and to ideally limit the increase to no more than 1.5°C.)

What is scenario analysis?

Scenario analysis (sometimes called “scenario planning” or “scenario and contingency planning”) is a structured process for organisations to analyse possible future events by considering several scenarios i.e. stories about how the future might unfold and how it will affect them. It is a tool that intends to explore alternatives that may significantly alter the basis for “business-as-usual” assumptions, therefore enhancing critical strategic thinking.

While scenario analysis is a relatively recent tool to asses climate-related risks and opportunities and their potential business implications, it is an established method for developing strategic action plans that are flexible and robust to cover a range of future states.

Scenario analysis is also a good ‘storytelling’ tool in connecting the various and complex interactions, behaviours and emergent properties of our natural, economic and social systems. It recognises the ‘human science’ perspective in the diverse epistemologies of the climate, economic, and social narrative. It assists multiple business actors to broaden the focus to encompass a richer set of considerations thus providing decision makers with the understanding of complex systems associated with climate-related risks and opportunities, effects from various forms of intervention, and to then tailor strategic and targeted approaches in managing these risks.

The tool is also useful in helping transcend sustainability and climate change discussions from just the sustainability department, into the boardroom and the offices of the CFO, COO, CIO, etc. – thereby strengthening internal relations of an organisation and its ability to respond quickly and effectively to emerging threats and opportunities.

Given that the foundation of scenario analysis is based on forward-looking assessments, it is also a useful communications tool for informing stakeholders about the organisation’s position pertaining to climate-related risks and opportunities.

How to use the scenario analysis?

If your organisation is just beginning to use scenario analysis, the TCFD recommends that you can begin with qualitative scenario narratives of storylines. As your organisation gains experience with qualitative scenario analysis, the scenarios and associated analysis of development paths can be guided by quantitative information such as using datasets and models (e.g. developed in-house or provided by third-party providers) to illustrate pathways and outcomes.

In identifying scenarios, the TCFD recommends using a range of scenarios that enlighten participants on the future exposure to both transition and physical climate-related risks and opportunities, tailored to the industry, economic sector, and geographical location of the organisation’s value chain.

A key scenario recommended by the Task Force is business-as-usual, which is critical for identifying the likelihood of physical risks (e.g. water scarcity, land degradation, flooding, extreme weather events), their magnitude and the necessary adaptation measures. This scenario will assist organisations with understanding the physical impacts from acute and chronic weather events which will interrupt businesses and operations across the supply chain.

Another key scenario which the Task Force recommends is a scenario which is consistent with keeping global warming below 2oC. This scenario assesses transition risks and its impacts under the assumption of meeting the science-based targets (SBT), in alignment with agreed international climate change commitments. This scenario will assist organisations to identify reduction targets and measures required for transitioning into a low-carbon economy. For information on SBT, please refer to

The typical categories of transition risks and/or opportunities an organisation should consider when applying scenario analysis are summarized in the table below:

Market and Technology Policy and Legal Reputation
As markets respond to climate change, supply and demand will shift for certain products and services. For example, reduced market demand for higher carbon products/commodities, and increased demand for energy-efficient, lower carbon products and services.

Organisations may also be impacted by improvements in technology, including technology that accelerates the transition to a lower-carbon economy. These new technologies will disrupt and displace parts of the current system.

How will these changes impact the financial security of investments? And what should key decision makers do to mitigate these disruptions?

International, national and state level legislations are evolving in response to the need for mitigation of climate change and to catalyse climate change adaptation. Organisations that fail to change are at risk of non-compliance.

For example, there is an increased threat to securing license to operate for high-carbon activities, and an increased risk of legal action against companies that have contributed to the causes of climate change.

Secondly, with the introduction of policies on pricing externalities (e.g. carbon tax), there is also an emerging concern about increased operating costs.

Stakeholders such as investors, lenders, and consumers are increasingly expecting responsible conduct from businesses. Failure to appropriately demonstrate adaptation risks loss of trust and confidence in management.

A client case study

In 2018, Paia Consulting was commissioned by a South East Asian client in the financial sector to conduct focus-group discussions (FGD) with a broad range of stakeholders, including senior management, representatives from all business units, and key external stakeholders.

The objective of the discussion is to solicit feedback from key internal and external stakeholders on the organisation’s sustainability strategy, materiality, and potential focus areas.

As part of the FGD, Paia applied the scenario analysis approach and presented two scenarios highlighting

  • physical risks from a business-as-usual approach, and
  • transition risks from government legislations and policies in meeting the national climate change commitments, i.e. the Intended Nationally Determined Contributions (INDC) under the Paris Agreement.

During the scenario analysis exercise, participants were asked to discuss and identify the effects of the scenario on the organisation, the organisation’s response to improve its resiliency, and initiatives which can be undertaken to achieve a different outcome or to thrive in these changing environments.

As a result of this scenario analysis exercise, participants were able to grasp and consider the multi-faceted ESG risks which can affect their organisation, and suggested potential solutions the company should develop to overcome key ESG risks.

[1] Global Climate Index 2017, Asset Owners Disclosure Project.