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