The number of organizations reporting under the Task Force on Climate-related Financial Disclosures (TCFD) framework has grown significantly in recent years, and the trend is not likely to abate. Over 1,500 organizations supported the TCFD in 2020 and nearly 60% of the world’s largest organizations support and/or follow TCFD reporting guidelines, according to the Financial Services Board (FSB).
By 2025, TCFD reporting will be mandatory in the UK, and the International Financial Reporting Standards Foundation (IFRS) has announced a working group to accelerate sustainability reporting standards, which will include TCFD recommendations.
Yet, even supporting organizations’ alignment with the TCFD recommendations varies widely, which is creating a gap in the quality of data available to investors regarding climate risk. A November 2020 report card of climate risk reporting across the G250 by KPMG showed only 32% of companies on average are disclosing the 11 categories recommended by TCFD.
This not only leads to poor investment decision-making, but it increases the delay in adequate action to address climate risks. Considering the narrow window of time for net-zero transitions to remain within the global warming boundary of 1.5 degrees Celsius outlined in the Paris Agreement, these delays can have severe consequences.
Improving TCFD reporting begins with a gap analysis. This reveals the disparities between an organization’s existing ESG reporting practices and the recommendations of the TCFD, and it serves as a powerful tool to improve Board buy-in.
TCFD Alignment Gap Analysis
The TCFD reporting recommendations fall under four categories: governance, strategy, risk management, and metrics/targets. Each of these breaks down into two or more additional recommendations for a total of eleven criteria, placing responsibility for climate risk assessment under the Board’s authority, establishing processes and methods of risk measurement and scenario analysis, disclosing systems of risk management and controls, and defining metrics, GHG emissions Scope (1, 2, or 3) and targets.
A gap analysis sets the stage within a broader change management structure. It gives a clear picture of the organization’s existing alignment to TCFD recommendations and areas for improvement.
Areas a TCFD alignment gap analysis covers existing capabilities and gaps for the following areas:
- Governance oversight of climate risks and opportunities
- Governance strategy for assessing climate risks and opportunities
- Physical and transition risk and opportunity identification methods
- Scenario analysis methodology (for short-, medium-, and long-term)
- Investment risk and opportunity reporting
- Investment resilience analysis
- Risk management procedures
- Risk management control systems
- Selection of climate risk reporting metrics
- Selection of GHG measurement scope
- Identification of targets
TCFD Gap Analysis Preparation
Reasons to complete a gap analysis:
- Understand how well your current disclosures align with TCFD
- Outline gaps in disclosure, responsibilities, processes or systems of review and control
- Benchmark against peers in your sector on reporting alignment
- Identify quick wins, which can be easily achieved for better alignment
- Identify the systems that require more rigorous planning and development over time
- Communicate the key takeaways and strategy for improving alignment to the Board
- Reassure additional stakeholders with a roadmap towards TCFD disclosure
A common framework for managing change for continuous improvement within an organization is Plan Do Check Act (PDCA).
For a TCFD gap analysis, the planning stage involves delegating the project responsibility and identifying the key materials that you’ll need to understand the gaps of reporting. After compiling the documents, divide the documents into the four relevant TCFD recommendation categories.
Useful documents for a gap analysis:
- Existing ESG reports and process documentation
- Board agendas, presentations
- Investment data
- Business planning reports
- Risk management data, control systems and procedures
Based on the documentation, an organization can compare the level of existing alignment, identify the gaps, and draw comparisons to alignment within the business sector. Develop a strategy for narrowing the gaps starting with quick wins and moving to more intensive changes that require additional planning and implementation.
Confirm that every item in the TCFD recommendations has been addressed in the strategy including roles and responsibilities, processes and methods.
Put the strategic plan into action.
Overcoming the challenges to TCFD reporting
Even though TCFD reporting is a form of non-financial reporting, it does have key differences compared with ESG reporting, which many organizations are already familiar with. Unlike traditional ESG reporting, in which organizations disclose the environmental, social and governance impacts of their activities, TCFD reporting reverses the emphasis to expose how organizations will be financially impacted by climate change risks.
TCFD calls for Board oversight of these risks, rather than management by the CSR department, as they directly impact the financial health of an organization. Making this shift requires Boards to become more versed in the types of climate change risks and their level of impact over time.
A surface understanding of an organization won’t be enough to fully grasp these risks. According to sustainability specialist Ann Chiang, those tasked with managing the risk should understand: “(1) the geographical locations of its value/supply chain; (2) its assets and nature of operations; (3) the structure and dynamics of its supply/demand markets; and (4) its customers and stakeholders.”
Apart from the steep learning curve, Boards may also feel reluctant to acknowledge, articulate and strategically mitigate climate-related financial risks, as climate change has long been viewed as a distant threat without immediate consequences. A recent survey of 80 firms reporting on TCFD by the Climate Disclosure Standards Board (CDSB) showed that just 3 had disclosed their climate risk in a 2˚C or lower scenario analysis.
Yet, TCFD reporting exposes how delayed action can lead to mounting risks. As a risk multiplier, climate change produces worse impacts the more action is delayed. The impacts of climate change range from food system insecurity to extreme weather and touch on nearly every business sector. Without swift action, these risks will result in market failure.
This is why climate-related financial risk and opportunity assessment has become a priority for the financial services and banking sectors in making investment decisions. Communicating climate change risk in financial terms enables organizations to gain clarity on the tangible impacts of climate change on business and to make a strong case for improvement.
TCFD alignment doesn’t mean organizations need to start from scratch, however. A number of existing ESG reporting standards have significant overlap with TCFD: CDP (Carbon Disclosure Project), CDSB, UNPRI (United Nations Principles of Responsible Investing), SASB (Sustainable Accounting Standards Board), GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), etc.
Yet, areas unique to TCFD, such as scenario analysis, are areas where little agreement on methodologies. For these areas and for an accurate depiction of physical and transition risks, it helps to implement additional support such as software capable of creating complex forward-thinking data analyses for climate change.
How Climanomics® can minimize TCFD reporting gaps
Our Climanomics® platform can play a crucial role in eliminating the reporting gap in the strategy section. Subscribers to the tool can monitor and measure the risks to their business in diverse geographic locations for different climate scenarios. The risks and opportunities are quantified in financial terms, so investors and business stakeholders can easily engage with the data.