With the evident consequences of climate change, public scrutiny of companies’ environmental practices has grown over the last few years. This has been ignited by the 2050 net-zero goals and the use of renewable energy sources globally. Therefore, investor interest is also increasing in ESG disclosures, transparency, and decarbonization plans.
Investors and financial markets need complete and comparable data from companies on their efforts towards addressing climate change and the impact of climate change on operations — risks and opportunities.
In the APAC region, greater ESG disclosure consistency has been set by regulators. This includes preparing and submitting sustainability reports aligned with the Task Force on Climate-Related Financial Disclosures (TCFD or Task Force) recommendations. In fact, elements of the framework are continuously honing forthcoming ESG report requirements and guidelines for listed companies in Singapore, Hong Kong, and Malaysia.
Developing the Task Force on Climate-related Financial Disclosures
Climate change poses financial risks to businesses and the global economy. In 2015, the Financial Stability Board developed Task Force on Climate-related Financial Disclosures to provide best practices on how companies should disclose climate-related matters to investors, lenders, and insurance underwriters. After months of consultation among international business leaders and financial firms, TCFD released its recommendations on climate-related disclosures.
Since its issuance, TCFD recommendations have become the golden framework for companies worldwide who are voluntarily reporting on climate-related matters. But with the global shift toward compulsory climate reporting, several countries have adopted TCFD in their voluntary and mandatory ESG reporting. The US Securities and Exchange Commission has proposed the standardization of climate-related disclosures, considering the Greenhouse Gas (GHG) Protocol and TCFD as the frameworks.
In most APAC countries, regulating authorities have been aligning their reporting requirements with the TCFD recommendations. The Hong Kong Exchanges and Clearing Limited (HKEX) released the Guidance on Climate Disclosures in 2021 to identify climate risks and create TCFD-aligned reports. This is in conjunction with the revised ESG reporting guidelines for HKEX issuers and the mandatory TCFD-aligned reporting by 2025.
Moreover, the Singapore Exchange Regulation is currently implementing a comply-or-explain approach for sustainability reporting in 2022. But in FY 2023, TCFD-aligned disclosures will be mandatory for listed companies under the Financial, Energy, Agriculture, Food, and Forest products industries. And in the following financial year, companies under Transportation, Materials, and Buildings are required to submit climate disclosures.
What is the TCFD Framework?
In October 2021, the Task Force updated its Guidance that supersedes the 2017 Annex, adding more recommended disclosures. Developing the standardized framework for climate reporting, the Task Force defined categories for climate-related risks and opportunities. This classification should serve as a guide for organizations to assess and disclose the matters that are pertinent to their business operations.
For the climate-related risks, TCFD has segmented them into two categories: (a) risks related to the transition to a lower-carbon economy, and (b) risks related to the physical impacts of climate change. Whereas for climate-related opportunities, these may vary according to the region, market, and sector in which the organization operates. To create a cohesive report, the Task Force also encourages accompanying the risks and opportunities with the potential financial impact.
The TCFD recommendations are structured around four thematic areas — governance, strategy, risk management, and metrics and targets. These core elements are supported by recommended disclosures that set out what information companies must disclose.
Governance
Under the Governance theme, companies would need to disclose the role of the board in overseeing climate-related issues and the role of the management in assessing and making policies to address such issues. This information supports the understanding and evaluation of investors and underwriters of how boards prioritize material climate-related issues.
Strategy
Apart from disclosing how climate-related issues are received by the board and management, companies must report on the impact of such issues on their businesses, strategy, and financial planning. It should include the climate-related risks and opportunities over the short, medium, and long term, and how resilient the company’s strategy is against unforeseen scenarios.
Risk Management
Climate-related issues may bring financial risks when not managed. Stakeholders should understand how companies identify, evaluate, and manage climate-related risks as part of their risk management. This part of the framework highlights how companies determine the relative significance of climate-related risks with other risks, and the processes to prioritize climate-related risks, including materiality determinations.
These disclosures can help investors understand a company’s overall risk profile and risk management activities.
Metrics and Targets
At the core of these themes are the metrics and targets. In this area, companies should report on how they measure and monitor climate-related risks and opportunities. Companies should reveal key metrics used and their consistency with the cross-industry metrics. Where information is material, companies must consider describing the incorporation of performance metrics into remuneration policies.
Companies must also report their climate-related targets in line with the cross-industry metrics. They are encouraged to disclose medium-term or long-term targets, where available. Targets and metrics should be provided for historical periods to allow for trend analysis.
Implementing TCFD Reporting for Effective Disclosures
While standards and regulations around the world are adopting the TCFD recommendations, companies must be prepared to disclose climate-related matters. Here are actionable steps to comply with your local reporting guidelines and create compelling sustainability reports.
1. Consider following TCFD’s Supplemental Guidance
Apart from the identified core themes and recommended disclosures, TCFD also set supplemental guidance for certain sectors to provide industry-specific climate-related financial information. The Task Force provided supplemental guidance for the financial and non-financial sectors. Detailed disclosures can be found in the TCFD Recommendations 2021.
Supplemental Guidance for the Financial Sector
To better understand carbon-related matters and their impact on financial systems, financial companies must be able to supplement their disclosures, specifically on Strategy, Risk Management, and Metrics and Targets.
Supplemental Guidance for Non-Financial Groups
The Task Force developed supplemental guidance for the non-financial sector to report on their impact and exposure to risks around greenhouse gas emissions, energy, or water dependencies. The non-financial groups are grouped into four areas: Energy, Transportation, Materials and Buildings, and Agriculture, Food, and Forest Products. Recommended disclosures are focused on Strategy and Metrics and Targets.
2. Follow TCFD’s Fundamental Principles for Effective Disclosure
Alongside the recommended disclosures, the Task Force also provided seven principles that are designed to describe clear connections between climate-related issues and the four key elements. The goal is to analyze and present disclosures completely and accurately without overwhelming the stakeholders.
Disclosures should:
- Present relevant information — Provide specific information on the potential impact of climate-related risks and opportunities on its markets, businesses, corporate or investment strategy, financial statements, and future cash flows
- Be specific and complete — Provide thorough quantitative and qualitative sustainability information and disclosures.
- Be clear, balanced, and understandable — The disclosures should be granular to inform specialized users but concise for those with less expertise. Balanced narrative explanations should provide insights from quantitative information.
- Be consistent over time — Consistency is needed across formats, metrics, and information to understand the development and comparison of climate-related matters. Any changes in the methods and formats should be explained.
- Be comparable among organizations within a sector, industry, or portfolio — Details provided in disclosures should have a comparison and benchmark of risks across sectors and at the portfolio level.
- Be reliable, verifiable, and objective — Data collected, analyzed, and defined should be verifiable and free from bias. Information in disclosures should be high-quality and accurate.
- Be provided on a timely basis — Disclosures should be delivered to stakeholders using the appropriate media and at least annually.
3. Make use of a Digital ESG Software
Aligning with the TCFD recommendations on climate reporting, companies may feel overwhelmed with the amount of data to gather and present. An ESG reporting software can help you by digitalizing the reporting process, from automating data collection to report generation. Convene ESG configures your sustainability report according to the TCFD guidelines with no hassle.
Create digital workflows for gathering your sustainability data and use dashboards for high-level analysis. Calibrate your ESG report according to the TCFD recommendations along with other global and local standards. Customize and automatically generate reports according to your company brand and format. Centralize data in one repository for goal tracking, benchmarking, and trend analysis. Do all this on one platform — Convene ESG.
Learn more about how you can create TCFD-aligned reports using digital reporting software. Head on to this page to know more about the features of Convene ESG.
