05. Task Force on Climate-related Financial Disclosures (TCFD)

Overview. The TCFD, established by the Financial Stability Board (FSB), created the global reference framework for climate-related financial disclosure. It set the stage for ISSB S2, and remains the most widely recognized framework for disclosing governance, strategy, risk management, and metrics/targets on climate risks and opportunities.

1) Why TCFD Matters

• First global framework to standardize climate risk disclosure for financial markets.
• Adopted or referenced by regulators across G20, central banks, and stock exchanges.
• Forms the backbone of ISSB S2 Climate and influences EU ESRS E1.

2) The Four Pillars

• Governance: Board oversight, management roles, frequency of updates, integration into decision-making.
• Strategy: Climate-related risks and opportunities, time horizons (short/medium/long term), resilience testing under different climate scenarios.
• Risk Management: Identification, assessment, and management of transition and physical risks; integration with ERM frameworks.
• Metrics & Targets: GHG emissions (Scopes 1–3), intensity metrics, climate-related targets, and progress monitoring.

3) Types of Climate Risk

• Transition risks: Policy changes (e.g., carbon pricing), technology shifts, market preference, reputation.
• Physical risks: Acute events (storms, floods, wildfires) and chronic risks (sea-level rise, heat stress, drought).
• Opportunities: Efficiency gains, new products/services, financing opportunities, resilience solutions.

4) Scenario Analysis

TCFD requires organizations to test strategy resilience against different climate pathways. Key practices:

• Use multiple scenarios (e.g., IEA NZE, IPCC RCPs, national policy scenarios).
• Test at least one Paris-aligned (1.5–2°C) and one higher-warming scenario.
• Quantify financial impacts: revenue shifts, asset impairments, insurance costs, supply chain disruptions.
• Qualitative narratives supplement quantitative modeling where data is limited.

5) Example Application

Case: European Utility

• Governance: Climate oversight assigned to sustainability committee, reporting quarterly to the board.
• Strategy: Transition plan to shift from coal → renewables; tested under €100/tCO₂ carbon price by 2030.
• Risk management: Integrated carbon pricing risk into corporate ERM; updated investment hurdle rates.
• Metrics & targets: Disclosed Scope 1–3 emissions, intensity gCO₂/kWh, and net-zero target 2040.

6) Link to ISSB & CSRD

• ISSB S2 directly adopts the TCFD four-pillar structure—companies can leverage existing TCFD work for ISSB compliance.
• CSRD ESRS E1 requires climate resilience and scenario analysis, harmonized with TCFD language.
• Thus, TCFD is the bridge for interoperability across jurisdictions.

Note: Although TCFD as a standalone initiative is being integrated into ISSB, its four-pillar architecture remains the common global reference point.