The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (“TCFD”), an industry-led group formed at the request of the G20, released yesterday its Final Recommendations Report for “voluntary” climate-related financial disclosure. The TCFD’s mandate is to ensure sufficient climate risk disclosure is available to avoid catastrophic financial market disruption due to climate change impacts.

Why Important?  While a variety of climate change disclosure frameworks already exist, such as those of SASB, GRI and CDP, as noted in our previous post summarizing the TCFD’s December 2016 draft recommendations, these recommendations are particularly relevant because of the FSB’s status as an international body founded by the G7 which coordinates national financial authorities and international standard-setting bodies, including the U.S. Securities and Exchange Commission, as these entities work toward developing strong regulatory, supervisory and other financial sector policies. The recommendations were strategically accompanied by a statement of support signed by the heads of approximately one hundred entities, including major financial institutions; asset managers; chemical, steel, airline, mining, energy, consumer goods, consulting and other companies; pension funds; ratings agencies; and stock exchanges.

What is Recommended?  The recommendations boil down to four thematically related areas: governance, strategy, risk management, and metrics and targets.

  • For governance, organizations are encouraged to disclose their governance around climate-related risks and opportunities, including board oversight and management’s role in assessing and managing these risks and opportunities.
  • With respect to strategy, one of the centerpieces of the recommendations and likely the most controversial and difficult, is the TCFD recommendation that organizations disclose the actual and potential material impacts of climate-related risks and opportunities on their businesses, strategy and financial planning, including (i) climate-related risks identified in the short-, medium- and long-term (not defined); (ii) the impact of such risks on the organizations’ businesses, strategy and financial planning; and (iii) the resilience of the organizations’ strategy under different climate-related scenarios including a 2ºC or lower scenario. Importantly, the TCFD is not recommending any specific 2ºC scenario, instead providing criteria to aid each organization’s design of its own 2ºC scenario.
  • For risk management, the TCFD recommends disclosure of processes for identifying, assessing and managing climate-related risks and a description of how these processes are integrated into the organization’s overall risk management.
  • Finally, with respect to metrics and targets, if material, the TCFD recommends organizations disclose (i) the metrics used to assess climate-related risks and opportunities in line with their strategy and risk management processes; (ii) their Scope 1, 2, and 3 greenhouse gas emissions (defined as direct emissions, indirect emissions from consumption of purchased power and other indirect emissions through the organization’s value chain) and related risks; and (iii) the targets used and the organization’s performance against such targets.

Where to Disclose?  While the TCFD styles the recommendations as voluntary, it makes abundantly clear its desire that these disclosures be contained in an organization’s annual “financial” filings, which TCFD defines as the annual reporting packages in which organizations are required under applicable law to deliver their audited financial results. Although not crystal clear, this appears to mean an organization’s annual financial statements and/or its Management’s Discussion and Analysis of Financial Condition and Results of Operations or equivalent.  TCFD does note that if these final recommendations conflict with the domestic disclosure requirements of an organization, such organization should include these disclosures in “other official company reports” which are issued “at least annually” and subject to the same internal controls to which mandatory disclosure is subject (e.g., review by the chief financial officer and the audit committee of the board of directors).

Potential Uptake and What’s Next?  The TCFD acknowledges that its recommendations are purposely ambitious, scenario analysis is relatively new, and improvements in data analytics are to come. Indeed, we are aware of only eight companies in the extractive industries that have prepared scenario analysis reports of varying scope to date, which analyses tellingly are not contained in annual financial filings. The response of disclosing organizations to these recommendation remains to be seen, although we would note that over 40% of disclosure preparers indicated in their comments to the TCFD’s December 2016 draft recommendations that they did not know if and when they would implement the recommendations.

TCFD is holding webinars to discuss these final recommendations on July 18 and July 24. Interested parties can use the hyperlinks for each date to register. TCFD will present the final recommendations at the G20 summit in Hamburg, Germany, next week. TCFD’s work will continue through at least September 2018 to support and monitor adoption, and to develop or identify example disclosures.

PDFs of the final recommendations are available here, supporting annex available here, technical supplement on the use of scenario analysis available here and FAQ available here.

*   *   *   *

The authors gratefully acknowledge the assistance of summer associate Jeffrey Adler in preparing this entry.