Our colleagues at BDO Australia provided an overview of the TCFD’s four pillars. We’ve revised the article to provide a Canadian perspective.
Many organizations approach climate reporting with the assumption they don’t know what to do. However, we find clients starting on this path do have relevant enterprise structures and processes that can be given a climate-related lens.
By utilizing existing structures, organizations can ensure they apply the same rigour and quality to climate disclosure as to other critical operations.
Globally, it is encouraged that entities start to comply with the recommendations set out by the Task Force on Climate-Related Financial Disclosures (TCFD), and to include disclosures on business risks and opportunities—including climate-related risks and opportunities—in their annual reports. The Canadian Securities Administrators’ (CSA) climate-related disclosure proposal is largely modelled based on the recommendations of the TCFD.
In this piece, we dive into the four pillars that structure the TCFD recommendations and the value they can bring to your business.
Why commit to climate-related reporting?
Stakeholders are demanding greater transparency about the climate-related risks and opportunities facing businesses they have financial exposure to. Disclosure of an organization's climate-related approach to governance, strategy, risks, and metrics helps investors, insurance underwriters, and financiers make informed investment decisions.
By actively considering climate-related risks and opportunities using the TCFD framework, a business may build resilience by identifying, measuring, and managing the potential impact of climate change on their business as well as identifying opportunities.
Four pillars of the TCFD recommendations
Businesses have a lot to consider when accounting for climate impacts. The TCFD addresses this with a package of 11 recommendations structured into four core pillars to guide users in their analysis and disclosures.
The pillars, as stated in the Recommendations of the Task Force on Climate-Related Financial Disclosures report, include:
- Governance: The organization’s governance around climate-related risks and opportunities.
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
- Risk management: The process used by the organization to identify, assess, and manage climate-related risks.
- Metrics and targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Notably, the four pillars do not operate in isolation. Interdependence between them is evident throughout the guidance provided, as are the common themes and challenges that can occur, and the overarching value each can bring.
Recognizing the value of TCFD-aligned reporting
Aligning ESG reporting with the TCFD recommendations brings significant value to businesses. Here’s how each of the four pillars can help organizations with their ESG strategy:
Integrating the management of climate-related risk across the enterprise is critical. It cannot be viewed in isolation from other financial and operational processes like capital allocation frameworks, enterprise risk frameworks, or procurement policies. More specifically, assigning climate-related responsibilities to the Board and management team will be important to stakeholders. Doing this demonstrates a recognition that the potential risks and opportunities are significant, and it involves the highest-level governance bodies in stewarding and overseeing related matters.
Short-, medium-, and long-term implications will be necessary for stakeholders forming expectations of a business's future performance. Consider questions like whether cash flow will withstand the impact and whether asset values hold up.
The strategy pillar tests the ability to identify climate-related risks and opportunities, which includes forecasting expected developments over time against identified future scenarios.
A mechanism should be established to amend, review, and revise the enterprise strategy periodically, with climate considerations embedded in the process to ensure the strategy’s resilience.
Risk management disclosure helps stakeholders better understand an organization's overall climate-related risk profile and its approach to the management of those risks.
The recommended approach is not about re-inventing risk management processes. Rather, it's about taking the opportunity to augment the organization's existing risk management appetite, profile, and activities with a climate change lens. The key is embedding the processes for identifying, assessing, and managing climate-related risks into existing enterprise risk management frameworks.
Disclosure of metrics and targets used to assess and manage relevant climate-related risks lets stakeholders assess an organization's climate-related exposure and progress over time.
A critical step is to calculate the organization's greenhouse gas (GHG) emissions footprint that acts as a baseline for developing future targets and a strategy to get there.
Start by gaining an understanding of Scope 1, 2, and 3 emissions:
- Scope 1 emissions are direct GHG emissions produced from sources owned or controlled by your company.
- Scope 2 emissions are indirect GHG emissions produced by the generation of purchased energy (typically electricity) consumed by your company.
- Scope 3 emissions are indirect GHG emissions that exist both upstream and downstream within your supply and value chains. They are a consequence of your company's activities, but produced from sources that you don’t own or control.
What does this mean for Canadian organizations?
As climate-related reporting is ingrained in corporate Canada, preparers will need to draw on the sustainability team's knowledge and expertise from finance and risk colleagues to guide the structure and location of any sustainability and climate-related disclosures.
Canadian regulators endorse and consistently advocate for the adoption of TCFD recommendations within disclosure frameworks. A collaborative approach is the best way to ensure climate reporting meets the required standards.
How BDO can help
Our national Sustainability team can support your organization to:
- Determine the scope and applicability of the TCFD recommendations.
- Conduct gap analyses between your current climate-related processes, controls, and disclosures against the TCFD expectations and requirements.
- Calculate Scope 1, 2, and 3 emissions.
- Draft and prepare TCFD reporting.
Understand how TCFD could impact your business and start your reporting journey.