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With TCFD reporting being adopted in the UK, US, and now Canada, it looks set to be the primary form of climate disclosures globally as more governments leverage reporting as a means to achieve their carbon plans. While all of this is ongoing, companies are left to figure out what requirements they must meet in order to comply with these new regulations. Climate reporting and the TCFD are recent developments in corporate reporting that have specific considerations. The following advice may be useful to new TCFD adopters.
The first step is to understand the four pillars that are fundamental to the TCFD recommendations. These four pillars underlie the framework of the TCFD and a report can only be said to align with the TCFD if they are addressed.
1. The company’s governance around climate-related risks and opportunities - Reporting organisations should explain senior leadership’s role in climate-related risks and opportunities, including who has oversight and management responsibility.
2. The actual and potential impacts of climate-related risks and opportunities on the business, strategy, and financial planning - Identified risks and opportunities should be over a short-, medium-, and long-term time horizon. resilience of the company’s strategy in various climate scenarios including a 2C or lower scenario.
3. How the company identifies, assesses, and manages climate-related risks - emphasis on the processes used to identify, assess, and manage risks including how climate-related risks fit into the company’s risk management framework.
4. The metrics and targets used to assess and manage relevant climate-related risks and opportunities, including Scope 1 and 2 greenhouse gas emissions at the minimum, and Scope 3 where material.
Additional guidance is provided in sectoral supplemental guidance for financial and non-financial groups, the latter being energy; materials and buildings; transportation; agriculture, food, and forest products.
Climate-related risks and opportunities are central to the TCFD. Companies will benefit from integrating climate considerations into the existing enterprise risk management (ERM) framework, and disclosures should include the processes by which climate-related risks and opportunities are considered, identified, and assessed. Keep in mind that existing ERM could be limiting in weighing the different climate scenarios that carry an element of uncertainty, and hence adjustments may need to be made.
Based on the four pillars and climate-related risks identified for the business, define your metrics and establish baselines. For starters, understand the parameters of Scope 1 (own energy source such as generators) and Scope 2 emissions (purchased electricity) and focus on collecting data from those sources. There are a plethora of tools available to calculate emissions. Life Cycle Assessment is useful for whole-life carbon footprinting, to calculate the end-to-end emissions of product.
For companies just starting out on TCFD reporting, we would recommend a gradual progression to Scope 3 emissions and finally scenario analysis.
It is worth noting that alignment with any reporting framework is a process and it is perfectly alright to start with what you have and work your way to stronger alignment. The TCFD does not have hard requirements per se. The recommendations are simply recommendations meant to guide users to better quality climate disclosures.