What is TCFD?
An explanation of the Task Force on Climate-related Financial Disclosures — what it requires, who it applies to, and what SMEs need to know as it becomes embedded in mainstream reporting.
Key Takeaways
- TCFD is a framework for disclosing how climate change affects a business's financial position, risks and opportunities.
- It is now mandatory for large UK companies, pension funds and listed businesses.
- SMEs are not directly required to comply but will be asked to provide climate data by large customers and lenders who are.
What TCFD is and why it exists
The Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015 by the Financial Stability Board to develop a framework for consistent climate-related financial disclosures. Its recommendations, published in 2017, ask companies to disclose how climate change creates financial risks and opportunities across four areas: governance (how the board oversees climate risk), strategy (how climate scenarios affect the business model), risk management (how climate risks are identified and managed), and metrics and targets (how performance is measured). The rationale is that investors and lenders cannot properly price climate risk if companies do not disclose it.
Who must comply
In the UK, TCFD-aligned disclosure became mandatory in phases from 2022. It now applies to UK-listed companies, large private companies (over 500 employees and £500m turnover), banks, insurers and regulated asset managers, and large pension schemes. The IFRS Sustainability Disclosure Standards (ISSB), which incorporate TCFD's framework, are being adopted globally and will eventually extend to more companies. Many businesses in TCFD's scope are required to disclose their Scope 3 emissions, which means asking their suppliers — SMEs — for carbon data. TCFD compliance by your large customers creates indirect reporting requirements for you.
What SMEs need to know
SMEs are not directly required to produce TCFD reports, but they are affected in two ways. First, if you supply to large companies in TCFD's scope, you will receive requests for your carbon data, energy consumption figures and climate risk information to feed into their Scope 3 and risk management disclosures. Second, if you seek bank lending or investment from institutions with TCFD obligations, they must assess the climate risk profile of their portfolio — including their exposure to your business. Having a basic carbon footprint, an energy reduction plan and an articulated view of how climate change affects your business operations positions you well for both conversations.