What is the Task Force on Climate-related Financial Disclosures (TCFD)? And why is it important for investors?

November 2, 2021 | by
Emily Steinbarth
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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

UNI-11934

The Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board in 2015, in recognition that without reliable climate-related financial information, markets cannot accurately price climate risks and opportunities. In the lead-up to the 2021 United Nations Climate Change Conference (COP26), the TCFD released several important updates. Before jumping into some of the new guidance, let’s first take a step back to recap exactly what the TCFD is, and why the TCFD’s recommendations are becoming an increasingly important reference for investors and financial regulators.

The recommendations

A core output of the task force are the recommendations—a set of 11 recommended disclosures spanning four thematic areas: governance, strategy, risk management, and metrics and targets. The recommendations were released in June 2017 and are designed to be adoptable by companies of any sector and size.

Click image to enlarge

Listed companies vs private equity companies

Source: TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (2017).

Investors leverage the TCFD recommendations in at least two ways. First, it is a disclosure framework for the companies they invest in. Where companies are disclosing, the information can be an input to the investment process or, if disclosure is lacking, the TCFD provides a reference point during engagement. The second use case is that the TCFD recommendation can also be a framework for the investor’s own disclosures. This is where we are seeing increased interest from asset owners, who face mounting requirements for mandatory TCFD-aligned reporting.

Growing regulatory pressure

An increasing number of regulators are introducing, or considering introducing, mandatory TCFD-aligned disclosures for financial institutions. This growing regulatory pressure has spurred considerable interest from investors to better understand the recommendations and what they need to do to be ready.

Here is just a snapshot of related regulatory developments:

Click image to enlarge

Listed companies vs private equity companies

What’s changed: Key takeaways from the TCFD updates

Just as investors had started to absorb the implications of upcoming reporting requirements, a new set of TCFD documents have been released. What, exactly, has changed? First, it is important to note that it is the TCFD documents themselves that have been updated, which is not the same as the regulations that are generally aligned to TCFD. Below, we assess a few of the key takeaways from the TCFD updates.

Snapshot of what’s changed:

  • The 11 recommended disclosures (see figure above) remain intact and unchanged
  • The annex (or implementing guidance) document has been superseded. This is the detailed guidance that sits underneath the recommendations, and includes sector-specific recommendations, including for asset owners
  • New guidance document on metrics, targets and transition plans

A few key elements of the new implementation guidance (the annex):

  • In recognition of the push for more disclosure around transition plans, transition plan disclosures were added to facilitate measuring progress along the way to 2050
  • Added disclosure on asset alignment to a well-below 2oC scenario
  • Disclosure of owned greenhouse gas emissions for asset owners
  • Added new appendix on cross-industry, climate-related metric categories

The bottom line

Climate risk is a new and complex beast for pension plans to grapple with, a task made even more difficult by a lack of consensus around methodologies and robust data. At Russell Investments, we have conducted our own extensive due diligence of climate risk experts over the past year and a half to understand what climate risk modeling capabilities are available today. After extensive review, we have selected Planetrics as our climate risk partner. While there are undoubtedly major challenges for investors in incorporating this area into their investment process, we look forward to the opportunity to assist our clients in meeting the challenges of this new frontier in investing.


Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

UNI-11934