Column 2024.11.05

What is TCFD? Easy-to-understand explanation! Disclosure items and scenario analysis

table of contents

Currently, companies and investors are placing importance on being aware of the risks and opportunities of climate change. The TCFD has recommended that companies properly disclose climate-related information related to greenhouse gas emissions.
Here we will provide a detailed Contents of the specific initiatives and recommendations made by the TCFD .

What is TCFD?

TCFD(Task Force on Climate-related Financial Disclosure) is an abbreviation for the Task Force on Climate-related Financial Disclosure. It was established by the Financial Stability Board (FSB) in 2015 at the request of the G20, and published its recommendations on voluntary information disclosure (the TCFD Report) in 2017.

Background of the establishment

Companies are now being asked to implement decarbonization and disclose climate-related information in order to achieve carbon neutrality by 2050. Furthermore, issues such as climate change and global warming not only affect the environment but also the financial situation of companies, and are said to pose a threat to the stability of the financial system through three routes: physical risk, liability risk, and transition risk.

As companies make efforts to decarbonize and combat climate change, the amount of ESG investment is also on the rise, attracting more attention from investors.

Objective of TCFD

The Ministry of the Environment states that "The TCFD calls on all companies to (1) use climate scenarios such as the 2°C target, (2) assess their own climate-related risks and opportunities, (3) reflect these in their business strategies and risk management, and (4) understand and disclose the financial impacts." *1

In this way, the TCFD aims to enable investors and others to make appropriate investment decisions by disclosing climate change initiatives and their financial impact.

Benefits of supporting TCFD

While there are many benefits to supporting and disclosing information about the TCFD, there are also disadvantages.

For example, one cost is the burden on resources. Measures that take climate change risks into account must be constantly considered, which creates a new workload on top of daily operations. Furthermore, analyzing risks and opportunities using climate scenarios requires advanced expertise, so it may be necessary to seek the support of external consultants or secure specialized personnel.

How to support TCFD

Supporting the TCFD means that a company or organization declares its support for the TCFD's framework and pledges to transparently disclose financial information related to climate change. Companies must first understand the TCFD's recommendations and guidelines and assess how they can be applied to their own operations. They then establish an internal system and processes for assessing, managing, and disclosing climate-related risks and opportunities based on four disclosure areas: governance, strategy, risk management, and metrics and targets.

Next, companies must complete the endorsement process through the TCFD's official website and submit basic information and a statement of support. After endorsing the guidelines, they are expected to clearly state on their websites and in official documents that they are TCFD supporters and actively publicize their disclosure efforts. Financial Institution and investors also use the TCFD's recommendations in their investment decisions, and regulatory authorities and industry groups are also promoting its widespread adoption.

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Disclosure items

The TCFD classifies the information that companies should disclose into the following four main categories: *2

governance

Disclose the company's governance system regarding climate-related risks and opportunities. Show how the board of directors and management are creating a system to incorporate risks and opportunities into business strategies.

strategy

Companies should disclose how they are assessing the impact of climate change risks and opportunities on their business, strategy and finances, and how they are responding to them. They are also encouraged to use long-term scenario analysis to show how climate change could affect their business in the future.

Risk Management

Disclose the process for identifying, assessing, and managing risks related to climate change. Information is required on how the process for identifying, assessing, and managing climate-related risks is integrated into the organization's overall risk management.

Indicators and goals

Disclose the metrics and targets used to manage climate change risks and opportunities, including Settings GHG emission amount targets and reporting progress.

Importance and benefits of TCFD

Disclosing information based on the TCFD brings various benefits to companies, including the following:

Compliant with global disclosure frameworks

CDPs, which sends questionnaires at the request of institutional investors and companies that make ESG investments and evaluates companies' environmental responses, asks questions that comply with the TCFD recommendations, and the TNFD, an information disclosure framework for risks and opportunities related to natural capital and biodiversity, references the TCFD framework. Many disclosure frameworks and evaluation organizations are aligning with the TCFD recommendations. The TCFD recommendations are becoming the standard for information disclosure frameworks and evaluations around the world, and supporting the TCFD recommendations will enable companies to promote information disclosure worldwide.

Earning investor trust

By disclosing information based on the TCFD, companies can demonstrate that they are properly assessing and managing climate-related risks. In recent years, ESG investment, an investment method that takes into account Environment, Social, and governance perspectives, has been expanding, which will increase the credibility of investment decisions and promote ESG investment.

Gaining social trust

By demonstrating your ability to respond to climate change and the environment, you can differentiate yourself from your competitors and secure a competitive advantage in the market. Sustainable management also makes it easier to gain support from consumers and business partners. Disclosing information based on TCFD can also lead to improving a company's brand image.

What is TCFD scenario analysis?

"Scenario analysis" is essential when discussing TCFD. This is a method of envisioning multiple future scenarios and considering appropriate countermeasures for each in order to prepare for risks such as climate change and the resulting deterioration of the business environment. Preparing specific scenarios in advance enables smooth response in the event of an emergency and allows for the long-term, highly uncertain risk of climate change to be incorporated into management strategies. This is especially important for industries that are susceptible to the effects of climate change.

TCFD scenario analysis aims not only to understand climate risks, but also to clarify how they will affect a company's strategy, risk management, and finances. The Ministry of the Environment recommends the following process for scenario analysis:

Obtain the understanding of management and Settings the analysis structure, target, and time frame
Identify the risks and opportunities that may arise from climate change and assess their financial impact and importance.
Define multiple scenarios based on factors such as the extent of increase in average temperature
Analyze the business and financial impact of each scenario
Consider countermeasures based on the results
Finally, the analysis results and countermeasures will be documented and disclosed.

Status of TCFD initiatives in Japan

In Japan, many companies support the TCFD recommendations and are working to disclose climate-related information. As of January 2022, 687 companies have endorsed the TCFD, and this number is on the rise. Furthermore, the Taskforce on Nature-related Financial Disclosures (TNFD) is promoting the disclosure of risks and opportunities related not only to climate change but also to the natural environment in general, making it an important initiative for Japanese companies. These efforts are contributing to improving corporate sustainability and investor decision-making.

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<Reference source>

*1: Task Force on Climate-related Financial Disclosures (TCFD) overview Document, Ministry of the Environment, 2021
https://www.env.go.jp/press/02_TCFDgaiyousiryou.pdf

*2: TCFD stands for TCFD Consortium
https://tcfd-consortium.jp/about