For the sixth year in a row, the World Economic Forum identified that environmental risks, including failure to mitigate climate change, extreme weather, and natural disasters, as the top global risks for the short (2 years) and long-term (10 years).
The private sector has a fundamental role to play, because it is exposed to different physical and transition risks as a result of climate change, and therefore it must embrace the climate agenda by strengthening its sustainability and climate practices and disclosure.
There is growing investor interest in companies engaged in sustainable business activities. Investors want to understand how companies tackle issues such as climate change, gender diversity, or supply chain risks that may have a material impact on their business. Standard-setters are developing new disclosure standards for climate-related financial information.
Regulators and stock exchanges are implementing climate disclosure requirements and listing rules, as well as developing guidance and training to improve corporate disclosure in this area.
Reporting of climate-related risks and opportunities not only provides investors with the data they require, but it also offers listed and non-listed companies with external and internal benefits. These may include better risk management, lower cost of capital and lower energy costs. These may include better risk management, lower cost of capital and lower energy costs.
The benefits of climate-related financial disclosure for companies
To prepare for disclosure on climate-related financial risks and opportunities, a business must assess its governance, processes and performance. This exercise, alongside with the benefits of disclosure itself, offer a number of internal and external benefits:
This section describes the disclosure of climate-related financial information of the Governance pillar of the Task Force for Climate-related Financial Information (TCFD).
Task Force for Climate-Related Financial Disclosure
The recommendations of the Task Force for Climate-Related Financial Disclosure (TCFD) were launched in 2017“ to help identify the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities”. The TCFD Recommendations comprise of four core elements:
- Risk Management
- Metrics and Targets
The recommendations were intended for voluntary implementation, but they are increasingly becoming mandatory in markets such as Brazil, Japan, Singapore, Switzerland, the United Kingdom, and others. More than 3,800 companies provided TCFD reports as of October 2022.
The climate-related and general sustainability-related disclosure standard of the International Sustainability Standards Board (ISSB) marked the culmination of the TCFD and the ISSB has now taken over responsibility for monitoring progress of companies’ climate-related disclosures from the TCFD.
International Sustainability Standards Board
The International Sustainability Standards Board (ISSB) is is an independent, private-sector body that develops —in the public interest— standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.
International Financial Reporting Standard (IFRS) S1 General Requirements for Disclosure of Sustainability-Related Financial Information provide the conceptual foundations and core content for reporting all sustainability-related financial information, while IFRS S2 Climate-Related Disclosures provides climate specific requirements within the foundations of IFRS S1. The standards are to be applied as of January 1, 2024. The ISSB's standards focus on sustainability-relayed risks and opportunities that are material for investors and are largely build on the TCFD Recommendations and as such, implementing the IFRS Sustainability Disclosure Standards also fulfills means that a company has implemented the TCFD Recommendations.
A few major jurisdictions are expected to adopt the standards and that that will gradually replace the TCFD reporting. Until then, the ISSB encourages companies to apply the IFRS Sustainability Disclosure Standards on a voluntary basis.
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
IFRS S2 Climate-related Disclosures.
For additional resources on the IFRS Sustainability Disclosure Standards, visit the IFRS Sustainability Knowledge Hub
European Sustainability Reporting Standards
On January 5, 2023, the European Union Corporate Sustainability Reporting Directive (CSRD) entered into force, affecting more than 50,000 companies in Europe and more than 10,000 outside of Europe. Companies subject to the CSRD must report according to the European Sustainability Reporting Standards (ESRS), including two cross-cutting standards on the general principles and requirements for reporting and detailed requirements on 10 topics across environment (five), social (four), and governance (one) to be applied to companies as of January 1, 2024.
US Securities and Exchange Commission Climate-Related Disclosures
In March 2022, the US Securities and Exchange Commission (US SEC) proposed climate-related disclosure requirements that would require public companies to provide climate-related financial data and greenhouse gas emissions insights in public disclosure filings. As part of the draft rule, companies have to disclose emissions for which they are directly responsible (Scope 1 and 2 emissions) and emissions from their supply chains and products (Scope 3 emissions). This aligns the US SEC approach more closely with the ISSB. Additionally, in May 2022, as part of the US SEC’s investor rule, US SEC proposed two new rules aiming to decrease unfounded claims by funds about their environmental, social, and governance (ESG) credentials and to create more standardization regarding ESG disclosures by certain investment advisors and investment companies.
US SEC Press Release regarding the draft Climate-Related Disclosure by the US SEC
CDP, created in 2000, is a nonprofit organization that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. More than 20,000 companies worldwide complete CDP’s questionnaire on climate, water, and forests. The CDP questionnaire is aligned with TCFD. CDP will incorporate ISSB climate-related disclosure standard into global environmental disclosure platform.
Comparing US SEC, ESRS, and ISSB Climate Disclosures
Comparison studies used for the table above:
- The Evolution of Sustainability Disclosure: Comparing the 2022 SEC, ESRS, and ISSB Proposals
- Draft European Sustainability Reporting Standards, Appendix V: IFRS Sustainability Standards and ESRS Reconciliation Table (ESRS E1 versus IFRS S2, pages 54–73)
- Comparison ISSB IFRS S2 Climate-Related Disclosures with the TCFD Recommendations;
- GRI and the European Sustainability Reporting Standards (ESRS): Q&A
TCFD Recommendations are structured around four core elements or pillars: governance, strategy, risk management, and metrics and targets. The recommendations are not designed to be considered linearly because they are interconnected and should be seen together as part of a holistic picture. For example, it would be appropriate to see risk management disclosures and some governance disclosures together to demonstrate how risks are governed within an organization. Furthermore, this information should be connected to the financial statements of the company. For example, expenditure on research & development to manage a risk, or take advantage of an opportunity.
The four pillars of Governance, Strategy, Risk Management, and Metrics and Targets are the basis of the IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards.
The IFRS Foundation’s International Sustainability Standards Board (ISSB) takes over responsibility for monitoring progress of companies’ climate-related disclosures from the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) as of January 2024.
In practice this means that companies applying ISSB IFRS S1 and IFRS S2 will meet the TCFD recommendations as the recommendations are fully incorporated into the IFRS Sustainability Disclosure Standards. The ISSB Standards requirements however go beyond TCFD recommendations. IFRS S2 is provides more detailed requirements (see a comparison here), while IFRS S1 provides a basis to go beyond reporting on climate and report on all sustainability-related financial information.
According to the ISSB’s announcement, companies can continue to use the TCFD recommendations should they choose to do so, and some companies may still be required to use the TCFD recommendations.
The recommendations are intended to be used to integrate financial disclosures on to climate risks and opportunities into a company’s mainstream financial filings or annual reports. They were developed with high-risk sectors and financial sector companies in mind, with advanced guidance for these sectors, but they can be and should be used by all sectors.
Eleven recommendations underpin the four pillars (see the following table).
TCFD provides a phased approach (Figure B6, p. 33) for the disclosure of the 11 recommendations. Companies do not need to start with disclosure of all recommendations. Phase 1 recommends disclosures related to the governance and risk management pillars.
- For additional resources on TCFD, visit the TCFD Knowledge Hub and the TCFD publications web page.
- For more resources for banks, visit the United Nations Environment Programme Finance Initiative TCFD Banking Pilot Projects web page. See company reports that include TCFD-related disclosures on the TCFD Report Database web page.
- Watch recordings of the United Nations Sustainable Stock Exchanges Initiative, International Finance Corporation, and CDP Worldwide training on TCFD, “TCFD—Climate Disclosure Training.”
- For guidance on climate disclosure, see the UN Sustainable Stock Exchanges Initiative’s Model Guidance on Climate Disclosure: A Template for Stock Exchanges to Guide Issuers on TCFD Implementation.
The ISSB and TCFD’s governance pillars both recommends that companies disclose the organization’s governance regarding climate-related risks and opportunities.
What do investors want to know?
- Insight into the governance and risk management context in which financial and operating results are achieved.
- Understand if climate-related issues receive appropriate board and management attention and are considered in decision-making.
Disclose the role of the board of the organisation in overseeing climate-related issues.
Consider including a discussion of:
- How and how often the board or board committees (such as audit, risk, or other committees) are informed about climate-related issues;
- Whether climate-related issues are considered when reviewing strategy, risk management policies, expenditure, and so on;
- How the board conducts monitoring and oversight of progress against targets for addressing climate-related issues.
Disclosing the role of management in assessing and managing climate-related issues.
Consider including a discussion of:
- Whether your organisation has assigned climate-related responsibilities to management-level positions or committees;
- Description of the associated organizational structures;
- How the governance body(s)’ or individual(s)’ responsibilities for climate-related risks and opportunities are reflected in the terms of reference;
- Mandates, role descriptions and other related policies applicable to relevant body(s) or individual(s);
- Processes by which management is informed about climate-related issues;
- How management monitors climate-related issues;
Top Tips for Getting Started with Disclosure
- Leverage existing processes and disclosures;
- Connect information;
- Cross-reference within and across reports (annual, sustainability, TCFD);
- Provide clear, concise, and proportional information;
- Clearly define time horizons (short-, medium-, and long-term);
- Start with qualitative reporting, if no data are available;
- Create an internal road map for climate-related disclosures;
- Coordinate with different functions and teams that address climate change.
Creating an Internal Road Map for Climate-Related Disclosures
Where to disclose climate-related financial information?
- Disclosure should be provided in the mainstream annual report;
- Intention was not for separate TCFD statements or additional sustainability reporting;
- Integrated into reporting and connected to financial information;
- Subject to the same governance processes and sign-off as the financial report;
- Accessible to investors as primary users.
Climate change is a significant and, in many cases, existential risk for companies. They are facing the unprecedented physical impacts of climate change, which their boards must address, such as extreme weather events disrupting value chains and affecting business infrastructure.
Using the IFC Corporate Governance Methodology, IFC’s climate governance approach guidance and recommended practices were developed to assist boards in appropriately identifying and overseeing climate-related risks and opportunities.
IFC’s main tool in assessing climate governance is the IFC Climate Governance Progression Matrix to evaluate a company’s climate governance practices in each of the six areas of governance, with four levels of achievement (from basic to international best practice):
- Commitment to Environmental, Social, and Corporate Governance: to create a climate mindset and demonstrate leadership;
- Structure and Functioning of the Board of Directors: to create active board engagement on climate change;
- Control Environment: to integrate climate change issues into key internal control systems, the internal audit function, risk governance, and compliance;
- Disclosure and Transparency: to ensure disclosure of climate-related financial information;
- Treatment of Minority Shareholders: to ensure equitable treatment of all stakeholders;
- Governance of Stakeholder Engagement: to involve those affected stakeholders.
In recent years, momentum and efforts have grown to develop globally harmonized sustainability reporting standards. These efforts resulted in the development of the IFRS Sustainability Disclosure Standards, a global baseline for sustainability disclosures and the European Sustainability Reporting Standards. Both disclosure standards have topic-specific standards for reporting of climate-related information: IFRS S2 Climate-Related Disclosures and ESRS E1 Climate Change. The Taskforce on Nature-related Financial Disclosures (TNFD) released in March 2023 the fourth version of its beta framework for the disclosure of nature-related information.
International Sustainability Standards Board
ISSB IFRRS S2 Climate-Related Disclosures includes disclosure on governance as one of the four pillars for climate-related financial disclosure (governance, strategy, risk management, and metrics and targets). The publication should be read in conjunction with ISSB IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information.
ISSB IFRS S2 Climate-Related Disclosures
5. The objective of climate-related financial disclosures on governance is to enable users of general purpose financial reports to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities.
6. To achieve this objective, an entity shall disclose information about:
(a) the governance body(s) (which can include a board, committee or equivalent body charged with governance) or individual(s) responsible for oversight of climate-related risks and opportunities. Specifically, the entity shall identify that body(s) or individual(s) and disclose information about:
(i) how responsibilities for climate-related risks and opportunities are reflected in the terms of reference, mandates, role descriptions and other related policies applicable to that body(s) or individual(s);
(ii) how the body(s) or individual(s) determines whether appropriate skills and competencies are available or will be developed to oversee strategies designed to respond to climate-related risks and opportunities;
(iii) how and how often the body(s) or individual(s) is informed about climate-related risks and opportunities;
(iv) how the body(s) or individual(s) takes into account climate-related risks and opportunities when overseeing the entity’s strategy, its decisions on major transactions and its risk management processes and related policies, including whether the body(s) or individual(s) has considered trade-offs associated with those risks and opportunities; and
(v) how the body(s) or individual(s) oversees the setting of targets related to climate-related risks and opportunities, and monitors progress towards those targets (see paragraphs 33–36), including whether and how related performance metrics are included in remuneration policies (see paragraph 29(g)).
(b) management’s role in the governance processes, controls and procedures used to monitor, manage and oversee climate-related risks and opportunities, including information about:
(i) whether the role is delegated to a specific management-level position or management-level committee and how oversight is exercised over that position or committee; and
(ii) whether management uses controls and procedures to support the oversight of climate-related risks and opportunities and, if so, how these controls and procedures are integrated with other internal functions.
7. In preparing disclosures to fulfil the requirements in paragraph 6, an entity shall avoid unnecessary duplication in accordance with IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) (see paragraph B42(b) of IFRS S1). For example, although an entity shall provide the information required by paragraph 6, if oversight of sustainability-related risks and opportunities is managed on an integrated basis, the entity would avoid duplication by providing integrated governance disclosures instead of separate disclosures for each sustainability-related risk and opportunity.
The European Sustainability Reporting Standards has topic-specific standards on climate change, which includes disclosure on governance as one of the four pillars for climate-related disclosure (Governance, Strategy, Impact, Risk and Opportunity Management, and Metrics and Targets). It should be implemented in conjunction with the general disclosures required in the cross-cutting ESRS 2 General Disclosures.
European Sustainability Reporting Standards, ESRS E1 – Climate Change
ESRS 2 General disclosures
12. The requirements of this section should be read and applied in conjunction with the disclosures required by ESRS 2 on Chapter 2 Governance, Chapter 3 Strategy and Chapter 4 Impact, risk and opportunity management. The resulting disclosures shall be presented in the sustainability statement alongside the disclosures required by ESRS 2, except for ESRS 2 SBM-3 Material impacts, risks and opportunities and their interaction with strategy and business model, for which the undertaking may, in accordance with ESRS2 paragraph 46, present the disclosures alongside the other disclosures required in this topical standard.
Governance Disclosure requirement related to ESRS 2 GOV-3 Integration of sustainability-related performance in incentive schemes
13. The undertaking shall disclose whether and how climate-related considerations are factored into the remuneration of members of the administrative, management and supervisory bodies, including if their performance has been assessed against the GHG emission reduction targets reported under Disclosure Requirement E1-4 and the percentage of the remuneration recognised in the current period that is linked to climate related considerations, with an explanation of what the climate considerations are.
Nature loss poses both risks and opportunities for business, now and in the future. More than half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature. The Taskforce on Nature-related Financial Disclosures (TNFD) was announced in July 2020 to develop and deliver a risk management and disclosure framework for organizations to report and act on evolving nature-related risks, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. In September 2023, TNFD launched the final Recommendations of the Taskforce on Nature-related Financial Disclosures , aligned with TCFD’s four-pillar structure.