A Guide to the Task Force on Climate-related Financial Disclosures (TCFD) for the Aviation Sector

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In an era where climate change poses unprecedented challenges to the global economy, understanding and managing climate-related risks has become imperative for businesses and investors alike. The Task Force on Climate-related Financial Disclosures (TCFD) has emerged as a powerful tool to address these pressing concerns and foster a more sustainable and resilient financial landscape. From 2024 the TCFD is passing on its monitoring responsibilities to the International Sustainability Standards Board (ISSB) and the ISSB welcomes this opportunity to build on the TCFD’s work.

This guide explores:

Embracing the TCFD represents a strategic opportunity for companies to strengthen their sustainability commitments, foster transparency, and build trust with stakeholders.

What is TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB), an international body founded to promote international financial stability, in response to the growing recognition of climate change as a significant financial risk.

TCFD recommendations provides a framework to businesses, investors, policymakers, and auditors on how to identify, assess, and disclose climate-related financial risks and opportunities. By providing consistent and comparable information, the TCFD recommendations aim to improve the understanding of climate-related risks and opportunities. The TCFD recommendations covers reporting disclosures across four key areas: governance, strategy, risk management, and metrics and targets.

The ISSB who will take over the monitoring of TCFD in 2024, incorporated the TCFD’s recommendations into its International Financial Reporting Standards (IFRS S1 and IFRS S2). To ensure that sustainability-related disclosures align with global standards, enhance reporting quality, improve decision-making, and establish a global baseline for disclosures.

How to report under TCFD?

TCFD-aligned reports should be published together with a company’s mainstream financial filings. They should be issued within four months of the company’s financial year-end.

TCFD-aligned report will include comprehensive disclosures related to the four key pillars (Governance, Strategy, Risk Management, and Metrics and Targets)

  1. Governance

Recommended disclosures:

  • Describe the board’s oversight of climate-related risks and opportunities.
  • Describe management’s role in assessing and managing climate-related risks and opportunities.
  1. Strategy

Recommended disclosures:

  • Describe the climate-related risks and opportunities identified over the short, medium, and long term.
  • Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
  • Describe the resilience of the organization’s strategy, considering different climate-related scenarios.
  1. Risk Management

Recommended disclosures:

  • Describe the organization’s processes for identifying and assessing climate-related risks.
  • Describe the organization’s processes for managing climate-related risks.
  • Describe how climate-related risk processes are integrated into the organization’s overall risk management.
  1. Metrics and Targets

Recommended disclosures:

  • Disclose the metrics used to assess climate-related risks and opportunities in line with the organization’s strategy and risk management process.
  • Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks.
  • Describe the targets used to manage climate-related risks and opportunities and performance against targets.

To achieve high-quality disclosures that clearly demonstrate the impact of climate change on organizations, TCFD recommends using the seven principles for effective disclosure:

TCFD principles for effective disclosure:

  • Disclosure should represent relevant information
  • Disclosure should be specific and complete
  • Disclosure should be clear, balanced, and understandable
  • Disclosure should be consistent over time
  • Disclosure should be comparable among companies within a sector, industry, or portfolio
  • Disclosure should be reliable, verifiable, and objective
  • Disclosure should be provided on a timely basis

When will TCFD be applied?

The TCFD framework has been available since 2017, and companies are encouraged to adopt it as soon as possible. Some companies have already adopted the TCFD recommendations voluntarily, while others are required to disclose climate-related risks and opportunities under the reporting requirements of their respective jurisdictions.

Is TCFD Mandatory?

It is important to note that the TCFD recommendations are voluntary. However, they have gained significant support and have been integrated into the regulatory frameworks of many jurisdiction.

For example:

  • Canada: In its 2022 budget, the Canadian government committed to mandating companies to report climate-related financial risks. As a result, we’ve seen several regulatory developments in Canada that draw on the TCFD framework.
  • United Kingdom (UK): Before COP26 summit (2021), the UK stated it would be the first G20 country to mandate TCFD. As a result, 1,300 of the UK’s largest private companies are required to disclose climate-related data in line with the TCFD recommendations
  • New Zealand: New Zealand was the first country to introduce mandatory TCFD-aligned climate-related disclosure in 2021. The disclosures are mandatory for financial firms, including banks, insurers, and investment managers, with total assets of more than NZD 1 billion.
  • Switzerland: Switzerland is expected to introduce mandatory TCFD requirements in the near future

Thus, it is only a matter of time before businesses are mandated to act on the TCFD’s recommendations.

How does TCFD impact the aviation sector?

TCFD significantly impacts the aviation sector, requiring companies to assess climate-related risks, seize sustainable opportunities, and boost investor confidence. By adopting TCFD recommendations, businesses can enhance transparency, inform stakeholders, and build long-term resilience.

The benefits of TCFD are more informed decision-making, attracting sustainable capital, and compliance with emerging regulations.

On the other hand, not adopting TCFD can lead to missed opportunities, underestimated risks, financial losses, reduced investor confidence, and limited access to sustainable capital. Embracing TCFD provides a proactive approach to climate challenges, ensuring a sustainable and competitive future for aviation companies.

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How can companies prepare for reporting on TFCD recommendations?

Companies can prepare for TFCD recommendations by following these steps:

  1. Gap analysis and benchmarking: Assess the existing level of climate-related disclosures and compare them to TCFD recommendations to identify gaps.
  2. Stakeholder engagement: Engage with stakeholders, including investors, customers, and regulators, to understand their expectations regarding climate-related disclosures.
  3. Climate risk assessment: Conduct a comprehensive assessment of climate-related risks and opportunities specific to the organization’s operations and value chain.
  4. TCFD scenario analysis: Develop scenario-based models to understand the potential financial impacts of climate change on the company’s business.
  5. Training and upskilling: Provide training to the board and executive committee members to enhance their understanding of climate-related risks and the importance of TCFD disclosures.
  6. Monitoring and governance: Implement a governance structure to oversee climate-related risks and ensure ongoing monitoring and reporting of relevant metrics and targets.
  7. Roadmap implementation: Develop a roadmap for TCFD adoption and implementation, outlining clear milestones and timelines for integrating climate-related disclosures into the company’s reporting framework.

By proactively addressing these challenges and preparing for TCFD, companies can demonstrate their commitment to managing climate-related risks.

Conclusion:

In conclusion, the Task Force on Climate-related Financial Disclosures (TCFD) holds significant importance for the aviation sector in the face of climate change challenges. By adhering to TCFD’s standardized approach to climate-related reporting, aviation companies can effectively identify, manage, and disclose climate risks and opportunities. This empowers them to make informed decisions, enhance transparency, and build long-term resilience, ultimately fostering trust with stakeholders and attracting sustainable investments.

While TCFD adoption is currently voluntary in various jurisdictions, the growing global momentum towards mandatory reporting indicates that aviation businesses will likely need to embrace TCFD’s guidelines in the near future. The International Sustainability Standards Board (ISSB), which will take over the monitoring of TCFD in 2024, has incorporated the TCFD’s recommendations into its International Financial Reporting Standards (IFRS S1 and IFRS S2). This ensures that sustainability-related disclosures align with global standards, enhance reporting quality, improve decision-making, and establish a global baseline for disclosures.

Early preparation for TCFD reporting is crucial, involving comprehensive climate risk assessments, stakeholder engagement, and robust governance structures to ensure a sustainable and competitive future. This proactive approach will help ensure a sustainable and competitive future.

Frequently Asked Questions

What does TCFD stand for?

TCFD stands for the Task Force on Climate-related Financial Disclosures.

Why was TCFD set up?

TCFD was set up to address the growing recognition of climate change as a significant financial risk. It was established by the Financial Stability Board (FSB) to improve and increase reporting on climate-related financial information, enabling companies to provide better information for informed capital allocations.

How many members are on the TCFD task force?

The Task Force on Climate-related Financial Disclosures (TCFD) consists of 31 members from across the G20, representing both preparers and users of financial disclosures. The TCFD is chaired by Michael R. Bloomberg, founder of Bloomberg L.P. These members collaborate to develop recommendations for disclosing climate-related financial information, aiming to enhance transparency and decision-making regarding climate-related risks and opportunities.

What are the 11 TCFD recommendations?

The TCFD’s 11 disclosure recommendations are the disclosures listed under the four key pillars of: governance, strategy, risk management, and metrics and targets.

What are climate related risks according to TCFD?

Climate-related Risk: TCFD defines climate-related risks as the potential negative impacts on organizations arising from climate change and the transition to a lower-carbon economy. These risks can be categorized into two major categories:

  1. Transition Risks: Risks related to the transition to a lower-carbon economy, such as policy and legal changes, technology advancements, and market shifts that may impact the value of assets, liabilities, and business models
  2. Physical Risks: Risks associated with the physical impacts of climate change, including extreme weather events, sea-level rise, and changes in temperature and precipitation patterns, which can affect infrastructure, supply chains, and operations

What are climate related opportunity according to TCFD?

Climate-related Opportunity: TCFD defines climate-related opportunities as the potential positive impacts on organizations arising from climate change and the transition to a lower-carbon economy.
These opportunities can include:

  • Revenue Opportunities: Opportunities to develop and offer climate-friendly products and services, enter new markets, and meet evolving customer demands for sustainable solutions
  • Cost Savings: Opportunities to reduce costs through energy efficiency measures, resource optimization, and operational improvements that align with climate goals
  • Innovation and Resilience: Opportunities to innovate and develop new technologies, business models, and strategies that address climate challenges and enhance resilience

What is the relationship between ISSB and TCFD?

The International Sustainability Standards Board (ISSB) is an organization that has taken on the responsibility of monitoring companies’ progress on climate-related disclosures from the TCFD starting in 2024. The ISSB has developed sustainability standards that align closely with the TCFD recommendations and incorporate elements from other voluntary sustainability reporting frameworks. The ISSB’s standards aim to create consistency, comparability, and reliability across climate disclosure, enabling investors to make more informed financial decisions.

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