Reporting climate

change risk
A step-by-step guide to implementing
the Financial Stability Board Task
Force Recommendations for disclosing
climate change risk
Contents
The Financial Stability Board Task Force Recommendations 1

Overview of the Recommendations 4

Overview of the reports 5

Key highlights of the Task Force reports 6

Why organizations should act now 10

Benefits of adopting the Recommendations 11

Steps to implement the Recommendations 12

EY contacts 13
The Financial
Globally, investors and shareholders have raised
concerns about the lack of forward-looking
assessments of climate related issues, including

Stability Board information on how vulnerable organizations may

be to climate risks and advice on how they could

Task Force
mitigate these vulnerabilities. For organizations, the
absence of an internationally recognized framework
for disclosure prevents them from deciding what

Recommendations information is reported and how it is presented.

In response, the FSB created the industry-led Task

Force in 2015 to establish a set of recommendations
The Task Force on Climate-related for consistent “disclosures that will help financial
market participants understand their climate risks.”
Financial Disclosures (also known Mark Carney, the Governor of the Bank of England
as the “Task Force” or “TCFD”) and founder of the Task Force, echoed this by warning
that the fight against climate change will likely be
was set up by the Financial
jeopardized unless the risks associated with climate
Stability Board (FSB) in 2015. change are priced into capital allocation. For this,
investors need the right information to respond to
In June 2017, a series these developments.
of recommendations The aim of the Recommendations is for financial
(Recommendations) was issued to and nonfinancial sectors to take into account
address gaps in the information climate-related issues and to disclose the financial
impact that climate risks have (or could have) on
disclosed on the financial impact their organization. The Recommendations address
of climate risk across the a number of major challenges identified by the
Task Force, including a lack of a coherent financial
investment chain. reporting framework, which makes it difficult for
investors, creditors and underwriters to use existing
disclosures in their financial decisions. These
stakeholders may want to know which companies
are most vulnerable to climate risk, which are best
prepared, and which are taking action.

Reporting climate change risk 1

With the release of the Recommendations and
associated sector-specific guidance in June 2017,
organizations have the opportunity to apply a more Key takeaways
rigorous and consistent approach to assessing and
disclosing the financial impact of climate risks in • The adoption of the Recommendations
their financial filings. All members of the Task Force is voluntary
have backed the disclosure recommendations. • Recommendations apply to the financial
A group of over 140 policymakers from around sector (e.g., banks, insurance companies,
the world signaled their support for the asset owners and asset managers)
Recommendations, calling on all stock markets
to ensure listed firms embrace the new guidance • Recommendations also apply to some
on climate risk disclosure. high-risk nonfinancial sectors (e.g., energy,
transportation, material and buildings,
This publication provides you with guidance to agriculture, food and forest products)
navigate the next steps towards managing your
• Climate risks include transition risks and
exposure to climate risks and addressing investors’
physical risks
and shareholders’ expectations.
• Scenario analysis should be applied
If you would like to continue the conversation, for assessing climate risks, including a
do not hesitate to get in touch. 2°C climate change scenario based on
short-term,medium-term and long-term
scenario definitions
• Qualitative and quantitative information
should be provided on an annual basis in
financial filings

2 Reporting climate change risk

Reporting climate change risk 3
Overview of the Governance
How climate risks can be integrated into the business

Recommendations Strategy
How climate risks can be incorporated into future
business decisions
The Recommendations are
structured around four themes Risk management
The processes used to identify, assess and manage
that reflect core elements of how climate-related risks
organizations operate — governance,
strategy, risk management, and Metrics
metrics and targets. The metrics and targets used to assess and manage
risks and opportunities

Each recommendation is supported by recommended

climate-related disclosures. The Task Force has issued
three reports:

1. F
 inal Report: Recommendations of the Task Force
on Climate-related Financial Disclosures1

2. A
 nnex: Implementing the Recommendations of the
TCFD2
G
 uidance for implementation of the
Recommendations for all sectors and sector-
specific guidance

3. Technical Supplement: The Use of Scenario

Analysis in Disclosure of Climate-related Risks and
Opportunities3

4 Reporting climate change risk

Overview of the
reports
Final Report: Recommendations of the Task
Force on Climate-related Financial Disclosures:
• Provides a description of the transition and
physical risks and opportunities resulting from
climate change
• Provides a description of the four themes
structuring the Recommendations and examples
of recommended disclosures
• Outlines the key issues considered by the Task
Force and the areas requiring further work

Annex: Implementing the Recommendations

of the TCFD:
• Provides suggestions of recommended disclosures
for all sectors across the four areas
• Provides suggestions of sector-specific
recommended disclosures for the financial sector
and certain nonfinancial sectors potentially most
affected by climate change

Technical Supplement: The Use of Scenario

Analysis in Disclosure of Climate-related Risks
and Opportunities:
• Provides guidance for applying scenario analysis
for climate risks assessment and disclosures
• Provides examples of resources, tools, parameters
and outputs
• Provides a description of different scenarios,
including a 2ºC scenario

Reporting climate change risk 5

Key highlights of Adoptable by all organizations
Because the transition to a low-carbon economy

the Task Force will affect most economic sectors and industries in
some way, the Task Force outlines Recommendations

reports
on climate-related financial disclosures, which it
describes as widely adoptable and applicable to
organizations across all sectors and jurisdictions.
The Task Force recommends all financial and
nonfinancial organizations with public debt or equity
(listed companies) implement its Recommendations,
and also encourages other organizations to
implement the Recommendations as well.

All organizations are recommended to provide

information on their Scope 1 and Scope 2 greenhouse
gas (GHG) emissions and, if appropriate, Scope 3 GHG
emissions and the related risks.

6 Reporting climate change risk

Scope 3 refers to the emissions associated with more thoroughly. The Recommendations promote
the upstream and downstream life cycle of a quantitative financial disclosures, particularly
product, process or service. Upstream activities disclosure of metrics about the financial impact
include operations that relate to the initial stages of that climate-related risks have or could have on an
producing a good or service (e.g., material sourcing, organization (e.g., asset impairments, impact on
material processing and supplier activities). cash flows from operations, net income and access
to capital).
Downstream activities include operations that relate
to processing the materials into a finished product
Designed to solicit decision useful,
and delivering it to the end user (e.g., transportation,
distribution and consumption).
forward-looking information on financial
impacts
Included in financial filings The Task Force emphasizes a greater need for
forward-looking analyses, highlighting climate
Climate-related financial disclosures should be
change scenario analysis as being important for
included in mainstream financial filings, and should be
organizations to incorporate into their strategic and
subject to appropriate internal governance processes,
financial planning. The report recommends scenario
similar to those used for existing public financial
analysis under different potential future states,
disclosures such as review by the chief financial
including a 2ºC scenario, in order to provide insights
officer and audit committee. Implementing the
into how business strategy deals with climate change,
Recommendations will likely require company
especially for organizations operating or investing in
directors to engage with climate-related issues
carbon-intensive areas.

Reporting climate change risk 7

 Scenario analysis may help provide better information
for investors to assess how companies have
Technical supplement aligned their technical business strategies with the
requirements of the Paris Agreement. As outlined
The use of scenario analysis in disclosure of in the technical supplement, when performing the
climate-related risks and opportunities. scenario analysis, organizations should ensure the
Given the importance of forward-looking following:
assessments of climate-related risk, a • That scenarios are appropriate and supporting
technical supplement is available to assist assumptions are reasonable
organizations in undertaking and using
climate-related scenario analysis, including: • That relevant information is provided to board
members and financial executives (e.g., chief
• Using scenario analysis financial officers, chief accounting officers
• Considerations for applying scenario and controllers), who should be involved in an
analysis organization’s evaluation of climate-related
risks and opportunities. This should also include
• Analytical choices involved in scenario
information on the efforts undertaken to manage
analysis
the risks and maximize the opportunities
• Types of climate-related scenarios
• That links are between scenario analyses performed
• Publicly available climate-related scenarios
to assess the potential impact of climate-related
from the International Energy Agency,
risks, opportunities and assumptions underlying
the Intergovernmental Panel on Climate
cash flow analyses used to assess assets (e.g.,
Change and others
goodwill, intangibles and fixed assets) impairments
Publicly available 2ºC scenarios suggested by
the report include: Strong focus on risks and opportunities related
• International Energy Agency, The 2°C
to transition to lower-carbon economy
Scenario (2DS) The Task Force emphasizes the importance of
• World Energy Outlook, 450 Scenario integrating the identification and management of
• Deep Decarbonization Pathways Project climate-related financial risk into existing risk
management frameworks.

The report outlines specific categories for

climate-related risks and climate-related opportunities
in order to enable consistent categorization, divided
into two major categories: risks related to the
transition to a lower-carbon economy and risks
related to the physical impacts of climate change
(please refer to the diagram opposite). Transition risks
include policy, legal, technology, reputational and
market changes to address mitigation and adaptation
requirements related to climate change.
Climate-related opportunities include resource
efficiency, energy source, products and services,
markets and resilience.

8 Reporting climate change risk

Disclosure of risk is recommended to be made for For those organizations that do not have publicly
each time horizon (short, medium, and long-term) traded debt or equity securities, including some
that could have a material financial impact on asset managers and asset owners, the
the organization. climate-related financial disclosures should follow
similar review and approval protocols currently used
Information quality controls by those organizations for similar communications.
In cases where recommended disclosure is not made,
Because the climate risks disclosures should be preparers should provide their rationale for omitting
included in mainstream financial reports or other the disclosure.
public documents, the Task Force recommends that
the governance processes should be similar to those Disclosures should be defined, collected, recorded
used for existing public financial disclosures and and analyzed in such a way that the information
would likely involve review by the chief financial reported is verifiable to ensure it is of high quality.
officer and audit committee as appropriate. For future-oriented information, this means
assumptions used can be traced back to their sources.

Climate-related risks, opportunities and financial impact

Transition risks Opportunities

Policy and legal Resource efficiency

Technology Energy source

Risks Opportunities
Market Products or services

Reputation Markets

Strategic planning Resilience

Physical risks Risk management

Acute

Chronic
Financial impact

Revenues Assets and liabilities

Income Cash flow Balance
statement statement sheet
Expenditures Capital and financing

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

Reporting climate change risk 9

 Why organizations
should act now
Will your business take a “wait and
see” approach or will it look to
benefit from the adoption of the
Recommendations?
Implementing the Recommendations may require
changes to governance and risk assessment
processes and may take several years for an
organization to be in a position to generate valuable
information for investors and shareholders to help
them make informed decisions. The earlier your
organization embarks on this journey the better,
as it provides a platform to help educate directors
and management about the climate risks and helps
leadership to engage with investors and shareholders
on the impacts and opportunities for your
organization.

10 Reporting climate change risk

Benefits of Risk management
• Climate risks (transition risks and physical

adopting the
risks) are embedded in an organization’s risk
management process and risk register

Recommendations Familiarization for scenario analysis

• Improved capability in quantitative modeling
and data analytics
As well as satisfying investors’ • Greater rigor and sophistication in the use of data
demands there may be benefits for sets and assumptions supporting the definition of
scenarios
businesses who implement all of the
Recommendations External communication
• Consistency of messaging across different
external reporting mediums (e.g., investor
relations, financial reporting, corporate
reporting, sustainability reporting)

Shift the focus areas of external stakeholders

• Content of disclosures is more aligned with
interest of long-term investors
• Focus of investors and shareholders shifts
towards forward-looking assumptions and
methodology, opportunities and strategy

Educational journey and fiduciary duty

• Increased directors’ awareness of their
fiduciary duty
• Education journey for board members and
investor relations teams

Reporting climate change risk 11

Suggested steps
Implementing the Recommendations may require
organizations to collect new types of information and
data from their supply chains and put in place new

to implement the processes and governance structures. Integrating

these changes into the business will take time and it is

Recommendations
expected that many businesses will start on a journey
to full implementation. Organizations should show
investors that they are making progress and can start
by adopting an implementation plan.

The table below sets out an optimistic timeline to reach full implementation

Year 1 Year 2 Year 3

• Gap analysis of current • Implement new data and • Integrate scenario analysis
disclosure state compared to reporting processes into strategic planning and/or
the Recommendations • Calculate climate metrics enterprise risk management
• Identification of new data and of full data set and compare frameworks
process requirements to year 1 results. Set baseline • Ongoing implementation of
• Collection of missing data metrics for external purposes Recommendations
and calculation of climate and comparison in future
risk metrics from preliminary years
data set for internal • From year 1 scenario analysis,
benchmarking purposes implement management
and data quality control strategies for any identified
• Review scenario analysis to value chain risks
identify a range of appropriate • Run scenario analysis using
scenarios and apply them appropriate scenarios and
across the value chain to identify qualitative risk areas
qualitatively assess impacted and quantify potential impacts
sectors for internal purposes • Document the process:
• Assign oversight to relevant communicate to relevant
board committees parties; be prepared
• Disclosure of certain to disclose key inputs,
Recommendations dependent assumptions, analytical
on current processes methods, outputs and
potential management
responses
• Disclosure of all
Recommendations

12 Reporting climate change risk

EY contacts
So what now for organizations Mathew Nelson
Global and Asia-Pacific
potentially impacted by climate CCaSS Leader
change? +61 3 9288 8121
mathew.nelson@au.ey.com
If you would like to discuss your next
steps further, our multidisciplinary
Velislava Ivanova
climate change team is ready to
Americas CCaSS Leader
work with you. +1 720 289 1889
veli.ivanova@ey.com

Christophe Schmeitzky
Europe, Middle East, India and
Africa CCaSS Leader
christophe.schmeitzky@fr.ey.com

Keiichi Ushijima
Japan CCaSS Leader
+81 3 3503 1100
keiichi.ushijima@jp.ey.com

This article originally appeared in our Let’s talk Sustainability publication. It was authored by Pip Best and
Frederic Papon (Ernst & Young, Australia).

Reporting climate change risk 13

References EY | Assurance | Tax | Transactions | Advisory
1
 inal Report: Recommendations of the Task Force on Climate-
F About EY
related Financial Disclosures, Task Force on Climate-related EY is a global leader in assurance, tax, transaction and advisory
Financial Disclosures, (2017). Accessed via: https://www.fsb-tcfd. services. The insights and quality services we deliver help build trust
org/publications/final-recommendations-report/. and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our
2
 nnex: Implementing the Recommendations of the TCFD, Task
A promises to all of our stakeholders. In so doing, we play a critical
Force on Climate-related Financial Disclosures, (2017). Accessed role in building a better working world for our people, for our clients
via: https://www.fsb-tcfd.org/publications/final-implementing-tcfd- and for our communities.
recommendations/.
EY refers to the global organization, and may refer to one or more,
3
 echnical Supplement: The Use of Scenario Analysis in Disclosure
T of the member firms of Ernst & Young Global Limited, each of
of Climate-related Risks and Opportunities, Task Force on Climate- which is a separate legal entity. Ernst & Young Global Limited, a UK
related Financial Disclosures, (2017). Accessed via: https://www. company limited by guarantee, does not provide services to clients.
fsb-tcfd.org/publications/final-technical-supplement/. For more information about our organization, please visit ey.com.

© 2017 EYGM Limited.

All Rights Reserved.

EYG no. 05733-173Gbl

BMC Agency
GA 1005858

ED None

In line with EY’s commitment to minimize its impact on the environment,

this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not
intended to be relied upon as accounting, tax or other professional advice. Please refer
to your advisors for specific advice.

ey.com

Certain services and tools may be restricted for EY audit clients and
their affiliates to comply with applicable independence standards.
Please ask your EY contact for further information.