An asset owner’s guide to the TCFD recommendations

Asset owners will need high-quality and timely data on climate-related risks to help guide them through the energy transition.

The FSB Taskforce on Climate–Related Financial Disclosures (TCFD) provide a global framework to translate non-financial information into financial metrics. The TCFD has been endorsed by over 238 companies, including 150 financial institutions representing a combined market capitalisation of over US$6 trillion and US$81.7 trillion assets under management.

Yet, what would adopting the TCFD recommendations mean in practice for asset owners? This publication provides technical guidance on:

the actions for asset owners;
example of peer asset owner practice on implementing the TCFD recommendations and reducing exposure to climate risk;
questions to engage consultantsor fund managers on TCFD;
climate scenarios.

Crafting an investment strategy

Engaging with fund managers on the TCFD recommendations

Asset owners can engage with fund managers on climate-related risks and opportunities and encourage them to support the TCFD recommendations, including asking questions such as:

Organisation-wide support for the TCFD recommendations:

Does your organisation support the TCFD recommendations?
If no, please explain the rationale behind this decision
If yes, when do you anticipate an implementation plan will be implemented?

Governance

Has your organisation included climate-related impacts as part of the board and/or management group’s oversight responsibilities?
How is progress reviewed, by whom and how often?

Strategy

Is there a firm-wide strategy in place to identify the risks and opportunities related to climate change?
Has the organisation considered the impact of climate-related scenarios on future outcomes in terms of expected risk and return, as well as the identification of new opportunities?

Risk management

Has a process been established to assess and integrate climate-related investment risks (transition and physical impacts) into investment decisions?
What is your process for monitoring these risks over time?

Metrics and targets

What climate-related metrics, if any, does your organisation use?
Can you describe how these metrics have impacted on investment decisions?

Climate scenario analysis

Scenarios analysis is the process of estimating the expected value of a portfolio after a period of time. Depending on the availability of the data and the maturity of the process, scenarios can be either for:

Context exploring (narratives about the future)
Decision making (forecasting)

Climate scenario analysis is, at present, arguably closer to the former and therefore not necessarily a forecast. The purpose of climate scenarios is to assess the potential earnings impairment of companies (as a result of transition policies, demand changes, physical impacts and other factors) and how this might translate into investment returns in a portfolio. Uncertainty exists in terms of the rate of warming, pace of technology change, future government policy – yet the uncertainty is not infinite. The value of climate scenarios is to test the extremes. Thus, it is important to avoid relying on a single reference scenario, otherwise the analysis risks becoming a prediction.

Four step approach to integrating climate scenarios