TCFD recommendations
TCFD recommendations are the 11 recommended disclosures under four pillars: governance, strategy, risk management, and metrics and targets. The exam tests the 11 disclosures, physical versus transition risk, scenario analysis, and the financial linkage.
The 11 disclosures
- Governance: board oversight; management's role.
- Strategy: climate-related risks and opportunities; impact on business, strategy and financial planning; resilience of strategy under scenarios, including a 2°C or lower scenario.
- Risk management: identification and assessment; management; integration into overall risk management.
- Metrics and targets: metrics used; Scope 1, 2 and 3 GHG emissions and related risks; targets and progress.
Worked example
A cement producer discloses board oversight and a carbon price assumption. In strategy, it explains that a higher carbon price raises kiln costs and shifts demand to lower-carbon blends. It tests resilience under orderly and disorderly transition scenarios and a hot-house world, then links capex and targets to the financial plan. The reasoning: scenario analysis tests strategic resilience; it is not a forecast and not only an emissions inventory.
Traps
- Disclosing only Scope 1 and 2 and omitting material Scope 3.
- Treating scenario analysis as a single point forecast.
- Describing risks without financial or strategic effects.
- Omitting board oversight or how climate risk is integrated into enterprise risk management.