TCFD Reporting: Leading the Way to Best Practice with Decision-Ready, Globally Comparable Financial Metrics

 Since its inception in 2015, the Task Force on Climate-Related Financial Disclosures (TCFD), created by the Financial Stability Board (FSB), has led the way in establishing consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.

One significant accomplishment of the TCFD was establishing a voluntary framework for disclosing climate-related risks. The framework is centered around recommended disclosures focused on four thematic areas: governance, strategy, risk management, and metrics and targets, and is based on scenario analysis of the future state of greenhouse gas emissions and climate change.

These TCFD-recommended disclosures have subsequently been adopted or have provided the basis for many financial regulators and standard-setting boards around the world.

An example of TCFD framework adoption comes from the International Financial Reporting Standards Foundation (IFRS) whose accounting standards are currently adhered to in more than 140 jurisdictions.

The IFRS formed the International Sustainability Standards Board (ISSB) in 2021, which is responsible for developing 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 Sustainability Standards Board

The ISSB recently announced it is building on scenario analysis recommendations from the TCFD as it finalizes requirements for entity disclosures about climate-related risks and opportunities. Examining risk management, one of the four TCFD recommended disclosure areas, requires entities to be able to disclose how their organization identifies, assesses, and manages climate-related risks.

Factors such as physical climate change risk, including both chronic climate risks such as extreme heat and drought, and also acute risks as weather events become more intense, based on a climate change scenario analysis, are included.

Ensuring compliance with recommended climate risk enclosures is very important for any organization, but so is establishing the potential impact of physical climate change risk. Entities around the world are now assessing how they can understand their climate risks in a meaningful way to help them prepare and adapt their businesses for the future, and to be able to take advantage of new opportunities that will arise.

Introducing Moody’s Climate on Demand Pro

We are seeing clients choosing Moody’s Climate on Demand Pro as a solution to provide the data they need for their physical climate risk quantification.

Entities are anticipating chronic changes and more frequent and severe extremes of climate, which in turn result in increased business interruption and damage across operations and supply chains with consequences for input costs, revenues, asset values, and insurance claims.

For the first time, Moody’s Climate on Demand Pro provides entities with the ability to quantify the financial impact of any expected damage and business interruption from both chronic and acute climate risks – for all their locations globally, and across the business as a whole, taking correlations between risks into account.

Moody’s Climate on Demand Pro expands upon hazard modeling by undertaking financial impact analysis by modeling other critical aspects of risk, such as building vulnerability, asset downtime, business interruption, damage to structures, nearby infrastructure and on-site equipment, and post-catastrophe inflationary pressures.

Looking ahead, users can build on hazard insights with location-specific impact scores that quantify the risk of assets or portfolios based on damage costs, average damage rates (ADR), average annual damage (AAD), and ADR standard deviation.

Another core capability of Climate on Demand Pro is its ability to assess climate change impacts under a range of different scenarios and at different future time horizons.

Current and future policies around greenhouse gas emissions, and underlying factors such as population, technological, and economic growth, creates uncertainty around which emissions path the world will follow, leading to very different future emissions and warming outcomes.

Therefore, accessing different scenarios helps to cover a range of plausible emissions path possibilities, enabling companies to more effectively evaluate possible consequences for their business. The use of scenarios is a core foundation of TCFD requirements and most reporting regulations.

Integration with Global Climate Risk Models

Establishing the impact of physical climate risk is possible through the integration of Moody’s RMS global climate risk models, which combine bottom-up weather simulations together with the latest climate science, and hundreds of vulnerability and impact curves to produce highly-granular quantification of the costs of climate change at scales relevant to financial services, such as at the individual asset or facility level.

The capabilities of Moody’s RMS models allow Climate on Demand to overcome additional limitations within climate change models, such as for hurricanes and typhoons, where climate models are unable to natively resolve and directly model tropical cyclones and how they will change in a warming climate.

These physical climate risk models go further to quantify the damage to property, contents, and equipment, business downtime, and disruption from climate change risks.

Moody’s RMS has been the leading provider of detailed loss quantification models to the multi-trillion dollar global (re)insurance industry for the past 30 years, with models thoroughly validated against billions of dollars of loss data and insurance claims.

Our models are now being rapidly adopted across the broader financial services sector to help clients understand supply-chain, credit, and investment risks, together with financial impacts among others.

To learn more about Moody’s Climate on Demand product updates and analysis on key trends shaping global climate change risk assessment and sustainable finance please visit Moody’s Climate on Demand and talk to an expert today.