A Comprehensive Climate Approach for Financial Institutions

The financial sector plays a significant role in the transition to a low-carbon economy, and several frameworks have emerged to assist financial institutions in assessing and reporting their climate risks and opportunities. Two relevant frameworks are the Task Force on Climate-related Financial Disclosures (TCFD) and the Science-Based Targets initiative (SBTi) for Financial Institutions (FI).

In this article, we explore the interconnections between these frameworks and how they can work together to help companies achieve their climate goals. While these frameworks have different objectives, they are closely related and can be used together to create a more comprehensive approach to climate-related financial reporting. By aligning financial practices with climate goals, financial institutions can help mitigate the risks associated with climate change and position themselves for success in a rapidly changing world.

The TCFD was established in 2015 by the Financial Stability Board, an international body from the G20 that monitors and makes recommendations about the global financial system. In 2017, with representation from some of the world's largest corporations, investors, banks, insurers, accountancy firms, and ratings agencies, the TCFD published 11 recommendations for disclosing information about the risks and opportunities related to climate change. The TCFD's recommendations cover governance, strategy, risk management, and metrics and targets. By disclosing this information, companies can help investors and other stakeholders make informed decisions about the risks and opportunities related to climate change.

In contrast, the SBTi-FI framework was launched in 2020 by the SBTi in collaboration with UNEP FI, WWF, CDP, and WRI. The SBTi-FI provides guidance to financial institutions on setting science-based targets (SBTs) for reducing their greenhouse gas emissions. SBTs are targets aligned with the level of emissions reductions necessary to limit global warming to no more than 1.5°C above pre-industrial levels, as laid out in the Paris Agreement. Financial institutions are a critical part of the global economy, and by setting SBTs, they can help reduce their own emissions as well as influence the emissions of their clients and investee companies.

Although the TCFD and SBTi-FI have different purposes, they are interconnected in several ways. First, both frameworks recognize the importance of addressing climate-related risks and opportunities. The TCFD's recommendations encourage companies to assess the physical and transition risks they face from climate change and to develop strategies to address these risks. The SBTi-FI encourages financial institutions to set SBTs that will help limit the physical and transition risks associated with climate change. By taking action to address climate-related risks, companies and financial institutions can also capture the opportunities that arise from the transition to a low-carbon economy.

Second, both frameworks emphasize the importance of metrics and targets. The TCFD's recommendations include metrics and targets related to greenhouse gas emissions, energy use, and other climate-related factors. The SBTi-FI provides guidance on setting science-based targets for reducing emissions and for influencing the emissions of clients and investee companies. By setting clear targets and tracking progress toward those targets, companies and financial institutions can demonstrate their commitment to addressing climate-related risks and opportunities.

Third, both frameworks recognize the importance of collaboration. The TCFD's recommendations encourage companies to engage with stakeholders, including investors, to better understand the risks and opportunities related to climate change. The SBTi-FI similarly encourages financial institutions to collaborate with clients and investee companies to set and achieve science-based targets. By working together, companies and financial institutions can develop more effective strategies for addressing climate-related risks and opportunities.

Fourth, both frameworks recognize the importance of transparency. The TCFD recommends that companies disclose information about climate change-related risks and opportunities they face. The SBTi-FI requires financial institutions to publicly disclose their SBTs and progress toward those targets. By being transparent about their actions and progress in addressing climate-related risks and opportunities, companies and financial institutions can build trust with investors and other stakeholders.

Finally, both frameworks recognize the urgent need for action. As the world grapples with the impacts of climate change, there is a growing recognition that businesses must take action. Acting quickly, companies and financial institutions can help mitigate the worst impacts of climate change and contribute to redirecting the economy toward net-zero.

At the Carbon Trust, we have extensive experience providing TCFD and SBT support to a wide range of corporations, financial institutions, and policymakers. We are continuously refining our approach to give our clients the latest insights. We offer strong leadership to encourage the adoption of TCFD and SBT across markets and use them as strategic tools beyond the disclosure requirements, turning compliance and reporting into a competitive advantage.