As we step into 2024, climate-related financial disclosures are undergoing a significant transformation. The Task Force on Climate-related Financial Disclosures (TCFD), which has guided companies for years, has now transitioned its responsibilities to the International Sustainability Standards Board (ISSB). This new body aims to streamline and elevate sustainability reporting across the globe by incorporating the TCFD’s framework into its IFRS S1 and IFRS S2 standards.
For businesses and financial modellers, this change isn’t just regulatory – it’s an opportunity to strengthen their financial practices.
The Four Pillars of TCFD
The core principles of TCFD reporting revolve around:
- Governance – Oversight of climate risks within an organisation’s structure.
- Strategy – Assessing how climate-related risks and opportunities influence a company’s strategy and financial planning.
- Risk Management – Identifying and addressing climate-related risks effectively.
- Metrics and Targets – Measuring progress, especially in terms of greenhouse gas emissions.
The new ISSB standards build on these pillars, pushing for more comprehensive disclosures, particularly around climate risk exposures, financed emissions, and resilience planning.
What Does This Mean for Financial Modelling?
The 2024 regulations bring a host of new challenges and demands for financial modelling. Businesses will need to adapt their models to reflect more nuanced and detailed climate-related data.
- Scenario Analysis: TCFD has always stressed the importance of scenario analysis, where companies model financial outcomes under different climate scenarios. With ISSB’s integration, the expectation is for even more precise and sector-specific assumptions, ranging from regulatory changes to future carbon pricing.
- Risk Assessment: Financial modellers now need to incorporate a broader range of risks, including both transition risks (such as higher carbon taxes or regulatory shifts) and physical risks (like climate-induced natural disasters). This data-driven approach will lead to more accurate risk management and scenario planning, essential for investors and stakeholders alike.
- Carbon Pricing and Emissions Tracking: As organisations adopt internal carbon pricing strategies, this needs to be embedded in financial models. Modellers should account for how carbon pricing will affect both operational costs and future profitability. Additionally, tracking Scope 1, 2, and 3 emissions becomes crucial for understanding a company’s carbon footprint and long-term sustainability.
- Financed Emissions: A new challenge for the financial sector involves calculating financed emissions—those generated by investments and loan portfolios. This will require modellers to dig deep into their portfolios and evaluate how investments align with global climate targets.
Preparing for 2024 and Beyond
To be ready for the ISSB standards, companies must not only familiarise themselves with the regulatory details but also build robust systems for capturing and reporting relevant climate data. For many, this will mean expanding existing TCFD-aligned disclosures, enhancing governance structures, and ensuring detailed climate risk analysis.
While this transition presents challenges, it also offers businesses an opportunity to strengthen their sustainability strategies. Financial modellers play a key role in ensuring that climate risks and opportunities are accurately reflected in company financials.
Time to Enhance Your Financial Models
At Finteam, we specialise in integrating climate-related financial disclosures into your business models, ensuring compliance with new regulations and optimising your long-term strategy. Whether you’re preparing for the ISSB transition or looking to refine your TCFD reports, we can help. Let’s connect and explore how we can future-proof your financial strategy in 2024! 🌍📈
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