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TCFD Framework: Climate-Related Financial Disclosures for Australian Companies

TCFD Framework: Climate-Related Financial Disclosures for Australian Companies

The Task Force on Climate-related Financial Disclosures (TCFD) has fundamentally shaped how organisations worldwide address climate risk governance and disclosure. For Australian businesses, understanding the TCFD framework is increasingly important because Australia’s mandatory climate disclosure standard, AASB S2, is explicitly aligned with TCFD. Whether your organisation is preparing for mandatory AASB S2 compliance or seeking to establish best-practice climate governance, TCFD provides the foundational framework.

This guide explains the TCFD framework, its four pillars, and how it integrates with Australia’s sustainability reporting standards. For broader context on ESG in Australia, see our complete ESG guide.

What Is TCFD and Why Does It Matter?

Background and Development

The Task Force on Climate-related Financial Disclosures was established in 2015 by the Financial Stability Board (an international body that monitors financial system stability) to develop consistent, comparable climate-related financial disclosures. The TCFD published its framework in 2017, and it has since become the global standard for climate disclosure, adopted by regulators, standard-setters, and businesses worldwide.

TCFD was developed to address the need for organisations to disclose how climate change and climate policy affect their financial performance, strategy, and risk management. The framework reflects the understanding that climate-related risks and opportunities are material financial matters that affect investor decision-making.

TCFD’s Influence on AASB S2

Australia’s AASB S2 (Climate-related Disclosures) is explicitly aligned with the TCFD framework. AASB S2 incorporates TCFD’s four pillars and many of its specific metrics requirements. For Australian organisations subject to AASB S2, TCFD provides the conceptual foundation and, in many cases, directly supports compliance implementation.

The Four Pillars of TCFD

Pillar 1: Governance

TCFD’s governance pillar requires organisations to disclose how governance structures and processes address climate-related risks and opportunities. Key governance disclosures include:

  • Board-level oversight: How the board is responsible for oversight of climate-related risks and opportunities, including relevant committee structures
  • Board expertise: The climate and sustainability expertise members of the board bring to discussions and decision-making
  • Management oversight: The roles and responsibilities of management in assessing, managing, and monitoring climate-related risks
  • Reporting lines: How climate information flows from management to the board
  • Remuneration: Whether and how executive and board remuneration is tied to climate-related performance

For ASX-listed companies, governance disclosures must align with ASX Listing Rules and ASX Corporate Governance Principles, which increasingly reference climate governance expectations.

Pillar 2: Strategy

TCFD requires organisations to disclose how climate-related risks and opportunities are integrated into business strategy. Strategy disclosures include:

  • Transition risks: Risks arising from the shift to a low-carbon economy, including policy/legal changes, technology disruption, market shifts, and reputational impacts
  • Physical risks: Risks from acute climate impacts (storms, floods) and chronic impacts (changing precipitation, temperature rise)
  • Opportunities: Market and operational opportunities arising from climate action and transition to low-carbon business models
  • Scenario analysis: How the business model and strategy would be affected under different climate scenarios (for example, scenarios limiting warming to 1.5°C or 2°C)
  • Financial impact: The potential financial impacts of climate risks and opportunities on revenues, costs, capital allocation, and strategic positioning

Pillar 3: Risk Management

TCFD requires disclosure of how organisations identify, assess, and manage climate-related risks. Risk management disclosures include:

  • Identification processes: How the organisation identifies climate-related risks across the business and value chain
  • Assessment methodologies: How risks are evaluated and prioritised (for example, using quantitative models, stakeholder input, or scenario analysis)
  • Integration with enterprise risk management: How climate risks are integrated into overall risk management frameworks and reporting
  • Management strategies: Actions taken to manage or mitigate identified climate risks
  • Monitoring and review: How the organisation tracks climate risk management effectiveness and evolves strategies

Pillar 4: Metrics and Targets

TCFD requires disclosure of metrics and targets used to assess and manage climate-related risks and opportunities. Key metrics include:

  • Greenhouse gas emissions: Scope 1 and Scope 2 emissions (mandatory), Scope 3 where material, in absolute and intensity formats
  • Climate-related targets: Where set, disclosure of absolute reduction targets, intensity targets, net-zero commitments with baseline year and methodology
  • Progress measurement: How progress towards targets is tracked and reported
  • Capital allocation: How climate considerations influence capital expenditure, investment, and financing decisions
  • Remuneration linked to climate performance: Disclosure of how remuneration is connected to climate targets and performance

Greenhouse Gas Emissions: Core Metrics

Scope 1: Direct Emissions

Scope 1 emissions are direct emissions from sources owned or controlled by the organisation. Examples include:

  • Emissions from fuel combustion in owned or controlled equipment or facilities
  • Fugitive emissions (for example, from refrigeration or natural gas leaks)
  • Emissions from vehicles owned or controlled by the organisation
  • Process emissions (for example, from industrial processes)

Scope 1 emissions are typically expressed in tonnes of carbon dioxide equivalent (tCO₂e) and should include all material sources within the organisation’s boundary.

Scope 2: Indirect Emissions from Energy

Scope 2 emissions are indirect emissions from purchased electricity, steam, heat, or cooling. These emissions arise from the generation of energy purchased and consumed by the organisation. Scope 2 can be calculated using:

  • Location-based method: Using average emission factors for the region’s electricity grid
  • Market-based method: Using emission factors specific to the electricity or renewable energy purchased

Many organisations report both methods to provide transparency on energy source impacts.

Scope 3: Other Indirect Emissions

Scope 3 encompasses all other indirect emissions in the value chain, including:

  • Upstream: Supplier emissions, purchased goods and services, capital goods, fuel and energy-related emissions
  • Downstream: Product use, end-of-life product treatment, business travel, employee commuting, franchises, leased assets

TCFD and AASB S2 require Scope 3 disclosure where material. For many organisations, particularly those with extensive supply chains or product-use phases, Scope 3 represents the most material emissions category.

Climate Scenario Analysis Under TCFD

Purpose and Approach

TCFD requires organisations to disclose climate scenario analysis—how their strategy and business model would be affected under different climate futures. This analysis serves multiple purposes:

  • Tests the resilience of current strategy to climate scenarios
  • Identifies material transition and physical risks
  • Informs capital allocation and strategic decisions
  • Demonstrates climate awareness to investors and stakeholders

Scenario Selection

Organisations typically analyse scenarios including:

  • 1.5°C scenario: Consistent with Paris Agreement goal to limit warming to 1.5°C (most stringent policy environment)
  • 2°C scenario: Consistent with limiting warming to well below 2°C
  • No additional policy scenario: Current policies continue without further action (baseline)
  • Hot house scenario (3-4°C): Limited climate action and significant physical climate impacts

Transition Risk Assessment

Scenario analysis should address transition risks—policy, legal, technology, market, and reputational changes as economies shift to low-carbon models. Examples include:

  • Carbon pricing or emissions trading schemes increasing operating costs
  • Fuel or energy source obsolescence (for example, internal combustion engines, coal power)
  • Customer or investor preference shifts affecting market access or capital availability
  • Supply chain disruption from supplier transition challenges
  • Regulatory changes restricting high-emission activities or requiring emissions disclosure

Physical Risk Assessment

Scenario analysis should also address physical risks—climate impacts affecting operations and assets. Examples include:

  • Acute risks: Increased frequency or severity of extreme weather events (floods, storms, heatwaves)
  • Chronic risks: Long-term changes in temperature, precipitation, sea levels, or other climate variables
  • Asset impacts: Damage to facilities, infrastructure, or supply chain disruption
  • Commodity/input impacts: Changes in availability or cost of water, key agricultural products, or other climate-sensitive inputs

TCFD vs AASB S2: Key Alignment Points

Similarities

  • Both use the same four pillars: Governance, Strategy, Risk Management, Metrics & Targets
  • Both require greenhouse gas emissions disclosure (Scope 1, 2, 3 where material)
  • Both require climate scenario analysis
  • Both address transition and physical climate risks
  • Both require governance disclosure and board oversight documentation

Key Differences

  • Mandatory vs voluntary: TCFD is voluntary guidance; AASB S2 is mandatory for Group 1 Australian entities from FY2025–26
  • Specificity: AASB S2 is more prescriptive with specific metrics and target requirements; TCFD is more guidance-oriented
  • Assurance: AASB S2 requires limited external assurance; TCFD does not mandate assurance
  • Scope: AASB S1 extends beyond climate to all material sustainability-related financial information; TCFD is climate-specific

Implementation Strategy

For Australian organisations implementing both TCFD and AASB S2, best practice is to:

  • Recognise that AASB S2 compliance effectively satisfies TCFD requirements (and goes further with broader AASB S1 requirements)
  • Structure governance and disclosures to align with both frameworks
  • Use TCFD’s detailed guidance on scenario analysis and risk management to enhance AASB S2 compliance
  • Maintain alignment with international climate reporting expectations where multinational stakeholder bases exist

TCFD Implementation Steps for Australian Companies

Step 1: Establish Governance

Ensure board-level climate governance is established with clear roles, responsibilities, and oversight structures. Document how climate is considered in board decisions and remuneration.

Step 2: Assess Climate Risks and Opportunities

Conduct comprehensive identification and assessment of transition and physical climate risks across operations and value chain. Prioritise based on financial materiality.

Step 3: Develop Scenario Analysis

Analyse how strategy and business model are affected under 1.5°C, 2°C, and current policy scenarios. Quantify potential financial impacts.

Step 4: Set Targets and Develop Strategy

Based on risk and scenario analysis, develop climate targets and strategies for managing identified risks. Ensure alignment with Paris Agreement goals where feasible.

Step 5: Collect and Verify Emissions Data

Establish robust data management for greenhouse gas emissions quantification. Use internationally recognised methodologies (GHG Protocol) and consider external verification.

Step 6: Disclose and Assure

Prepare TCFD/AASB S2-aligned disclosures and obtain external assurance. Publish climate disclosure in annual report or standalone sustainability report.

Frequently Asked Questions

Is TCFD mandatory for Australian companies?

TCFD itself is voluntary guidance. However, AASB S2, which incorporates TCFD’s framework, is mandatory for Group 1 Australian entities (ASX-listed and large companies) from FY2025–26. For other entities, TCFD may be required by voluntary sustainability frameworks (GRI, CDP) or investor expectations.

How do we measure Scope 3 emissions if we don’t control suppliers?

Scope 3 is measured using supplier-provided data, industry averages, or spend-based methodologies. TCFD and AASB S2 acknowledge data limitations and allow use of reasonable estimates where primary data is unavailable. Disclosure should explain methodology and limitations.

What climate scenarios should we use for analysis?

TCFD recommends scenarios aligned with Paris Agreement goals (1.5°C, 2°C) and a baseline scenario reflecting current policies. Most organisations also include a 3-4°C scenario to explore physical risk implications if transition efforts are inadequate.

Can we set net-zero targets without scenario analysis?

Best practice is to conduct scenario analysis first to understand climate risks and identify pathways to targets. Scenario analysis strengthens the credibility and feasibility of net-zero commitments by demonstrating they are based on rigorous climate risk assessment.

How does TCFD integrate with financial reporting?

TCFD emphasises that climate-related risks that have financial implications should be reflected in financial statements (for example, asset impairment, provisions for remediation). Climate disclosure should reconcile with financial reporting impacts.

What is the difference between absolute and intensity emissions targets?

Absolute targets reduce total emissions (for example, 50% reduction by 2030). Intensity targets reduce emissions per unit of activity (for example, emissions per dollar of revenue). Both are useful; intensity targets allow for business growth while improving efficiency.

Moving Forward with TCFD in Australia

TCFD provides a proven, globally recognised framework for climate governance, risk assessment, and disclosure. For Australian organisations, TCFD alignment with AASB S2 means that strong TCFD implementation effectively satisfies mandatory climate disclosure requirements while positioning the organisation as climate-aware to international investors and stakeholders. Whether implementing TCFD for voluntary engagement or to support AASB S2 compliance, the framework’s four pillars provide a comprehensive roadmap for integrating climate into organisational governance and strategy.

Ready to implement TCFD and AASB S2 climate disclosures? Book a Free ESG Strategy Session to develop your climate governance and disclosure strategy.