An estimated $4.2 trillion in corporate assets are at risk from climate-related events by 2030. Investors, regulators, and stakeholders are demanding greater transparency on how businesses are managing climate risks and capitalising on opportunities in the transition to a low-carbon economy. This is where the Climate-Related Financial Disclosure or CRFD compliance comes in. By providing a structured, standardised approach to reporting climate-related financial risks, CRFD helps organisations integrate climate considerations into their business sustainability strategies, governance, and financial planning. Keep reading as we delve deeper into the CRFD and outline key steps for meeting its requirements.Â
What is CRFD?Â
The CRFD refers to the structured reporting framework that organisations use to disclose climate-related risks and opportunities to investors, regulators, and other stakeholders. It helps businesses assess the financial impact of climate change on their operations and long-term strategy. This ensures greater transparency and accountability in corporate decision-making.
Understanding the CRFD frameworkÂ
The CRFD framework typically encompasses four core elements that organisations must address in their disclosures:
1. Governance: This element focuses on the organisation’s governance structure around climate-related risks and opportunities. Disclosures should detail the board’s oversight role and management’s role in assessing and managing climate-related issues. This includes reporting lines, committees responsible for climate matters, and how climate considerations are integrated into decision-making processes.
2. Strategy: Organisations must disclose how climate-related risks and opportunities affect their business strategy and financial planning. This includes:
- Identifying short, medium, and long-term risks and opportunities
- Describing their potential impact on the business
- Explaining how the organisation’s strategy addresses these factorsÂ
A critical component of this is scenario analysis, which tests the resilience of organisational strategies under different climate-related scenarios.
3. Risk management: This element requires organisations to describe their processes for identifying, assessing, and managing climate-related risks. Disclosures should explain how these processes are integrated into the organisation’s overall risk management framework and the tools and methodologies used to prioritise climate risks.
4. Metrics and targets: Organisations must disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This typically includes:
- Greenhouse gas emissions data (Scope 1, 2, and, increasingly, Scope 3)
- Climate-related targets
- Performance against these targets.Â
The disclosures should also include the methodologies used to calculate these metrics and any industry-specific indicators that are relevant.
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Key steps for CRFD complianceÂ
Achieving effective CRFD compliance involves several critical steps:
Establish cross-functional oversightÂ
Form a cross-functional team with representatives from finance, sustainability, risk management, operations, and the board to oversee climate-related disclosures. This team should establish clear roles, responsibilities, and reporting lines for managing climate-related issues.
Conduct a materiality assessmentÂ
Identify and prioritise climate-related risks and opportunities that are most material to your organisation. This materiality assessment should consider both physical risks (such as extreme weather events) and transition risks (such as policy changes and market shifts). The assessment should be tailored to your organisation’s specific industry, geography, and business model.
Develop data collection systemsÂ
Implement robust systems for collecting, verifying, and reporting climate-related data, particularly greenhouse gas emissions. This may require investment in new technological solutions and training for staff. Ensure these systems can provide data with sufficient granularity and reliability to support decision-making.
Perform scenario analysisÂ
Conduct scenario analysis to evaluate the potential impact of different climate scenarios on your business. This should include at least one scenario aligned with the Paris Agreement goal of limiting global warming to well below 2°C. The analysis should inform strategic planning and risk management processes.
Integrate climate considerations into financial planningÂ
Incorporate climate-related risks and opportunities into financial planning processes, including capital allocation decisions, budgeting, and financial projections. This integration should be documented and explained in disclosures.
Establish targets and metricsÂ
Set clear, measurable targets for addressing climate-related issues, such as emissions reduction goals. Develop relevant metrics to track progress against these targets and to assess the effectiveness of your climate strategy.
Prepare comprehensive disclosuresÂ
Develop comprehensive disclosures that address all four core elements of the CRFD framework. Ensure these disclosures are consistent with financial filings and other public communications. The disclosures should be clear and concise, and provide decision-useful information to stakeholders.
Implement internal controls and assuranceÂ
Establish internal controls to ensure the accuracy and completeness of climate-related disclosures. Consider obtaining external assurance to enhance the credibility of your disclosures, particularly for emissions data and other quantitative information.
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Challenges and solutionsÂ
Organisations face several challenges when implementing CRFD, but practical solutions exist:
Challenge 1 – Data quality and availabilityÂ
Many companies struggle with collecting complete and accurate climate-related data, particularly for Scope 3 emissions within their value chain. To address this, businesses should invest in data management systems and technologies that automate data collection and enhance quality. Engaging with suppliers and value chain partners can improve data sharing, while industry averages or proxy data can serve as interim solutions while working towards more accurate reporting.
Challenge 2 – Scenario analysis complexityÂ
Conducting meaningful scenario analysis requires specialised expertise and can be resource-intensive. Businesses can start with simplified scenario analysis and gradually enhance their sophistication, leveraging industry resources and tools like those provided by the TCFD. Collaborating with peer organisations or industry associations can also help share methodologies and best practices, making the process more efficient and effective.
Challenge 3 – Regulatory complexity and evolving standardsÂ
The global landscape of CRFD regulations is complex and continuously evolving, making compliance challenging. Businesses should establish a dedicated team to monitor regulatory developments and adopt a principles-based approach aligned withthe Task Force on Climate-Related Financial Disclosures recommendations for flexibility. Engaging with industry associations and participating in consultations can also help stay informed about emerging standards.
Challenge 4 – Integration with existing financial reportingÂ
Organisations often struggle to integrate climate-related disclosures with traditional financial reporting processes. Implementing integrated reporting approaches that connect climate data with financial reporting can help bridge this gap. Involving finance teams from the outset and developing clear internal guidelines on how climate information should be reflected in financial statements and disclosures will ensure consistency and accuracy.
Challenge 5 – Addressing investor expectationsÂ
Investors’ expectations for CRFD are becoming more sophisticated, requiring organisations to continuously enhance their disclosures. Proactively engaging with key investors to understand their expectations, benchmarking against industry leaders, and incorporating stakeholder feedback can improve transparency. The focus should be on providing decision-useful information rather than just meeting minimum compliance requirements.
Challenge 6 – Balancing transparency with competitive concernsÂ
Organisations may hesitate to disclose detailed climate risks and strategies due to competitive concerns. To address this, they can focus on industry-level risks and opportunities while providing company-specific context. Emphasising how climate strategy creates long-term value without revealing proprietary information and using qualitative disclosures where quantitative data is commercially sensitive can help balance transparency and confidentiality.
Conclusion
The evolution of the CRFD marks a pivotal transformation in corporate reporting frameworks. As we move toward 2030, organisations that excel in climate-related financial disclosure regulations will gain distinct competitive advantages. The future of the CRFD will likely feature greater integration with broader sustainability reporting, increased digitalisation of disclosure processes, and more sophisticated use of artificial intelligence in analysing climate impacts. By proactively embracing robust climate-related financial disclosure practices today, businesses can position themselves advantageously for the climate-conscious economy of tomorrow.Â
