TCFD and regulation Reporting climate risks

Governments, regulators and investors are forcing the industry to disclose more about climate risks

One of the most effective ways to encourage a more sustainable global financial sector is to force companies, fund managers and financial institutions to dig deeper into the climate-related risks they face – and to report these openly to their stakeholders.

That’s the goal of the Task Force on Climate-Related Financial Disclosures (TCFD), set up by global regulatory body the Financial Stability Board in 2015. It has established a set of voluntary recommendations to improve environmental reporting and governance globally that are increasingly referenced by investors, regulators and even in government legislation. Pantheon is a supporter of TCFD and will seek to make disclosures in line with TCFD principles in 2021.

The recommendations cover four main areas and require companies to:


Identify who is accountable for climate-related reporting


Disclose the procedures and process in place to address these factors


Assess fundamental risks to the business as a result of climate change


Provide metrics and targets to quantify climate-related risks and opportunities


To help ensure a consistent standard of reporting, the TCFD also provides a range of definitions that act as a typology of risks and metrics for assessing climate exposure.

Physical risks resulting from climate change:

  • Acute risks: Event-driven exposures, including the increased severity of extreme weather events (cyclones, hurricanes, floods, etc.)
  • Chronic risks: Longer-term shifts in climate patterns (e.g. sustained higher temperatures), for example.

Transition risks resulting from the transition to a lower carbon economy:

  • Policy and legal risks: Evolution of regulations and potential litigation or legal risk
  • Technology risks: Technological improvements or innovations that support the transition to a lower carbon, energy-efficient economic system
  • Market risks: Effects of climate change on supply and demand
  • Reputation risks: Changing customer or community perceptions related to climate considerations.

Regulatory environment

Creating a more sustainable financial sector has also become an increasingly important topic for regulators around the world, which have adopted increasingly interventionist policy stances. Below we summarize the key legislative and regulatory initiatives that are shaping our industry’s approach to sustainability both now and in the future.


The European Union (EU) arguably has the most interventionist legislative agenda when it comes to climate change, with the European Commission working towards its ambitious renewed sustainable finance strategy in early 2021. This will establish a broad range of regulatory objectives focusing on long-term sustainability goals, both through improved disclosure of climate risks and incentives to positively promote sustainable investment.

EU regulations are already in train include the far-reaching Sustainable Finance Disclosure Regulation, which came into force in March 2021 and will require all fund managers to report on ESG risks across their portfolios. Coupled with changes coming as part of a review of the Non-Financial Reporting Directive, which governs sustainability disclosures, the EU will also provide a common framework to define economic activities that are “environmentally sustainable” to enhance the impact of this increased transparency.

Meanwhile, the Commission is consulting on proposed amendments to the Alternative Investment Fund Managers Directive that are closely related to the Sustainable Finance Strategy and disclosure regulations. These would mean that, from the end of 2021, fund managers will have to take sustainability risks into account in the development of their internal structures and decision-making procedures, risk management and due diligence policies, and procedures and conflicts of interest policies.

The UK has also been one of the leading proponents of legislative action to drive the transition to a lower carbon economy. As early as 2013 amendments to the Companies Act 2006 required certain companies to disclose their approach to ESG matters, including notably carbon emissions – and in August 2020 the Department for Work and Pensions published a consultation on mandatory rules for occupational pension schemes with more than £1billion in assets to report on climate risks and governance in line with the TCFD recommendations by 2023.

So far, the Financial Conduct Authority’s focus has been on reporting by large listed companies, but in its 2020/2021 Business Plan the regulator elevated climate change to a cross-sectoral priority. We can therefore expect future regulatory output to consider how firms are managing and reporting on the physical and transition risks posed by climate change.



While the U.S. has yet to develop a comprehensive legislative framework or regulatory regime for sustainable finance, investors in the country are cognizant of climate challenges – and they are similarly demanding more from their fund managers in terms of reporting in line with best practice in other jurisdictions.

Moreover, while the U.S. is not as advanced in terms of legislation at a federal level, state governments are taking a more interventionist stance. Currently, 15 states and territories have introduced policies to move toward a 100% clean energy, while in January 2020 Illinois became the first state to impose rules that will directly impact private markets asset owners by passing the Illinois Sustainable Investing Act, which requires managers of public funds to integrate “sustainability factors” into investment analysis, decision-making and ownership.