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TCFD transitional risks – What every director should know

Updated: Mar 15, 2022

Theodora Thunder, member of the Red Links Sustainability Consortium and independent consultant, highlights the transitional risks that companies face as a result of climate change and recommends that they align themselves with the Taskforce for Climate-related Financial Disclosures (TCFD) reporting framework.

As a governance professional, acquainting yourself with the TCFD reporting framework is a smart move. Regulators, in response to Hong Kong’s 2050 carbon neutral commitment, are moving towards mandatory environmental, social and governance (ESG) reporting, aligning to the TCFD framework. While the framework is focused on climate change, regulators recognise its broader application as an informative tool and platform that moves across jurisdictional restrictions and strengthens standards-specific reporting.

This article focuses on the transitional risks defined by the TCFD that arise when adapting to a climate-challenged future. These risks are of significant interest to Hong Kong’s services-based organisations as they directly affect boardroom governance and decision-making. We examine what directors need to know and be prepared for when formulating their response to shareholders on the ESG consequences of climate change.

The TCFD approach

Financial markets and investors need clear, comprehensive and high-quality information on the impacts of climate change. In 2017, the Financial Stability Board, under the stewardship of Mark Carney and Michael Bloomberg, created the TCFD to improve and increase reporting of climate-related financial information. The TCFD approach proposes a more transparent, universally aligned and comprehensive format to guide reporting. This includes the threats and opportunities presented by rising temperatures, climate-related policy and emerging technologies in our changing world.

TCFD is now the rising nom de guerre in global ESG reporting. In Hong Kong, while endorsed at high levels in the HKSAR Government, only 19 organisations are registered supporters of the TCFD, 15 of which are either professional or financial services organisations. This hardly inspires the proactive approach that Hong Kong seeks to leverage in its role as an international financial centre or to meet the HKSAR’s 2050 carbon neutrality goal.

In keeping with these goals and in step with global regulatory trends, the Green and Sustainable Finance Cross-Agency Steering Group has published a five-point strategy (see ‘Online links’) for Hong Kong, which includes climate-related disclosures aligned with the TCFD recommendations as mandatory for relevant sectors no later than 2025.

It is important to note that the purpose of the TCFD is to help companies understand, measure, manage and report on the impact climate change imposes on the company. In other words, TCFD focuses on the external climate-related risks that affect a company’s sustainable development. This fundamentally differs from the current ESG risk assessment reporting required, but also complements other well-established reporting standards such as the Global Reporting Initiative (GRI), CDP and the Sustainability Accounting Standards Board (SASB). These standards measure the impacts generated by the company. This change in approach to risk assessment and management brings the TCFD conversation to the board and executive team where strategic risk decisions are made.

The TCFD, as a reporting format, brings into sharp focus how public companies are using shareholder money in the areas of climate change. How does the executive team deploy the resources of the company in these areas? What liabilities are generated and can climate impacts be insured against? Is management taking a position to restrict allocation of resources to climate change mitigation as the impact on such actions are significantly beyond the quarterly or annual earnings report?

Board oversight of transitional risks

Measuring and managing the physical and transitional risks identified by the TCFD (see ‘Transitional risks – are you prepared?’) requires a critical rethink on strategy, policy and procedures. Current disclosure requirements in Hong Kong address only carbon emissions generated by the internal organisational footprint. With TCFD reporting, consideration of external impacts often beyond the company’s control changes the risk management landscape. Within Hong Kong’s largely services-based economy, an individual service company (whether in fintech, professional legal and accounting services or financial services) may have a physical risk footprint that is generally quite small and quantifiable, but exposure to transitional risks can be of significant impact on future corporate development and strategy.

Boards need to be versed in the transition risks that can arise from the process of adjustment towards the low-carbon economy to which Hong Kong has signed up as part of its commitment to the Paris Agreement. Addressing such risks requires adopting the longer-term thinking that drives board governance decision-making. This includes policy and regulatory changes, reputational impact, shifts in market preferences, changing social norms, new technologies and potential liability exposure and credit risk.

The reality of these risks is already witnessed in tightening energy efficiency standards and carbon emissions caps, and rapid technology changes that create asset/product obsolescence. Any failure to mitigate, adapt or disclose the financial risks from climate change thus exposes companies to possible climate-related litigation, limited capital market access and the impacts on the supply chain resulting from pandemic responses. Landmark shareholder voting and the European Union court rulings against big European fossil fuel conglomerates are a case in point. More recently in the US, three directors were voted off the board of Exxon Mobil by shareholders sending a serious message to the organisation that change is on the horizon.

Under TCFD-aligned reporting, the board’s understanding of, and oversight of, transition risks and its response preparedness should be discussed as part of the Management Discussion and Analysis disclosures in annual reports. A recent survey of FTSE 100 companies undertaken by PwC (see ‘Online links’) observes that while 76% of companies have a board-level committee with climate change oversight, only 10% describe the board’s competencies in this area and 17% disclose that board training is in progress. Hong Kong is no doubt further down the leader board on this. This calls for serious scrutiny of local competencies, the commitment to managing climate risks and whether current actions represent proper duty of care.

It is the board’s responsibility to put the shareholder in the seat of the CEO and show that shareholder how the enterprise is being shepherded today, tomorrow and well into the future when it comes to climate change risks and opportunities. By 2025, the board should be asking at minimum the following questions in regards to transitional risks and should be in command of the answers.

  • What is our appetite to run transitional risk? Are we thinking long term enough? Climate risk materialises over periods of time as short as two years and as long as 20 to 30 years and, as the stewards of the company, do we have the confidence to make decisions now that will have the desired impact well past our tenure?

  • What is our exposure to transition risks? How are we informed about these risks? In which sectors will transition risks emerge more quickly, and will they present possible nearer-term stranded asset risk?

  • In our supply chain, which of our business partners are doing well at assessing their own transition and physical risks, and which are further behind? What are the potential exposures? How are we educating and helping them to manage these risks?

  • What is our methodology to identify, manage, measure and report transition risk? How are responsibilities assigned to management/committees and how are they reported back? How often should we review our risk responses in connection with TCFD?

  • Do we have a clear understanding of our roles, and the accountabilities and responsibilities to manage these risks and do we have the correct skills to do this? Would the company consider making senior-level compensation conditional to performance on climate change?

These last two questions will be of increasing relevance as adoption of the TCFD reporting framework picks up. Without board competency and the clarity of climate change risks and impacts, and accountability for actions, there is no strategic plan to successfully operate within a climate-challenged future.

Practical recommendations

While there is no substitute for personal experience, there are options that can be learned from current international practices to bridge and facilitate uptake of the TCFD reporting framework. Many companies have already established internal ESG and climate change committees to establish scenario planning under the TCFD. These committees are well positioned to adopt the framework, but require the backing and endorsement of the board to be effective. This assumes a level of climate change competency at the governance level and an informed position on the issues.

Board-level training and regular briefings provide the critical understanding of climate risk as a global issue and the more specific understanding of the transitional and physical risks within the market sector and the company itself. An ESG/climate change expert can be appointed to the board or, at minimum, the executive to develop, oversee and steer strategy and policy. Some companies elect to set up advisory boards tapping external expertise to support decision-making. These strategies ensure that the necessary understanding and guidance from the most senior levels are in place, together with the supporting operational level systems and competencies for effective implementation.

The bottom line in TCFD reporting is that shareholders want defined assurances from the board on responsive climate change risk management and strategy planning. To quote Blackrock’s 2021 letter to CEOs, in which the company wholly endorses TCFD-aligned reporting, ‘We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors’.

SIDEBAR: Transitional risks – are you prepared?

The Taskforce for Climate-related Financial Disclosures (TCFD) distinguishes between the ‘acute’ physical risks from extreme weather events and the ‘chronic’ risks arising from changing weather patterns, and rising mean temperature and sea levels. The TCFD approach is particularly useful, however, in its emphasis on the need to also consider the transitional risks resulting from climate change and the shift to a carbon neutral future. As stated in the main article, these transitional risks are likely to be far more relevant to Hong Kong’s service-based companies. The TCFD highlights the aspects of transitional risks set out below:

Policy and legal

  • carbon pricing and reporting obligations

  • mandates on, and regulation of, existing products and services, and

  • exposure to litigation.


  • substitution of existing products and services with lower emissions options, and

  • unsuccessful investment in new technologies.


  • changing customer behaviour

  • uncertainty in market signals, and

  • increased cost of raw materials.


  • shift in consumer preferences

  • increased stakeholder concern/negative feedback, and

  • stigmatisation of sectors.

This article was first published in CSj the monthly journal of The Hong Kong Institute of Chartered Secretaries, September 2021, and is reproduced here through the kind permission of Theodora Thunder, member of the Red Links Sustainability Consortium and independent consultant.

Click here to learn how Theodora and the Red Links Sustainability Consortium can help you better understand and assimilate climate risks and opportunities into your business and more

External links are included for readers’ convenience. The inclusion of these sources is neither an endorsement of that provider nor intended to provide readers with any assurance as to the completeness or accuracy of the particular article linked.


  • More information on the Green and Sustainable Finance Cross-Agency Steering Group is available from the Hong Kong Monetary Authority website:

  • The PwC survey of FTSE 100 companies is available from the PwC UK website:


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