KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

I. Background and Purpose of Research

▶This study analyzes the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and their implementation status in South Korea, presenting tasks for effective execution and broader application.

▶ In the context of mandatory E.S.G. disclosures, key global frameworks and indicators expected to play a central role include the EU’s Corporate Sustainability Reporting Directive (CSRD) and its detailed standards, the ESRS, the U.S. climate disclosure regulations, and IFRS S2 Climate-related Disclosures.

○ These disclosure standards, particularly regarding climate change, are either based on the TCFD recommendations or demonstrate a trend toward expanding their universality. However, in South Korea, while institutionalization discussions are proliferating, there has been a lack of concrete introduction and analysis of TCFD recommendations within the field of legal.

▶ This study aims to enhance stakeholders' understanding and increase companies' applicability of the TCFD recommendations, which are expected to be the basis for the future mandatory disclosure standard, IFRS S2 Climate-Related Disclosure Standards. This study introduces the TCFD recommendations, identifies application issues, and derives future tasks.

○Companies must develop and internalize proactive capabilities in response to TCFD recommendations and IFRS S2 climate-related disclosure standards.

- The TCFD recommendations were proposed to establish guidelines for disclosing financial impacts related to climate change. The oversight function of TCFD recommendations has been transferred to the IFRS Foundation.

- The TCFD recommendations will maintain continuity through IFRS S2 climate-related disclosure standards.

- Companies must proactively prepare and build capabilities to respond to the expected mandatory IFRS S2 climate-related disclosure standards.

- Therefore, understanding the TCFD recommendations, which serve as a guideline for IFRS S2 climate-related disclosure standards, is necessary.

▶ Based on this awareness of the issue, this study first analyzes the key contents and characteristics of the TCFD recommendations, identifies their limitations in application, and proposes future tasks to enhance the understanding of relevant stakeholders and improve the applicability for businesses.

 

Ⅱ. Contents

▶This study introduces the TCFD Recommendations and analyzes differences with the IFRS S2 climate-related disclosure standards to identify application issues, current application cases, and the status of TCFD recommendations are reviewed, and tasks for improving applicability and expanding TCFD recommendations in the future are derived.

○ The TCFD recommendations are proposed as guidelines for disclosing the financial impacts of companies' environmental activities to stakeholders.

- The TCFD recommendations provide a disclosure framework for the financial risks and opportunities posed by climate change, establishing themselves as a global framework that enhances corporate transparency and supports informed decision-making by investors and stakeholders.

- The TCFD Recommendation proposes four pillars: governance, strategy, risk management, and metrics and targets, with 11 supplementary indicators for the four pillars.

○The oversight of the TCFD Recommendations has been transferred to IFRS Foundation. Therefore, the TCFD Recommendations will continue to serve as fundamental guidelines for companies' climate response activities through the IFRS S2 Climate-Related Disclosures standard.

- The oversight function for corporate climate response activities based on the TCFD Recommendations has shifted to the IFRS Foundation; companies are expected to perform financial disclosures through the 'IFRS S2 Climate-Related Disclosure Standards' proposed by the ISSB of the IFRS Foundation.

○ It is necessary to identify current issues before IFRS S2 climate-related disclosures become mandatory and present supplementary guidelines, policies, and institutional support measures.

-It is necessary to develop differentiated (relaxed) application guidelines by company size to expand the application of TCFD recommendations to medium and small enterprises (SMEs). 

-It is urgent to propose differentiated (relaxed) application guidelines and policy and institutional support measures for industries such as agriculture, forestry, and food manufacturing, where the application rate of TCFD recommendations is meager and the proportion of small businesses is very high.

▶ Status and Challenges of TCFD Implementation in South Korea: The Korean government, led by the Ministry of Environment and the Financial Services Commission, has actively promoted the adoption of TCFD recommendations. 

○ Through frameworks like the K-Taxonomy, the government has aimed to complement TCFD objectives and advance sustainable finance.

-Initially, major corporations in sectors such as energy, finance, and manufacturing began adopting TCFD-based reporting. However, participation among small and medium-sized enterprises (SMEs) remains significantly limited.

○ From an industrial perspective, strategies tailored to the type and scale of industries are necessary for effective implementation. Yet, the lack of localized indicators to concretize the abstract goals of TCFD persists in South Korea.

-SMEs, in particular, face multiple challenges in applying TCFD recommendations, including inadequate data availability, difficulties in data collection, obstacles in scenario analysis, and the absence of regulatory mandates.

▶ The Need for Response Strategies Considering Global Trends and Enhanced Universality: Global actors such as EFRAG, the IFRS Foundation (ISSB), and GRI have adopted TCFD as the standard for climate-related disclosures while simultaneously enhancing its universality.

○ Harmonization with international sustainability standards is expected to improve comparability among businesses and boost trust in global investment environments. However, domestic efforts to align with these trends remain insufficient.

○ In addition to TCFD, the Task Force on Nature-related Financial Disclosures (TNFD) was established in 2021 to address natural capital-related financial disclosures that TCFD does not cover. TNFD tackles comprehensive issues such as biodiversity, ecosystem services, and natural assets.

- While TNFD shares structural similarities with TCFD, it employs a specialized approach (LEAP) tailored to natural-related disclosures.

- Ultimately, the integrated application of TCFD and TNFD is anticipated to strengthen the capacity to address both climate change and nature loss while establishing disclosure systems aligned with global sustainability standards.

 

Ⅲ. Expected Effects

▶This study provides a basic understanding of the TCFD Recommendations for the application and interpretation of sustainability reports and climate risk response guidelines.

○ This study provides an understanding of the information disclosure requirements of stakeholders related to climate response and the standard for providing financial and non-financial risk information related to the impacts of climate change.

▶This study provides foundational knowledge for formulating strategies to respond to sustainability reports and climate risk disclosures.

○ This study provides the need for establishing climate-related risk management systems to respond to climate-related disclosures in the U.S. and Europe, as well as IFRS S1 and S2 information disclosures.

▶ Providing a Foundation for Corporate Sustainability Reporting and Climate Risk Response Strategies

○ With the implementation of climate-related disclosure regulations in the U.S. and Europe, the mandatory E.S.G. information disclosures in South Korea, and the adoption of IFRS S1 and S2 standards, it is essential to establish a foundation for identifying climate-related E.S.G. solutions and enhancing climate risk management frameworks.

▶Strengthening Climate Risk Management and Enhancing Global Competitiveness for Korean Industries

○ The government must fully understand the ongoing global trends toward integration and expanded universality in sustainability disclosure standards. Furthermore, it should translate the abstract goals of TCFD into actionable and practical strategies.  

○ To achieve this, differentiated guidelines tailored to industries and company sizes must be developed. Additionally, concrete measures to support small and medium-sized enterprises (SMEs) should be implemented to ensure broader participation and effective climate risk management.