The TCFD framework (Task Force on Climate-related Financial Disclosures) is a structure for disclosing climate change-related risks and opportunities across four pillars: governance, strategy, risk management, and metrics and targets. ISSB (IFRS S2) and SSBJ require disclosures based on TCFD, and with the mandatory disclosure of sustainability information in securities reports (yukashoken hokokusho) becoming more widespread, financial impact assessment of climate-related risks has become an urgent practical priority for Japan's Prime Market-listed companies.
The Four Pillars of TCFD — What Must Be Disclosed
TCFD-required disclosure is structured around the following four pillars. This four-pillar structure is carried over into ISSB (IFRS S2) and SSBJ standards and can be understood as effectively the same disclosure framework.
Governance: How the board of directors is involved in climate-related risks and opportunities. Disclose the board-level approval process and accountability structure of senior management.
Strategy: The impact of climate-related risks and opportunities on business strategy and financial planning. Multi-scenario future simulations are the core of this pillar.
Risk Management: How climate-related risks are identified, assessed, and managed. Show the state of integration with the company-wide risk management process.
Metrics and Targets: Metrics used to assess climate-related risks and opportunities (such as Scope 1, 2, and 3 emissions), and the status of reduction target-setting.
Of these, the "Strategy" section's scenario analysis and financial impact estimation require the most effort in disclosure preparation.
The Structure of Transition and Physical Risks
Transition Risks (Policy, Technology, Market)
Includes pricing risks from carbon taxes and GX-ETS, equipment upgrade costs from regulatory tightening, transition risks from fossil fuel-dependent technologies becoming obsolete, and market risks from demand shifting toward low-carbon products. For manufacturers, rising carbon costs and changes in product competitiveness are the primary impact pathways. For manufacturers serving the automotive sector in particular, changes in product demand driven by the electrification shift are the main transition risk item.
Physical Risks (Acute and Chronic)
Classified into acute risks (factory damage and operational shutdowns from typhoons, floods, and droughts) and chronic risks (long-term changes in the business environment from rising average temperatures, changing precipitation patterns, and sea-level rise). Cases where physical risks in the upstream supply chain cascade to the company's own operations are also important. If supplier sites in Thailand, China, and India are located in flood risk areas, the risk of procurement disruption increases.
Opportunities (Transition Opportunities)
Identified opportunities include growing demand for low-carbon technologies and products, cost reduction through improved energy efficiency, and improved access to green finance. TCFD requires disclosure of opportunities as well as risks, and strategic descriptions linking to product competitiveness are valued. For manufacturers, growing demand for energy-efficient equipment, EV-compatible components, and renewable energy equipment products are representative opportunities.
Practical Scenario Analysis — How Many Scenarios, What to Calculate
ISSB/SSBJ standards require sensitivity analysis across multiple scenarios, including a 1.5°C scenario (IEA NZE, IPCC SSP1-1.9, etc.) and a high-temperature scenario (IEA STEPS, IPCC SSP5-8.5, etc.).
Selecting reference scenarios: Rather than developing in-house, refer to scenarios published by the IEA (International Energy Agency), IPCC, and the Institute of Energy Economics Japan. IEA NZE (Net Zero by 2050) has been adopted by many companies as the representative reference for the 1.5°C scenario.
Setting time horizons: Disclosure recommends impact assessment across three time horizons — short-term (up to 5 years), medium-term (5–10 years), and long-term (over 10 years). For manufacturers with long capital investment cycles, long-term impacts (2035–2050) are also important disclosure items.
Carbon cost estimation (transition risk)
Multiply carbon prices under a 1.5°C scenario (e.g., USD 150–200/tCO2 by 2030) by the company's Scope 1 and 2 emissions to estimate the potential increase in carbon costs. Companies subject to GX-ETS should also factor in the cost of exceeding allowances. The impact rate relative to manufacturing cost or EBITDA is often calculated. Example: Annual emissions of 500,000 tCO2, carbon price of USD 150/tCO2 → Annual carbon cost of JPY 7.5 billion → Estimate the EBITDA impact rate.
Stranded asset risk assessment (transition risk)
Review the book value and estimated remaining useful life of equipment — such as coal boilers and heavy oil facilities — that may be rendered obsolete early by decarbonization. The size of stranded assets as a proportion of total fixed assets and an estimate of the cost of replacement investment form the disclosure content. Quantifying the impairment risk of stranded assets under transition scenarios from 2030 to 2040 is required.
Supply chain disruption risk assessment (physical risk)
Identify physical risks (flood hazard maps, typhoon frequency) in the regions where key raw material and component suppliers are located. For single-source procured items with high physical risk, the cost of alternative procurement or business continuity losses can be included in the disclosure. A 'vendor map × hazard map' overlay analysis is the starting point.
Manufacturer-Specific Financial Impact Pathways
In TCFD disclosure for manufacturers, the following industry-specific impact pathways are particularly important.
Energy cost dependence: For materials manufacturers that consume large volumes of electricity and gas in production processes (steel, chemicals, cement, glass, etc.), rising carbon prices directly impact manufacturing costs. Quantifying the relationship between energy intensity (energy consumption per ton of product) and emissions forms the foundation for carbon cost estimation.
Product demand shifts: Automotive component manufacturers need to disclose changes in product mix driven by electrification (declining demand for engine components, growing demand for new EV components) as transition risks and opportunities. After organizing which product groups are "stranded products (transition risk)" and which are "growth products (transition opportunity)," sales impacts should be estimated by scenario.
Regulatory compliance costs: Including the combined compliance costs for multiple climate-related regulations — such as CBAM, EU Taxonomy, and domestic GX-ETS — in TCFD disclosure enables investors to see a comprehensive picture of financial impacts.
The Starting Point for Disclosure Practice
Financial impact estimation does not need to achieve perfect precision from the outset. The staged approach adopted by many leading companies is: "identify the qualitative direction of impacts → conduct range estimation for quantitatively important risks → increase precision annually alongside disclosure."
Phase 1: Qualitative Risk Identification
Based on industry and business characteristics, create a list of risks and opportunities affecting the company. Organize the direction of impact (cost increases, revenue declines, etc.) and time horizon for each risk. No numerical data is needed at this stage — a workshop format for drawing out insights from relevant departments is efficient.
Phase 2: Quantitative Estimation of Key Risks
Conduct sensitivity analysis for 2–3 items judged to have the largest financial impact among the risks identified in Phase 1. Carbon price sensitivity analysis (the cost impact when carbon price changes at USD 50, USD 100, or USD 200) is the most accessible entry point for quantitative estimation.
Phase 3: Integrated Disclosure and Accuracy Improvement
Incorporate into securities reports and undergo review by external audit firms, while improving disclosure accuracy annually. Reference TCFD disclosures from leading companies and customize disclosure formats applicable to the company's own situation.
Designing a process whereby the CFO, finance department, and ESG department jointly review at least once a year leads to sustainable disclosure operations. If TCFD is treated as "an ESG matter" with no finance department involvement, the financial consistency checks necessary for inclusion in securities reports cannot be ensured. Clearly positioning the CFO or a senior finance executive as one of the responsible parties for TCFD compliance from the outset is the most effective organizational design for improving both the quality and speed of disclosure.