ESRS E1 vs TCFD: What Changes for Physical Climate Risk

Why this matters now

If your company spent the last few years reporting climate risk under the TCFD framework, you built a real skill. You learned to describe how floods, heat, drought, and storms could affect your business. Now that work is becoming law in Europe. Companies in scope of the Corporate Sustainability Reporting Directive (CSRD, the EU law that requires large companies to publish sustainability information) report under the European Sustainability Reporting Standards (ESRS). The first group of reporters is filing now.

The honest question most teams are asking is simple: we already do TCFD, so what is actually different?

The short answer for physical risk: TCFD let you keep the number optional. The new mandatory rules make you produce it.

This piece walks that shift in plain terms. It covers physical risk only (the risk that climate hazards damage your assets and operations). It does not cover transition risk (the risk from the shift to a low-carbon economy, such as carbon pricing or changing markets). Where a rule covers both, this piece reads only the physical-risk side.

The one thing to take away

TCFD left the physical-risk number optional. IFRS S2 already requires it (a rule called Paragraph 29(c)). ESRS requires it too, with the most demanding version of the metric (the value of exposed assets before you account for any defences, the share of those assets your defences cover, and the revenue at risk), phasing in for the first wave of EU reporters from FY 2027.

That is the whole story in three lines. The rest of this piece explains each one, so you can see where your existing TCFD work carries over and where you have a genuine gap to fill. For the detailed walkthrough of the IFRS S2 requirement, see our companion piece on IFRS S2 Paragraph 29(c).

What TCFD was, and where it went

TCFD stands for the Task Force on Climate-related Financial Disclosures. The Financial Stability Board, an international body, created it in 2015, and it published its recommendations in 2017, giving companies a common way to talk about climate risk in their financial reports. It organised everything into four areas:

• Governance: how the board and management oversee climate risk.
• Strategy: how climate risk could affect the business, its plans, and its finances.
• Risk Management: how the company finds, judges, and handles climate risk.
• Metrics and Targets: the measures and goals the company uses to track climate risk.

Under those four areas sat eleven recommended disclosures. The important word is recommended. TCFD was voluntary. It was a set of good-practice recommendations, not a law, and companies chose how far to take it. (Some countries, such as the United Kingdom, later made TCFD-style reporting mandatory, but the framework itself was built as a voluntary standard.)

TCFD has now done its job and closed. The Task Force disbanded in October 2023, and responsibility for tracking climate disclosures moved to the International Sustainability Standards Board (ISSB), the body behind the IFRS sustainability standards. So TCFD did not lose a contest with ESRS. It was the starting point that two mandatory regimes grew out of: the global IFRS S2 standard, and Europe’s ESRS. ESRS even kept TCFD’s basic four-part shape.

For the full background on the framework and its history, see our TCFD framework guide.

The core shift: from optional to counted

Here is the heart of the difference, and it is worth being precise, because TCFD is easy to caricature.

TCFD did not ignore physical risk. It asked companies to identify climate risks and describe their possible effects. But it gated the harder parts on materiality and let the analysis stay qualitative. Two features of the framework show this clearly.

First, TCFD asked companies to describe the effect of climate risk on the business “where such information is material.” That phrase appears throughout the recommendations. It means a company decided, case by case, whether to put a number on the exposure at all.

Second, TCFD was explicit that the deeper analysis could be words rather than numbers. Its own text states that “scenario analysis can be qualitative, relying on descriptive, written narratives, or quantitative… or some combination of both.” In plain terms: a company could test its resilience to climate change with a written story about the future and meet the recommendation.

Even the most detailed physical-risk guidance produced for TCFD kept the numbers optional. A 2018 supplement listed exactly the kind of figures a company might report, including value-at-risk from one-in-a-hundred or one-in-two-hundred-year events and annual average losses. But it framed them as metrics that “may include” those items, not must. They were illustrations of good practice, not requirements.

So the fair summary of TCFD on physical risk is optional by default, not absent. The information was encouraged. The number was never compulsory.

ESRS changes that. The European standard for climate, called ESRS E1, contains a disclosure requirement (E1-9 in the version in force today) on the anticipated financial effects of physical risk. Once a company judges that it has assets materially exposed to physical risk, the figures are no longer a choice. The standard asks for:

• the monetary amount and percentage of assets at material physical risk, before accounting for any climate adaptation actions, split by sudden hazards (such as floods and storms) and slow ones (such as heat stress and rising seas);
• the percentage of those assets that adaptation actions already address; and
• the monetary amount and percentage of net revenue that comes from activities at material physical risk.

The word that does the work is before. ESRS wants the gross exposure, the picture before your defences are counted. TCFD never asked for that.

Side by side

The table below sets the two frameworks against each other on physical risk, with the global IFRS S2 standard included where it sharpens the point. All three trace back to TCFD, so read it as a progression, not a contest.

One row deserves a note, because it surprises people. ESRS does not force you to run scenario analysis. The drafters made that a deliberate choice, recording that “the scenario analysis is not required by ESRS” and calling it a conscious departure from IFRS S2, which does require it. What ESRS does require is that you disclose the key elements of the method you used to assess physical risk. So ESRS is lighter than IFRS S2 on the scenario question, even though it is heavier on the exposure number. For how the IFRS S2 scenario rule works, see our piece on IFRS S2 Paragraph 22.

Three things a TCFD reporter underestimates

If your reporting muscle was built on TCFD, three parts of the move to ESRS tend to catch teams out.

1. You cannot net out your defences. Under TCFD, a company could describe its flood risk and, in the same breath, describe the flood walls and insurance that reduce it. ESRS asks first for the value of exposed assets before any adaptation actions, and then separately for the share those actions cover. You have to show the raw exposure and the protection as two distinct figures. The gross number is often larger than teams expect, because they are used to reporting the net story.

2. Someone checks your work. TCFD reporting was self-published. No external reviewer signed off on it. Sustainability statements under CSRD carry mandatory limited assurance, meaning an external provider reviews them. That changes the standard your method has to meet. A written narrative is no longer enough. Your physical-risk figures need a method that another party can follow and reproduce.

3. Materiality runs both ways. TCFD looked at one direction: how climate change could affect your business. ESRS uses double materiality, which adds the second direction: how your business affects the climate. For physical risk the first direction is what matters most, but the doubled test means climate gets special treatment in the standard, and a company that decides climate is not material to it has to explain that conclusion rather than simply stay silent.

Where your TCFD work carries over

None of this means starting from zero. The move from TCFD to ESRS is a deepening, not a restart.

Your governance disclosures carry over almost directly. Your risk-management process, the way you find and judge climate risks, carries over. If you built a scenario-analysis habit, that experience carries over too, even though ESRS does not strictly require it. The four-part TCFD structure is recognisable inside the European standard, because ESRS was built on it.

The genuine gap is the quantitative layer: the specific, asset-level, before-adaptation exposure figure. That is the part TCFD let you leave as a description and ESRS turns into a required number. It is also the part that is hardest to produce credibly, because it depends on data about individual locations rather than a company-wide narrative.

What the number actually needs

To produce a defensible before-adaptation exposure figure, you need to assess each asset against climate hazards at its actual location, under forward-looking scenarios, and document the method well enough that an assurance provider can follow it.

In practice that means a few things working together: named, traceable climate and terrain datasets rather than generic estimates; an assessment at the coordinates of each site rather than a national average; a range of emissions scenarios (a moderate pathway and a high one) so the exposure is tested across plausible futures; and several time horizons, from today out to mid-century, because the same asset can move from low to high risk as the climate shifts.

This is the layer Continuuiti is built for. We produce the asset-level physical-risk assessment the figure is built on: which assets are exposed, to which of twelve hazards, at what severity, under standard scenarios and time horizons, documented for assurance. A company maps its own asset carrying amounts onto that exposure to produce the monetary figure ESRS requires. Our methodology documentation sets out the datasets and approach in full.

The takeaway is steady, not dramatic. TCFD taught a generation of reporters to describe physical climate risk. The mandatory regimes now ask them to count it. For European reporters, the counting is no longer optional, and the figure they need is the one TCFD never asked for.

Where to go next

• The detailed EU rule on identifying physical risk: ESRS E1-2 physical risk identification
• The ESRS E1 climate standard, in overview: ESRS E1 explained
• The global mandatory version of the physical-risk number: IFRS S2 Paragraph 29(c)

Frequently asked questions

Is TCFD still required?

The TCFD framework itself has closed. The Task Force that ran it disbanded in October 2023, and responsibility for tracking climate disclosures moved to the body behind the global IFRS sustainability standards. The recommendations did not disappear: they became the foundation of two mandatory regimes, the global IFRS S2 standard and Europe’s ESRS. Where a country had already written TCFD-style reporting into law (the United Kingdom, for example), that obligation continues.

Does ESRS replace TCFD?

Not in the sense of winning a contest. TCFD was always a voluntary starting point, and it forked into two mandatory standards: the global IFRS S2 and Europe’s ESRS. ESRS even kept TCFD’s basic four-part shape (governance, strategy, risk management, and metrics and targets). So ESRS is best read as TCFD made mandatory and more demanding for European reporters, not as a rival that pushed it aside.

Do I have to run scenario analysis under ESRS?

No. The drafters made scenario analysis voluntary under ESRS, a deliberate departure from IFRS S2, which does require it. What ESRS does require is that you disclose the key elements of the method you used to assess physical risk. So on this one point ESRS is lighter than the global standard, even though it is heavier on the exposure figure.

What is the before-adaptation number?

It is the value of the assets exposed to climate hazards before you count any defences, such as flood walls or insurance. ESRS asks for this gross figure first, then separately for the share your adaptation actions already cover, plus the revenue at risk. TCFD never asked for the before-defences view, which is why the gross number tends to be larger than teams expect.

Sources

1. TCFD, Final Recommendations (Task Force on Climate-related Financial Disclosures, June 2017). The four pillars, the eleven recommended disclosures, the “where such information is material” gate, and the statement that scenario analysis “can be qualitative.” Public document.

2. Advancing TCFD Guidance on Physical Climate Risks and Opportunities (EBRD and the Global Centre of Excellence on Climate Adaptation, 2018). Lists value-at-risk and average annual losses as physical-risk metrics that “may include,” i.e. illustrative rather than required. Public document.

3. Financial Stability Board / IFRS Foundation, on the disbandment of the TCFD in October 2023 and the transfer of disclosure monitoring to the ISSB.

4. Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 (the ESRS). Annex I, ESRS E1 Climate Change, Disclosure Requirement E1-9, paragraphs 64 to 66: the anticipated financial effects of physical risk, including the before-adaptation amount and percentage of exposed assets, the share addressed by adaptation, and net revenue at risk. EUR-Lex CELEX:32023R2772.

5. EFRAG, November 2025 amended ESRS E1 exposure draft, Disclosure Requirement E1-11 (the renumbered successor to E1-9), paragraph 38: keeps the same physical-risk metric, sharpened to “carrying amount.” Not yet adopted by the European Commission; target effective FY 2027.

6. EFRAG, Basis for Conclusions on the amended ESRS (December 2025), paragraph 285: records that scenario analysis “is not required by ESRS,” a deliberate departure from IFRS S2.

7. Commission Delegated Regulation C(2025) 4812 final of 11 July 2025 (the “Wave 1 Quick Fix”). Lets first-wave reporters give qualitative-only physical-risk financial-effects information for their first three years of reporting, which places the first mandatory quantitative cycle at FY 2027.

8. IFRS S2 Climate-related Disclosures, Paragraph 29(c): requires the amount and percentage of assets or business activities vulnerable to physical climate risk. The mandatory global counterpart to the ESRS requirement.

9. Continuuiti methodology documentation, continuuiti.com/methodology/climate-risk/: datasets, scenarios, time horizons, and the per-asset assessment method behind a before-adaptation exposure figure.