Energy Advice Hub’s Guide to
Task Force on Climate-Related Financial Disclosures
Sustainability Disclosure Requirements
As of April 2022, over 1300 UK-registered large companies and financial institutions are required by law to carry out climate-related reporting. Your annual reporting should now include disclosures in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
As well as meeting their current obligations, organisations in scope of TCFD-aligned reporting need to be aware of future developments. The Sustainability Disclosure Requirements (SDR), currently at consultation stage, are set to go further than the current guidelines.
Our guide explains exactly what TCFD reporting is and why it matters to your organisation. Crucially, it also explains what is coming next: how the SDR will work and what to expect.
We are used to thinking of climate reporting in terms of a company’s carbon footprint. Whether it is in the context of mandatory carbon reporting or under a broader ESG umbrella, the focus until now has been on how the company affects the climate. TCFD flips the focus: it is all about how the climate affects (or could affect) the business .
TCFD flips the focus: it is all about how the climate affects (or could affect) the business
The changing climate brings a multitude of different risks to businesses, on a spectrum from entirely predictable to completely unexpected. But they come in two broad categories.
Physical risks are connected to the tangible effects, or potential effects, of climate change. This could be anything from transport problems caused by railways buckling in a heatwave, to damaged goods caused by a factory flooding. Physical risks also include the effects of climate change on human beings connected to the business; for example, if the workforce in a particular part of the world is affected by heat-related illness.
Transition risks are connected to our response to climate change and our attempt to transition to a net zero economy. This might mean falling foul of new emissions-related legislation, or customers turning away from a business perceived as slow to act on the climate threat.
Up to now, most companies have not made climate change a serious factor in their business planning. The small minority of businesses that have modelled outcomes based on different degrees of global warming have not (until now) been under any obligation to share that information with anyone else. This puts investors and other stakeholders at a serious disadvantage.
It is impossible to assess a company’s future profitability accurately without taking climate into account. Exposure to climate-related risk is a key factor in the viability or otherwise of the business. Without knowledge of this potentially large area of risk, investors cannot make informed decisions.
Investors are well aware of this and have been pushing for greater transparency on climate risk.
“Sustainability is no longer something that can be addressed after strategic investment decisions have been made; it is indispensable to making investment decisions.”
BlackRock, the world’s biggest asset manager
The TCFD’s guidelines have been endorsed by over a hundred countries. In 2021, New Zealand became the first country in the world to make it mandatory for certain businesses to follow the TCFD’s guidelines. In 2022, the UK became the first G20 country to do the same. The purpose? To avoid destabilising the economy through poorly informed investment decisions.
TCFD reporting is mandatory for UK-registered companies and limited liability partnerships (LLPs) that meet certain criteria. This includes:
Mandatory TCFD reporting currently applies to over 1,300 of the largest UK-registered companies and financial institutions.
It is very likely that the scope of mandatory TCFD reporting will broaden as time goes on. The government’s first major statement of intent was the 2019 Green Finance Strategy, which set out goals of “greening the global financial system and catalysing the investment we need”. Bringing in mandatory TCFD-aligned reporting for all listed companies and large asset owners was the first step, but the strategy makes it clear that government will be “building on” this achievement.
November 2020’s A Roadmap towards mandatory climate-related disclosures also makes it clear that the government is still pushing forwards on climate reporting. The roadmap sets out the expectation that other categories of business will gradually be brought into scope in the coming years, although the exact details are subject to consultation.
For businesses already in scope, the reporting is for accounting periods starting 6 April 2022 onwards.
Some companies will be used to producing a non-financial information statement as part of their Strategic Report, because this is already mandatory for quoted companies, banking companies and insurance companies. As of April 2022, this statement is now known as the Non-Financial and Sustainability Information Statement and should include your TCFD-aligned reporting.
For other companies and LLPs, it depends on whether or not you already prepare a Strategic Report.
The TCFD says that climate reporting should cover four areas, or “pillars”.
It is crucial that climate is considered as part of the top-level governance of an organisation rather than being the responsibility of one department. The board, board-level committees and non-executive directors should be aware of climate issues and how they could affect the organisation. You should cover how the board is kept informed of climate risks and how climate is a consideration in board decisions. You should also mention what processes you have for ensuring the board is keeping track of progress on climate goals.
This should cover how your business strategy is informed by climate considerations. This means not just the risks, but also the potential opportunities linked to climate action. (For example, taking decisive and public action on emissions may help your business to position itself as a green leader in the market and attract a new demographic of customers.)
Your business strategy should model how you will respond operationally to different warming scenarios. How will the running of your business change in a 1.5°C warmer world, and how do you plan to respond to that? What about 2°C and beyond?
Is your organisation taking climate risk as seriously as any other kind of business risk? What is your process for identifying potential climate risks and assessing their severity? Your organisation will have to choose which potential risks to prioritise when allocating resources for managing them. What are your criteria for these kinds of decisions?
Remember that “climate risk” does not just mean physical risks such as a drought affecting agricultural production or a flood causing havoc with supply chains. It could also mean reputational risk, legal risk and more.
This pillar requires your organisation to back up the claims made in the other three categories with some hard numbers. What figures are you using in your modelling of climate risk at various degrees of warming? What numerical targets are you setting to measure the success of your strategy?
This pillar has to include your emissions data in Scope 1 and 2 at a minimum, and Scope 3 where appropriate. As well as the data itself, TCFD-aligned reporting must be clear on the methodology used to arrive at those figures.
As well as absolute emissions, many organisations use intensity ratios to measure progress towards their climate targets in a way that is meaningful to them. That could be kg of carbon dioxide equivalent per hundred pints poured, per £100 profit or per thousand customers served. The TCFD welcomes this, as long as the metrics used to measure it are consistent over time.
TCFD reporting also requires companies to consider their own plans in relation to the net zero transition.
Businesses should now disclose “targets consistent with cross-industry, climate related metric categories where relevant”.
Those businesses with a comfortably distant “by 2050” goal are also expected to include interim targets, so that it is clear how they intend to reach that goal and what progress they are making so far.
This does not mean that organisations actually have to set their own net zero targets – at least, not yet. But it does mean that they have to acknowledge the overall transition to a net zero UK economy and plan for how they intend to adapt to the changes involved. The transition plans should include:
In April 2022, the UK government unveiled the Transition Plan Taskforce to develop a “gold standard” for transition plans.
As the agreed standards emerge, the government will be strengthening its requirements and pushing to increase adoption. Financial institutions will be the first businesses to be required by law to publish transition plans. This means asset managers, regulated asset owners and listed companies.
Large firms in high-emitting sectors come next, needing to meet this requirement from 2023. The mandate for other large businesses and public enterprises will come in by the end of 2024.
Mandatory TCFD-aligned reporting is not an isolated piece of legislation, but part of a broader push towards greening the UK economy. Back in October 2021, the government laid out its plans in the Greening Finance Roadmap. This introduced the more ambitious Sustainability Disclosure Requirements, or SDR.
The SDR goes beyond TCFD-aligned reporting in two important ways.
While TCFD reporting is focused solely on climate, the SDR is intended to be an integrated framework for all corporate sustainability disclosures. The UK will be developing its own version of the EU Green Taxonomy (published in 2020) to define environmental objectives. Business activities will then be measured against the new UK Green Taxonomy to assess how environmentally sustainable they are.
The UK Green Taxonomy is likely to have the same six objectives as its EU counterpart:
The SDR is also likely to bring in a new legal concept: the idea of “double materiality”.
Double materiality is the acknowledgement that:
So a double materiality focus for disclosures means stating both
The SDR were originally going to be included in the Financial Services and Markets Bill that was announced in the Queen’s Speech in May 2022. But ministers made a last-minute decision to leave out any mention of the SDR. The Treasury told the Financial Times that it remains “committed to implementing sustainability disclosure requirements and will proceed with the necessary legislation in due course”.
It seems likely that after more consultation, the new rules could be in place in the next couple of years. But unfortunately there is little certainty over timescales, detail or scope of the SDR at present. Large UK businesses, especially those in the finance sector, will need to be prepared in order to avoid being caught out.
The changes coming, along with the rules that are already here, mean that UK businesses will have to engage with climate issues more actively than ever before. The good news is that you may have done more of the groundwork than you realise.
If your business is in scope of the Streamlined Energy and Carbon Reporting (SECR) scheme, you will be familiar with reporting on your energy use and associated emissions. You may also be keeping notes on your environmental impact for other reasons, such as ESG reporting. So TCFD-aligned reporting does not mean starting from scratch.