Task Force on Climate-related Financial Disclosure (TCFD) reporting: a quick explainer
What is TCFD?
The Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase company reporting of climate-related financial information.
In 2021 it is highly likely TCFD reporting will become mandatory for a number of UK organisations. But what kind of information does this mean, who is affected and why is this happening?
Why should businesses share climate information?
Every business faces risks and opportunities, and it is important for investors, lenders and insurance underwriters to have an idea about what these are, to inform their decision-making. The changing climate represents an important source of such risks and opportunities, yet up to now, companies have not been required to share information about the potential impact of climate change on their business.
When businesses aren’t transparent about their climate-related risks, this doesn’t just affect the organisations who have dealings with them directly. On a larger scale, it is a threat to the stability of the economy as a whole. A market where decisions are made without the full information required is a market that can be vulnerable to abrupt corrections.
This is why the TFCD was created: to give companies guidelines on how best to identify and disclose the climate-related risks they face.
Who will have to carry out TFCD reporting?
Various countries have begun implementing the recommendations of the TFCD in their own way and on a voluntary basis. When the UK government set out its strategy in November last year, it warned that because of the urgency of the climate threat, “a voluntary approach to climate-related financial disclosure may not be sufficient.” It intends to put a significant proportion of mandatory requirements in place by 2023 following a roadmap for UK companies to transition to undertaking reporting. These roadmap/pathways will be subject to review and consultation by the relevant UK Regulators and Government departments.
The current roadmap suggests that TFCD-aligned disclosures will become mandatory this year for:
- Occupational pension schemes with over £5bn in net assets;
- Banks, building societies and insurance companies;
- Premium listed companies – that is, those which comply with the UK’s highest standards of regulation and governance.
A consultation has just closed on the government’s proposals to make climate-related disclosures mandatory for publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs) by 2022. Other types of organisation mentioned in the roadmap as having new obligations from next year are:
- Occupational pension schemes with over £1bn in net assets;
- The largest UK-authorised asset managers, life insurers and FCA-regulated pension providers.
- UK registered companies
- Wider scope of all listed companies
2023 and beyond
After next year, the scope will widen, probably to include smaller businesses, pension providers and asset managers, and there will be further refinements in measures across categories, including responses to evolving best practice.
What will TFCD reporting involve?
The TFCD sets out four categories for disclosure of climate-related information which will need to be factored into a company’s adherence to the reporting scheme:
Governance. Does your organisation consider the climate when discussing strategy and plans of action? Is climate part of your organisation’s risk assessment procedures? Is climate considered when you discuss significant actions such as mergers and major expenditure?
Strategy. Climate-related issues tend to manifest over the medium and longer terms, so does your company’s strategy take this into account? Have you considered how climate change could affect your operations in the long term? What about your supply chain? What are your organisation’s plans for adapting to a changing climate? If your organisation has used models of climate-related scenarios to inform your strategy, this should be disclosed.
Risk management. The TFCD recommends that organisations set out their assessment of climate-related risks, and how these compare to other risks faced by the business. How does climate fit into your overall risk management strategy? It is important to include the possibility of changing regulatory requirements as a climate-related risk too. For example, if the government introduced strict limits on emissions in your sector, how would your business respond to this?
Metrics and targets. It is important to share the figures underlying your decision-making and action on climate change. Is your organisation using internal carbon pricing, and if so, what price are you putting on carbon? What revenue do you expect to get from redesigning your products for a lower carbon economy? And, crucially, what are your greenhouse gas emissions? (You may already be measuring and reporting on these if your business falls in scope of SECR.) The TFCD recommends that you calculate your emissions in line with internationally accepted standard the Greenhouse Gas Protocol, and include Scope 3 emissions (those from your value chain) if appropriate.
The government said in its roadmap report last year that despite the pandemic, tackling climate change remains a priority. The increased transparency brought about by the introduction of TFCD reporting is intended to help drive investment in businesses and projects that are more environmentally sustainable and resilient to climate risk. This is part of the overall push to bring about a “green recovery” for the UK economy. For this reason, it is likely that the government will move ahead roughly in line with its roadmap. Businesses should prepare for the new rules by beginning to collate the data on their own climate impact, and on how climate informs their decision-making.