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The Taskforce on Climate-related Financial Disclosures was created by the Financial Stability Board at the Paris COP21 conference in 2015. It was launched to encourage the reporting of climate-related financial details across the global business community.
It is an industry-led group aimed at providing financial markets, investors and stakeholders with clear and precise information about the actions organisations are taking on topics such as climate change, global warming, climate-related policy and developing technologies.
Some countries are more aligned with TCFD goals and recommendations than others and the UK is among the global leaders in the field. Here, we explore how the UK’s largest businesses, trade companies, banks and financial institutions go about fulfilling their TCFD commitments.
What is the Taskforce on Climate-related Financial Disclosures (TCFD)?
The TCFD encourages the UK’s largest businesses and investors to make climate change the centrepiece of their activities and decision-making. The ultimate goal is to create transparent comparisons for all stakeholders and help the UK Government achieve its net-zero target of decarbonising all sectors of the UK economy by the year 2050 in line with the 2015 Paris Agreement.
The UK became the first G20 country to make it mandatory for its largest businesses and financial institutions to reveal their climate-related risks and opportunities based on TCFD recommendations. By doing so climate-related disclosures became consistent which created greater transparency for all stakeholders.
Is TCFD reporting mandatory?
The UK is committed to mandatory climate-related disclosures in line with TCFD recommendations and is the first G20 country to do so as it bids to establish its financial system as the greenest in the world.
Since April 2022, more than 1,300 UK-registered companies began disclosing this information alongside private organisations that have over 500 employees and an annual turnover worth £500 million or more. By doing so, climate-related disclosures became consistent which created greater transparency for all stakeholders and allowed investment managers to support major investors in UK-listed and private companies as they moved towards a greener business model
The mandate will likely be expanded by 2025 to include even more organisations and businesses. Research has shown many of the UK’s top companies anticipate there will be numerous benefits arising from TCFD reporting including an increase in brand value and company valuation, reduced shareholder pressure, more diversity of investors and an overall positive impact on finances.
If a parent company does not provide consolidated accounts, its disclosures should include details of how the value of its investment in subsidiaries may be affected by climate-related risks and opportunities.
In the case where a UK company has an overseas parent which reports on a consolidated basis, the UK company is required to comply separately with climate-related disclosure requirements.
An organisation may use third-party information to assess climate-related risks and opportunities. However, it is the legal duty of directors to make the disclosures.
How do you make TCFD disclosures?
The TCFD set out 11 recommended disclosures around four core pillars. These guide organisations and companies on best practices for reporting climate-related information in regular financial reports. This is aimed at ensuring climate-related issues are adequately addressed through governance and that transparency is followed at all times.
UK companies affected by TCFD recommendations are required to report climate-related financial information in their Non-Financial Information Statement which has recently been renamed the Non-Financial and Sustainability Information Statement (NFSIS). This forms part of the Strategic Report.
Limited Liability Partnerships (LLPs) which have more than 500 employees and a turnover exceeding £500 million should report disclosures in their Strategic Report or Energy & Carbon Report which forms part of their Annual Report.
At this point, there is no set format for making climate-related disclosures and information doesn’t need to be included within the NFSIS as it can be incorporated into an organisation’s Annual Report and Accounts. An organisation may also use third-party information to assess climate-related risks and opportunities.
What are the four pillars of TCFD?
There are four pillars of TCFD which aim to deliver climate-related information provided by organisations that is consistent, comparable, reliable and clear. The four pillars are:
1. Governance
This involves an organisation’s governance around climate-related risks and opportunities. This process often occurs at board and management levels to give clarity around an organisation’s integrated approach. Examples of this are how often a governing body meets, how many times climate matters appear on the agenda and how all relevant information is reported and relayed.
2. Strategy
TCFD reporting involves the actual and potential impacts of climate-related risks and opportunities on an organisation’s business portfolio, strategy and financial forecasts. This is likely to involve discussions around uncertainties associated with a variety of outcomes and scenarios relating to future climate change, including a 2 degree Celsius or lower global warming scenario, plus potential implications on costs due to increased insurance claims, for example.
3. Risk management
Risk management involves the processes introduced by an organisation to identify, assess and manage any climate-related risks and the impact they may have. This could involve how TCFD recommendations might affect major investment decisions and how these impacts will be addressed and managed across a team. TCFD requires organisations to describe how these processes are integrated into an overall risk management strategy.
4. Metrics and targets
This describes the metrics and targets used to assess and manage climate-related risks and opportunities. This could include disclosure of an organisation’s climate-related objectives, their performance targets plus any relevant environmental performance data around areas such as energy consumption, vehicle use, business travel and CO2 emissions.
How does TCFD affect businesses?
TCFD maps out clear recommendations around climate-related financial disclosures, so businesses consider the risks and opportunities facing them as a result of climate change. By doing this, businesses reveal their plans for reducing harmful emissions and improving sustainability.
This greater level of openness around attitudes and strategies towards climate change will provide a higher level of understanding for investors and businesses and establish a uniform method for assessing the effects of climate change on their business model. It will also highlight areas where businesses can maximize opportunities that emerge from UK’s transition to net zero.
To harness high-quality information that enables users to understand the impact of climate change on organisations, the Task Force recommends businesses and companies follow these seven principles for effective and detailed disclosure:
- Disclosure should represent relevant information.
- Disclosure should be specific and complete.
- Disclosure should be clear, balanced and understandable.
- Disclosure should be consistent over time.
- Disclosure should be comparable among organisations within an industry sector.
- Disclosure should be reliable, verifiable and objective.
- Disclosure should be provided on time.
Are there penalties for failure to comply with TCFD requirements?
Yes. The Financial Reporting Council has the power to monitor Strategic Reports and also make a court request for the preparation of related documents.
Non-compliance can result in fines ranging from a minimum of £2,500 to a maximum of £50,000.
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