ZERO IN ON...

The Task Force on Climate-related Financial Disclosures

Why it’s more than a reporting mechanism

With governments around the world committing to net zero, reporting on climate considerations is a must for business.

The Task Force on Climate-related Financial Disclosures (TCFD) has developed a set of recommendations that are changing the way organisations manage climate risks and opportunities.

More than a tick-box exercise for a company’s annual report, TCFD reporting provides consistent, decision-useful and forward-looking information on the material financial impacts of climate change.

It will help reshape your business. And, importantly, it’s paving the way for a corporate standard on sustainability-related financial disclosures.

To help you on your way, here’s our tips for those starting out on their TCFD journey. If your business is already reporting on the disclosures, read our round-up on progress to date and emerging best practice.

Five things you need to know about TCFD

A leading standard that’s widely adopted

Nearly 60% of the world’s 100 largest public companies support the disclosures or reporting in line with the TCFD recommendations, or both.

Various countries are taking steps to encourage or mandate TCFD implementation and in the UK, the Financial Conduct Authority and UK Government have set us on a path to mandatory TCFD reporting.

Since 1 January 2021, all UK premium-listed companies have been required to state, in their Annual Report, whether their disclosures are consistent with TCFD recommendations, or to explain why not. The UK Government is also making TCFD-aligned disclosure mandatory for over, 1,300 of the largest UK-registered companies and financial institutions; making it the first G20 country to do so.

At COP26, the International Financial Reporting Standards Board (IFRS) announced the formation of a new International Sustainability Standards Board (ISSB), which will develop a comprehensive global baseline of sustainability standards. As TCFD will form a part of the ISSB, alignment will help position companies well for compliance with the new standards set out by the ISSB.

You’ll need to prepare your business for action

TCFD is about more than reporting. There’s a series of activity you’ll need to undertake so your business is prepared and able to report on TCFD’s 11 disclosure recommendations. This will involve introducing a governance structure for climate-related risk and opportunities, reviewing the transitional and material impacts of climate change and identifying the right metrics to assess and manage these impacts.

If you’re not already reporting under TCFD, start by reading the requirements. On the surface, the disclosures appear relatively straightforward but the detail behind them is contained in a separate annex – so begin by identifying your organisation’s known unknowns.

It will help future-proof your business

Climate scenario analysis is one of the 11 recommendations. Even the most basic scenario analysis can be enlightening, showing how businesses can realise opportunities or succumb to climate-related risks in different versions of the future. More complete, quantitative forms of analysis can help organisations test the resilience of their business models, as well as gain a fuller appreciation of how to prepare for the future.

This understanding will support organisations as they respond to the UK Government’s newly announced requirements for companies to publish net zero transition plans. The requirements apply to UK financial institutions and listed companies, who will need to set out in detail how they plan to adapt and decarbonise in line with the UK’s 2050 net zero target.

And drive strategic change

The disclosures can help pinpoint how climate change could affect revenue and costs, and challenge long-held assumptions of future value – both where value might be eroded and where it can be created. These insights help inform strategic decision-making and the choices needed to be made to grow your organisation.

TCFD disclosures start to provide a clearer understanding of where and how to make low-carbon investments, and often kick-start broader strategic questions on the optimal business model design to succeed in a climate-compatible future.

It provides a confidence boost for stakeholders

Investors, regulators, customers and employees are becoming increasingly climate conscious. TCFD assurance provides a clear message of intent, commitment and confidence to these stakeholders.

Assurance can help support strategic objectives and risks associated with unchecked ESG claims and ‘greenwashing’ considerations. It’s likely that external assurance over TCFD disclosures will soon become mandatory. Businesses need to understand the value they get from assurance, and the robustness of the assurance provider’s approach and reporting.

As we are now over halfway through the first year of compliance for UK premium-listed entities, find out how TCFD disclosures are shaping up in the market, and emerging best practice in the space.