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 / The New Task Force on Climate-Related Financial Disclosures

The New Task Force on Climate-Related Financial Disclosures

25 Feb 2022

|5 minutes

The TCFD's objective is to report the impacts an organisation has on the global climate.

Over 1,300 UK companies required by task force to disclose climate-related financial information

Climate change and all its implications has an intricate complexity that spans the globe. The unpredictability of natural disasters and the speedy transition to low-carbon technologies bring unique challenges when it comes to financial and economic decision making.

What is the TCFD?

Recognising this unprecedented issue, the Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) whose role it has been since its inception to report on the impact a company has on the climate. Its purpose - to introduce transparency to the decision-making process.

The purpose of the TCFD framework and recommendations

The TCFD developed a reporting framework, which it released in 2017, to make climate-related disclosures made by organisations consistent and comparable. The reasoning behind the framework was to develop guidance that would allow investors, insurance companies and lenders to understand the risks and opportunities facing a company as a result of climate change. It would also inform on market pricing. The TCFD framework was favourably received and has been widely used by organisations around the world.

In October 2021, new guidance was released by the TCFD covering climate-related targets, plans and metrics that will help organisations connect these areas to financial impact. The release of the new guidance was met with a swift and decisive response from the UK government. The decision is set to affect some of Britain’s largest companies and financial institutions.

UK response and implementation of climate-related disclosures

In what could be considered a timely announcement, the UK government disclosed just a few days before the start of the climate summit – COP26 – in Glasgow, that under new legislation, it would be mandatory for firms that meet certain criteria to disclose their climate-related information in accordance with the TCFD recommendations. The announcement also followed the release of the government’s net-zero strategy which laid out stringent targets for achieving carbon-neutrality by 2050.

Who will the mandatory TCFD reporting affect?

The move means that the UK will become the first G20 country to legally bind itself to the TCFD framework; a framework that has always attracted voluntary observance. As countries and their organisations come under increasing pressure to respond to climate change, it’s likely that others will follow the UK’s trail-blazing approach and shift to making disclosure under the TCFD recommendations mandatory.

The new rules surrounding the disclosure of climate-related financial information come into effect in April and will apply to accounting periods starting on or after 6 April 2022. Around 1,300 UK companies will be affected by new reporting mechanism; those in scope are those that:

  • Have more than 500 employees
  • Generate over £500 million in turnover

And that fall into either:

  • Financial sectors – banks, insurers, asset owners, asset managers

Or:

Non-financial sectors – energy, transportation, materials and buildings, agriculture, food and forest products

The information that will be required to be disclosed may be entirely new to some companies and will closely follow the four key pillars of the TCFD recommendations, which are: Governance, Strategy, Risk Management, and Metrics and Targets.

There are two main requirements:

Submission of a qualitative scenario analysis

Businesses will now have to provide a qualitative scenario analysis. This analysis could rely on industry trends, historical and experiential information, or could be research based. Real analysis and data from industry trends could be used, while climate-related experiential information could be gathered from teams and departments across the organisation to form an overall picture of risk and opportunity. Research-based scenarios could make use of surveys and industry studies.

Recommended TCFD disclosures

Companies are advised to also consider including the TCFD’s 11 recommended disclosures and describe:

  1. The board’s oversight of climate-related risks and opportunities
  2. Managements role in assessing and managing those risks and opportunities
  3. Identified risks and opportunities of the short, medium and long term
  4. Impacts of risks and opportunities on business, strategy and financial planning
  5. The resilience of the company’s strategy under different scenarios
  6. The process for identifying and assessing climate-related risks
  7. The process for managing climate-related risks
  8. How 6 & 7 are integrated into the overall risk management
  9. The metrics used to assess climate-related risks and opportunities
  10. Scope 1, 2 & (if appropriate) 3 emissions

As the target for achieving net-zero looms, smaller UK businesses can expect to be required to report on their climate change and carbon footprint goals and initiatives. So, for organisations not currently impacted by TCFD could it be best practice to start while it’s still a voluntary option?

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