What is it?
Set up in December 2015, the Task Force on Climate Related Financial Disclosures (TCFD) was created by the Financial Stability Board, (an international intergovernmental body) who monitor and make recommendations about the global financial system, with the board including representatives from G20 members. The TCFD was created due to increasing pressure surrounding the need for large companies to be aware of and accountable for the risks relating to climate change. Made up of 31 people, the taskforce has amassed a wide portfolio of businesses who have signed up to their recommendations which were published in June 2017, with over 4000 organisations spreading 100 countries.
The recommendations state that disclosures should be structured around four thematic areas:
- Governance- Disclosing the board’s oversights of climate risks and opportunities, alongside their role in assessing and managing this. Companies should document the frequency in which the board are informed on climate issues, whether the climate is considered in large-scale plans and whether climate responsibilities have been assigned to management or a committee.
- Strategy- Describing the climate risks and opportunities to short, medium and long-term plans. Businesses will need to factor in the resilience of their plans under numerous potential scenarios and how this could impact their overall aims.
- Risk Management- Any risks that arise need to be managed, consequently this involves the process for identifying, assessing and managing climate risks and how they can be integrated into the company’s overall risk management policies. These need to be considered alongside existing regulations.
- Metrics/Targets- The metrics used to evaluate climate risks, strategies and opportunities needs to be published alongside historical data and future forecasts with the aim of illustrating that the business meets all climate targets.
The TCFD aim to create disclosures which can be optimised by the widest audience possible and should strive to be:
- Presenting the relevant information.
- Specific and complete.
- Clear, balanced and understandable.
- Consistent over time and provided on a timely basis.
- Comparable with other companies within a certain sector.
- Reliable, verifiable and objective.
UK Approach
The recommendations are yet to be embedded within legal requirements around the world and remain optional, but the UK has taken a proactive approach, becoming the first country in the G20 to adopt them as a legal requirement from April 2022. The UK government estimated that over 1,300 of the largest companies would have to comply, those included are:
- UK companies which produce a non-financial information statement.
- UK companies on the Alternative Investment Market (AIM) of the London Stock Exchange, which is for smaller and fast-growing companies, with over 500 employees.
- UK companies which are in neither of the above but have more than 500 employees and a turnover of over £500 million.
- Limited Liability Partnerships which have more than 500 employees and a turnover of £500 million.
- A wide range of businesses are covered, with examples including Tesco, Aviva and Unilever.
The mandate for which companies must comply is expected to be broadened by 2025 and administration within the UK has been handed to the Financial Reporting Council (FRC). The FRC has the power to:
- Monitor strategic reports.
- Make court requests.
- Issue fines for non-compliance which can range between £2,500 and £50,000.
The global picture highlighted that non-compliance can be an issue, in October 2022 a TCFD survey of 1400 companies signed up to their recommendations found that only 4% sufficiently covered all four of the desired areas. The UK government will hope that through mandating the disclosures, they eradicate this chequered pattern of reporting.
Benefits of Adopting
Adopting the recommendations will have multiple benefits for an organisation within the UK:
- Demonstrates that a business is thinking about the climate.
- Formulating policies to tackle climate issues and communicating them in a sufficient manner.
- Better access to capital from investors and lenders due to confidence that climate risks are being managed.
- Ensure that all existing climate regulations are being met and increase overall company transparency.
- Helps protect against potential loses from catastrophes relating to climate change, between 2017 and 2021 the TCFD estimated that $1.28 trillion was lost in this way.
Reporting on climate risks and opportunities is going to be a permanent feature of the business landscape in the UK and the legislation which will uphold the disclosures is only going to strengthen. In 2021 the COP26 summit in Glasgow saw the International Sustainability Standards Board (ISSB) be established, with the hope that the ISSB can provide a worldwide jurisdictional requirement for disclosures.
How LGE can help
LGE have extensive expertise in carbon management and sustainability. To find out how we can assist you with your TCFD submission contact us at info@lgegroup.com