TCFD mandate: Everything you need to know about the UK’s new climate disclosure requirements

Earlier this year, the ISSB announced the launch of a consultation on sustainability disclosures

The UK Government confirmed last October, in the run-up to COP26 in Glasgow, that it would introduce the first mandatory TCFD-aligned reporting requirements for the private sector from 6 April 2022. Dates in 2022 and 2023 were floated, with an agreement ultimately being reached to select a more ambitious deadline.

Time has flown by since then and, now, the introduction date is upon us.

The aim of the mandate is to increase climate-related engagement between investors and the companies they invest in. Until now, non-unified climate disclosures have made it challenging for investors to truly measure their exposure to climate risk. Another benefit is that, in measuring their climate impact, risks and opportunities, businesses may well be compelled to increase their environmental ambitions and accelerate actions. For businesses, this may come with operational cost savings and cost savings in terms of avoided risks.

“By applying a common set of requirements aligned with the TCFD recommendations, UK companies will be provided with a uniform way to assess how a changing climate may impact their business model and strategy, and ensure they are well placed to harness opportunities from the UK’s transition to net-zero,” reads a Government statement on the matter.

But, of course, businesses and financial organisations will need to undertake additional work and potentially additional spending to produce the additional disclosure. Here, edie answers some common FAQs about the mandate.

What is the TCFD, and why mandate disclosures aligned with its framework?

The TCFD was formed by the Financial Sustainability Board in a bid to encourage the uptake of unified climate risk and opportunity measurement and disclosure across the private sector. It first published its framework in 2017, outlining guidance for disclosures regarding governance, strategy, risk management and climate targets. A key and unique facet of the framework is that it encourages businesses to undertake scenario analysis. This involves mapping likely risks and opportunities to the business’s value chain at a range of global warming trajectories, including those detailed in the Paris Agreement (2C and 1.5C).

192 countries plus the EU have joined the Paris Agreement. There is a growing recognition that bringing global greenhouse gas emissions to net-zero by 2050 will give the best chance of limiting the global temperature increase to 1.5C – the Agreement’s more ambitious pathway, and the pathway needed to avoid the worst physical impacts of the climate crisis. 90% of global GDP is now covered by net-zero targets from nations and regions.

With this in mind, national governments are increasingly drawing up plans to help the private and financial sectors transition away from activities that would undermine the delivery of the Paris Agreement. Disclosures can help investors to approach the low-carbon transition credibly and can force companies – particularly those with sizeable emissions footprints – to understand their climate impacts and risks and act accordingly. Responses may involve changing business strategy or even business model.

Which organisations are covered by the mandate?

The Government has estimated that around 1,300 organisations will be covered by the mandate in the first instance. It will apply to all companies currently required to produce a non-financial information statement annually – so listed companies, banks or insurers with more than 500 employees.

Also required to disclose will be UK-based AIM companies with 500 or more employees; LLPs with 500 or more employees and a turnover of more than £500m, and non-listed companies with 500 employees or more and a turnover of more than £500m. The Government will count employees in the UK and overseas and, if the company is a parent company, the threshold applies to the collective number of companies across the conglomerate.

Watch this space in the coming years; it is likely that the mandate will be expanded by 2025.

Non-compliance can result of fines of a minimum of £2,500 and a maximum of £50,000.

What, exactly, do I need to disclose?

The required disclosures are:

• A description of the organisation’s governance-related arrangements to measuring and managing climate-related risks and opportunities
• A description of the processes in place for measuring and managing climate-related risks and opportunities
• A description of how the above is integrated into an organisation’s overall risk management process
• A description of the key climate-related risks and opportunities arising from the organisation’s operations
• A description of the actual and potential impacts of these key climate-related risks and opportunities on a company’s strategy and business model
• Scenario analysis: An assessment of the resilience of the organisation’s business model and strategy in a range of different warming scenarios
• A list of the organisation’s targets relating to climate impact reduction, climate risks management and maximising climate opportunities
• Details of performance against the above targets to date, including a list of the KPIs used to assess progress

The Government appears to be focusing more on getting companies to start focusing on governance-related activities rather than providing full, in-depth disclosures. The regulations do provide flexibility to allow for differences in reporting due to the nature of the business, called the “materiality filter”. The materiality filter applies to the strategy, metrics and targets elements of the TCFD’s framework. Where any information is omitted, you will need to explain why.

What does best-practice disclosure look like?

As indicated above, it would be preferable for your organisation’s disclosures to include all recommended sections. If that is not possible for this year, details of plans to add missing sections from 2023 would also be welcomed, alongside robust explanations for any missing parts.

The best disclosures will likely be based on the best quality data. Businesses will need to provide up-to-date, credible and detailed data to conduct meaningful risk analysis and scenario analysis. They will also need accurate emissions data for all scopes.

Several organisations have also issued statements to edie arguing that, for companies truly wishing to go above and beyond the TCFD mandate, disclosure will not be seen as a tick-box exercise.

Carbon Intelligence Director Will Jenkins said: “There is far more value to be created. When embedded properly into an organisation, it is a strategic planning tool designed to drive internal change and allow better decision making in the context of economic and climate uncertainty in climate risk scenarios and the transition to net-zero.

“The TCFD framework provides an excellent opportunity to test the resilience of an organisation’s strategy and business model beyond the typical business planning cycles. Through the lens of multiple climate-related scenarios playing out in the future, organisations can make more informed strategic plans to manage risks and opportunities. Scenario analysis provides the context that is required to build robust transition plans.”

From 2023, certain large businesses in high-emitting sectors will need to produce transition plans, outlining how they will reach net-zero by 2050 at the latest and the measures they will take to maintain profitability and protect workers and communities at the same time. This measure was first confirmed by Chancellor Rishi Sunak at COP26. Further guidance for businesses is expected to be provided in the second half of 2022.

What resources can I access for guidance on producing a TCFD-aligned report?

edie hosts a free-to-download ‘explains’ guide on TCFD reporting. This was published last year and has been developed in partnership with Inspired Energy Plc, outlining all the key considerations that businesses need to be aware of when improving climate-related data disclosure and forecasting. Click here to access your copy.

Guidance from the TCFD itself can be accessed here, covering metrics, targets and the development of transition plans.

Specifically for UK listed companies, the London Stock Exchange has produced a guidance resource that can be accessed here.

Many companies will likely not have the in-house expertise to deliver a robust, TCFD-aligned report. It is worth looking for a credible external partner if this is the case.

How many organisations are already producing TCFD-aligned disclosures voluntarily?

The TCFD published its last annual status report in October 2021. That report revealed that the number of organisations voicing support for the Task Force’s recommendations increased by more than one-third year-on-year to 2,600 – the biggest annual increase to date. At that point, the combined market capitalisation of all supporters was $25.1trn.

But voicing support does not automatically equate to producing a good report. Around half of the companies to have voiced support for the TCFD had produced at least one report by October 2021. The TCFD has reported a slow and steady increase in reporting quality, and has recorded that the uptake of good scenario analysis has been slower than the adoption of many other parts of its framework.

Will other countries be introducing similar requirements to the UK?

The G7 meeting in Cornwall last June saw leaders agreeing to introduce a mandatory TCFD reporting requirement in the coming years. The UK will be the first, and the other six nations – Canada, the US, France, Germany, Italy and Japan – are expected to outline their proposals shortly. Also committed to introducing a TCFD mandate are Switzerland, which has set a 2024 introduction date, and New Zealand, which is aiming to introduce its rules in 2025.

Separately, the US Security and Exchange Commission (SEC) last month unveiled proposals to mandate bigger businesses to disclose their emissions in a unified way, including indirect (Scope 3) emissions. If the proposal passes, information will need to be included in publicly available annual reports from, potentially, as early as next year.

edie Staff