The UK Government’s Climate-related Financial Disclosure (CFD) regulations introduced mandatory climate change reporting requirements for hundreds of large UK private companies and limited liability partnerships (LLPs) in 2022. However, there is some confusion on what the need for CFD is considering the close alignment to the Taskforce for Climate-Related Financial Disclosure (TCFD) and its broader position in the sustainability reporting landscape. EcoAct analyst, Freddie Baker outlines what climate-related financial disclosure is, who it applies to and when you need to start reporting.
As a result of a climate change, many businesses and organisations now face risks to their operations and performance. These climate risks arise in two forms: physical climate risk, such as extreme heat and flooding, and transitional climate risk, such as regulation and changing customer demands. Businesses and organisations need to work to mitigate the climate risks they face, however in doing so this also produces opportunities for organisations, whether through resource efficiency or cost savings.
What climate-related financial disclosure aims to do is integrate the governance, assessment, management and monitoring of climate risks and opportunities into traditional financial filings and wider business strategy. This has two main outcomes and is more than just regulation. First is to provide guidance on how businesses and organisations can identify and incorporate material climate risks and opportunities into their financial planning, and therefore mitigate them through business transformation. The second is to communicate the actions on the relevant climate risks and opportunities externally, in an outward facing disclosure for third parties, such as investors, to make sound decisions based on the exposure of the climate-related risk.
CFD is a UK-based Companies Act legislation to publicly disclose on climate change related risks and opportunities. It is mandatory to produce disclosures against the requirements of the legislation which broadly cover how climate change is addressed in corporate governance; the impacts on strategy; how climate related risks and opportunities are managed; and the performance measures and targets applied in managing these issues.
You might be thinking that sounds just like the TCFD. That’s because it largely is. The government state that they recognise “the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) as one of the most effective frameworks for companies to analyse, understand and ultimately disclose climate-related financial information”. However, they see the adjustments they have made from TCFD to CFD to be closer aligned with their broader Net Zero Strategy, which is causing confusion especially for those that may fall under both TCFD and CFD reporting.
CFD is required in the group level annual report with clear signposting in the renamed ‘non-financial information statement’. Subsidiaries whose activities are included within a consolidated group report of a UK parent that complies with the climate-related financial disclosures requirements are not required to report separately. If a company is not included within the consolidated group reporting then you must report at the company level. Similarly, subsidiaries registered in the UK with an overseas parent company must comply to CFD.
In the table above we have outlined specific company types that are required to comply and the characteristics of those companies required to disclose against CFD vs TCFD. There is considerable overlap between the two which will resort in many companies having to disclose against both CFD and TCFD.
In the UK there is a significant proportion of the economy that is not covered by any climate-related financial disclosure. Since the expansion of the mandatory TCFD reporting to include all premium listed companies, along with the largest asset managers, life insurers and pension providers, this has shrunk, but the government believe those outside of these categories should also be covered by mandatory reporting.
Unlike TCFD which is comply or explain and regulated by the FCA, CFD is a mandatory requirement of the Companies Act and so increases the level of government agency on those that have to disclose and what the disclosure looks like.
CFD is applicable for financial years starting on or after 6th April 2022. This is not brand new legislation and we recognise it can be difficult to juggle all the requirements of environmental policy. We have a dedicated team at EcoAct that focuses on climate-related financial disclosures and can help you navigate this space, provide compliant disclosure and best practice examples. We recommend you check with internal legal teams to assess whether you fall under the regulation.
As already mentioned, CFD is largely born out of the TCFD recommendations, yet there are some important differences. The largest being the fact that CFD is mandatory to respond to all requirements whereas TCFD is on a comply or explain basis. The table below summarises the key differences.
|Comply or Explain
|Where to report?
|Annual Report or separate documentation
|Why – why a scenario was chosen, why this metric, why this target
|What – What scenario was chosen, what your metric is, what your target is
|Materiality is defined by the disclosing company
|Provide and explanation as to why exclusions have been made
|Not a requirement
|Climate Scenario Analysis?
|Required to be updated every 3 year
|Not explicit on the frequency
|Number of reporting criteria?
A large number of companies in the UK will now be legally covered by CFD and TCFD reporting. But fear not, this doesn’t mean double the output. Due to the similarities highlighted above, any information disclosed in an annual report against TCFD can count towards CFD disclosure and vice versa. However, the subtle differences should be addressed and where your TCFD disclosure may have used the ‘explain’ option previously, this will need to be fully responded to, to ensure compliance with the mandatory CFD requirements.
If you need support understanding climate-related financial disclosure, our team of dedicated experts can help. Get in contact with them here.
Traditionally, climate disclosure focused on the question “What is the impact of your organisation on climate change?”. The TCFD flips this question on its head, to ask “What will be the impact of climate change on your organisation?”.
Now, more than ever before, we must consider this question and understand the implications of climate change to make sure we are taking adequate action: investors are demanding it, governments are making it mandatory and climate science is telling us it is increasingly urgent.
In our TCFD eBook we demonstrate how to improve business disclosures, strengthen climate and sustainability strategy, and future-proof business through one exercise: TCFD alignment.
Download the guide to learn:
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