Are you ready for mandatory TCFD?

Mandatory TCFD reporting now applies to UK premium listed companies. EcoAct’s TCFD expert, Sarah McGaw explains TCFD alignment and how best to be ready for mandatory reporting

By 2025, it will be mandatory for organisations across the UK economy to align their financial risk disclosures to the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD)[i]. The Government-regulator taskforce (UK taskforce) has published its roadmap to mandatory reporting, with the majority of new implementations planned to occur by 2023[ii]. The Financial Conduct Authority (FCA) has already published new policy which mandates all UK premium-listed companies to make TCFD-aligned disclosures for accounting periods that began on or after 1st January 2021[iii]. Whether your company needs to start on TCFD-aligned reporting now or in a couple of years, here is some information to clarify TCFD alignment and how best to be ready for mandatory reporting.

What is the TCFD?

In 2017, the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) published its recommendations for consistent, reliable, and decision-useful climate-related financial disclosures. The recommendations focus on four specific areas:

  • Governance
  • Strategy
  • Risk Management
  • Metrics & Targets

To date, they have been endorsed by over 1,500 organisations and have become firmly established within company reporting[iv].

The framework has gained momentum with standards bodies and the UN PRI requiring mandatory reporting for its signatories in 2020. In the Green Finance Strategy published in 2019, the UK Government set the expectation that that all listed issuers and large asset owners will be aligned to the TCFD recommendations by 2022[v].

While support for TCFD-aligned reporting and adoption has steadily gained momentum since 2017, the latest TCFD progress report reveals that there are still significant gaps in the quality of disclosures regarding the financial impact of climate change on companies’ strategies[vi]. According to the report, these aspects provide the most useful information to investors[vii]. Detailed disclosures are essential to facilitate better capital allocation, enhance market integrity and support the transition towards more sustainable investment.

Who is required to report?

The UK taskforce has published an indicative roadmap to mandatory TCFD disclosure in 2025, building upon initial steps made by independent regulators so far.

Timeline of planned or potential regulatory actions or legislative measures

What does this mean for companies?

UK companies with a premium listing are now required to make TCFD-aligned disclosures on a ‘comply or explain’ basis[viii]. The rule applies to accounting periods beginning on or after 1st January 2020, therefore the first disclosures will be published in Spring 2022.

Comply or explain:

Where they have not been able to make a recommended disclosure, companies must provide an explanation of why not, and a description of how they are addressing this gap and steps towards better disclosure in the future, including relevant timeframes. Due to known data collection challenges for some sectors, there will be some initial flexibility to allow companies to put in place necessary procedures[ix].

Looking forward

By mid-2021, the FCA will release mandatory TCFD implementation measures for asset managers, life insurers and FCA-regulated pension providers[x]. Consultation is also underway for amendments to the Pensions Scheme Bill which, when complete would see new measures take effect in Autumn 2021[xi].

For UK-registered companies, the Department for Business, Energy and Industrial Strategy (BEIS) released a public consultation in March. The new regulations will be published as revisions within the Companies Act 2006 and are due to take effect in 2022[xii]. Furthermore, in 2022 the Prudential Regulation Authority (PRA) will review the quality of disclosures from banks, building societies and insurance companies, and if necessary, they will consult on further measures to be included[xiii].

The Government will provide an update on progress alongside its revision of its Green Finance Strategy in 2022.

How can you get ready for mandatory TCFDs?

EcoAct’s recommendations:

  • Undertake a TCFD gap analysis to understand where your business is on strategy and governance in relation to climate change and how aligned you already are against the requirements. This might mean new processes and initiatives need to be set up. However, these will play an important role not just to satisfy the demands of reporting, but also in assisting future-proofing your organisation and in turn contribute to the future stability of the global financial system in the face of a changing climate.
  • Plan how you will carry out climate scenario analysis (CSA). CSA is a valuable tool for understanding the consequences of climate change for businesses and to encourage longer term strategic thinking about risks and opportunities. This is a long-term piece of work that requires engagement across the business but, if embedded successfully, will have benefits that extend far beyond compliance because it enables an organisation to not just avoid risk but make the most of opportunities and thrive.

 


 

[i] Deloitte (2020) – https://www.iasplus.com/en-gb/news/2020-en-gb/11/uk-tcfd-2025

[ii] Linklaters (2020) – https://www.linklaters.com/en/insights/blogs/linkingesg/2020/november/uk-paves-way-for-mandatory-tcfd-climate-disclosure-for-companies-and-other-organisations-by-2025

[iii] FCA (2020) – https://www.fca.org.uk/publication/policy/ps20-17.pdf

[iv] TCFD (2020) – https://assets.bbhub.io/company/sites/60/2020/10/TCFD-2020-Status-Report-Press-Release_FINAL.pdf

[v] FCA (2020) – https://www.fca.org.uk/publication/policy/ps20-17.pdf

[vi] TCFD (2020) – https://assets.bbhub.io/company/sites/60/2020/10/TCFD-2020-Status-Report-Press-Release_FINAL.pdf

[vii] FCA (2020) – PS20-17

[viii] FCA (2020)

[ix] Roadmap (2020) – https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933783/FINAL_TCFD_ROADMAP.pdf

[x] Ibid roadmap (2020)

[xi] Interim report – https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/933782/FINAL_TCFD_REPORT.pdf

[xii] Ibid – interim report

[xiii] Ibid – interim report

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