Since the introduction of the 2017 Task Force on Climate-Related Financial Disclosures (TCFD) recommendations a lot has happened in the climate risk disclosure space. EcoAct experts Lauren Jasper and Louise Dubreuil explain how TCFD disclosure has evolved over recent years and breakdown key recommendations for improving TCFD-aligned reporting.  

How has TCFD disclosure evolved?

The climate risk disclosure space is continually evolving and while many companies have been voluntarily reporting against TCFD recommendations since 2017, TCFD-aligned reporting only became mandatory for over 1,300 of the largest UK-registered companies and financial institutions in 2022.

Support for the TCFD has increased significantly since its 2021 status report was published. Around 1,300 new organisations indicated their support for the TCFD following this report, and TCFD-aligned reporting increased at an average of 32% annually over recent years. This is positive to see. This upward trend is also evident in the recently published 2022 TCFD Status Report, with 90% of TCFD survey respondents indicating that they use climate-related financial disclosures in making financial decisions.

However, EcoAct’s most recent Climate Reporting Performance research found that, despite increased recognition of the TCFD in corporate reporting, 22% of large companies still do not acknowledge climate as a principal risk to their organisations in their Annual Reports, and not every company is demonstrating best practice reporting on climate risk. Given the current climate crisis we face, it is clear that more urgent progress in climate disclosure is still required.

Key takeaways from the FCA review of TCFD disclosures

Earlier this year the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) conducted a critical thematic review of a sample of the first TCFD statements from companies regulated under the UK Premium Listed Companies regulations.

This first year of regulated disclosures has proven difficult for many companies, specifically around collecting new data and establishing governance. However, despite challenges, the FRC noted a significant increase in climate disclosure from the previous 2020 Thematic Review.

As climate risk disclosure evolves, the FRC highlights several key points for companies looking to increase the quality of their TCFD disclosures.

1. Granularity and specificity

Companies should consider providing the potential impact of climate change specifically on their different business units, on their sector, and on their geographical location.

2. Balance

The FCA expects companies to balance the conversation between risks and opportunities, without focusing too much on one or the other.

3. Interlinkage with other narrative disclosure

Companies should consider linking their TCFD disclosures to the company’s overall risk framework or how the results of its Climate Scenario Analysis (CSA) have informed strategic direction of the company. Many examples of TCFD disclosures were insufficiently integrated with other elements of companies narrative reporting.

4. Materiality

The FCA requires companies to publish their TCFD reports on a “comply or explain” basis at the TCFD recommendation level. This means that a company needs to outline why it is currently not aligned with the TCFD recommendations and what are the next planned steps to become aligned.

The FRC found that in multiple reports companies had omitted some recommendations without providing an explanation as to whether these were not relevant to the company or specific data was missing. If these explanations are missing from a disclosure, the FCA may challenge this.

5. Connectivity between TCFD and financial statements disclosure

There is currently still a gap between the TCFD disclosures and how these feed into a company’s financial disclosures. The FCA therefore expect companies to provide additional explanations, including:

1. How the TCFD-consistent risk assessment has informed the financial planning of a company
2. How growth projections may be impacted by the climate-related risks and opportunities
3. How Greenhouse Gas (GHG) emissions reduction commitments have been factored into financial statements and forecasting

Overall, the FCA expects companies to clearly link and integrate TCFD disclosures with financial elements of their Annual Report.

Best practice recommendations for TCFD disclosure

In addition to the above points on increasing the quality of your TCFD disclosure, here are some of our best practice recommendations:

1. Include a compliance or concordance summary table at the beginning of the TCFD disclosure, setting out where to find the disclosure and a statement to the extent of consistency with the TCFD recommendations.

2. If the TCFD disclosure is provided outside an Annual Report, ensure to explain why this is.

3. Clearly outline the level to which the disclosed data has been verified, and don’t claim data to have been verified if it was only to a limited or partial extent.

What emerging TCFD disclosure regulations do you need to be aware of?

Following the changing TCFD regulations that are coming into force in the UK, we can expect to see climate risk disclosure continuing to evolve. From 2023 we will see more disclosures from standard listed companies, under an extension of the FCA Premium Listed Company Regulation and private companies/LLP’s with over 500 employees and £500 million turnover, under the BEIS Regulation.

On a global level, the US SEC is also planning to mandate climate-risk disclosures for public companies with a view to providing investors with consistent, comparable and decision-useful information. To keep track of international developments, see the TCFD Status Report 2022 for more detail.

How can you prepare for mandatory TCFD disclosure?

EcoAct has extensive experience in supporting companies with TCFD disclosures. We recommend undertaking a TCFD gap analysis to help understand how aligned to the requirements you already are.

It is also essential that you plan to carry out Climate Scenario Analysis (CSA). CSA can help you understand the consequences of climate change to your business and encourage long-term strategic thinking about the risks and opportunities you face. CSA can enable your organisation to not just avoid risk but make the most of current and future opportunities and thrive long-term.

For more information on TCFD disclosure access our Factsheet.