Climate risk reporting for financial institutions: Timetable for mandatory TCFD

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Mandatory TCFD EcoAct

Catherine Chisem, EcoAct Senior Consultant - Transition plan blog
Catherine Chisem, EcoAct Senior Consultant

Financial institutions not yet up to speed on TCFD reporting will now need to prepare for the UK’s planned phase-in of mandatory reporting rules. EcoAct’s Senior Consultant, Catherine Chisem reviews the timetable for mandatory TCFD and explains how these changes will play an important role not just to satisfy reporting requirements, but also in assisting future-proofing organisations.

COP27 sharpened the focus on mandatory TCFD reporting by financial institutions and pushed for enhanced accountability on net-zero targets and climate transition plans. For many large companies in the UK, TCFD reporting will already be a familiar topic, with almost all FTSE 100 companies reporting against the framework. Financial institutions not yet up to speed on TCFD reporting will now have to prepare for the UK’s planned phase-in of mandatory reporting rules. With the UK now leading the introduction of enhanced TCFD and climate strategy reporting by large financial firms, it is expected that other G7 regulatory regimes will follow suit.

Finance stakeholders raise expectations for TCFD and transition plan reporting

Beyond the UK Financial Conduct Authority (FCA) and other securities regulators pushing for enhanced TCFD and climate risk reporting, central banks and macroprudential regulators are also weighing in. The US Federal Reserve Bank now considers climate-related risks to financial stability in the United States, joining the European Central Bank and the Bank of England in leading work in this area. Efforts are also underway at the central bank climate club, the Network for Greening the Financial System, to more accurately assess climate risk and to better align monetary policy with secure climate outcomes. Clients across insurance, banking and asset management and shareholders in these firms are all demanding more coherent narratives on how financial institutions plan to identify risks, respond to challenges, and implement strategic business plans that will benefit from an accelerated net-zero transition in line with the Paris Agreement. TCFD reporting and transition plans will underpin this wider financial system shift.

What new systems and processes will be required in the next phase of mandatory TCFD?

With TCFD reporting becoming mandatory, companies will need to establish new systems and processes to improve the consistency and accuracy of this information. However, these changes will play an important role not just to satisfy reporting requirements, but also in assisting future-proofing organisations. Longer-term strategic thinking linked to climate risk assessment and reporting helps companies to better mitigate risks and capture opportunities in the present. For UK-listed financial institutions, TCFD becomes mandatory at different times:

  • 2021-22: Premium listed companies required to “comply or explain”, including asset managers, life insurers and pension providers with assets under management (AUM) over £5bn.
  • 2022-2023: Large UK-authorised asset managers, FCA-regulated pension providers, pension schemes with AUM above £1bn.
  • 2023-2024: All UK-authorised asset managers, life insurers and FCA-regulated pension providers.
  • 2025 onwards: Ambition for full TCFD coverage, moving beyond “comply or explain”, accompanied by climate scenario analysis. Transition plans will likely be integrated into reporting.

Getting into the details: TCFD and Scope 3

The TCFD recommendations focus on four specific areas: Governance; strategy; risk management; metrics and targets. Although last in the list, the metrics and targets component of TCFD reporting can often pose the greatest challenge to organisations, as it requires full carbon footprinting, including setting a boundary for Scope 3, and perhaps most challenging of all for financial institutions – measuring Category 15: Investments. This is accepted as by far the largest emissions segment for the Financial Services sector, with CDP claiming that the finance sector’s funded emissions are over 700 times greater than its own.

For all types of financial firms, Scope 3 emissions present a reporting challenge. The FCA has already indicated its intention to adapt its regime to future standards published by the International Sustainability Standards Board (ISSB). Last month, the ISSB announced in turn that Scope 3 disclosures will be mandatory, rather than recommended, as part of its push to make global climate-related accounting disclosures more consistent, comparable and decision-useful for investors.

Data in EcoAct’s 2022 Corporate Climate Reporting Performance Report show that just 38% of large financial firms are disclosing their Scope 3 investment-related emissions, perhaps taking advantage of the flexibility that TCFD currently allows, and the uneven regulatory expectations across the G20. Working with firms across the financial system, from private markets to large, listed banks and asset managers, we see that market expectations are rapidly evolving. Shifting demands from asset allocators, regulators and accounting standards setters mean that in 2023 all financial firms will have to get serious about understanding and preparing to report on financed emissions, in line with the GHG Protocol, PCAF and other accepted standards.

What comes next after Scope 3 data collection?

Collecting Scope 3 data and assuring it is complete are just the first steps in preparing accurate TCFD and related climate strategy information. Beyond data gathering and reporting, we know that leading firms are bringing climate risk information into their strategic business planning, with executive management teams and boards of directors challenged to consider forward-looking scenarios. With many firms publicly committed to halving their emissions by 2030, and to driving a shift in the real economy towards net-zero, there is not a moment to lose.

Are you a financial institution wondering how to benchmark your progress on climate risk reporting, including Scope 3 data collection and management? Please get in touch or download our Sustainable Finance brochure.

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Understanding the climate risks and opportunities posed to your organisation as a result of climate change will allow you to strengthen your Net Zero strategy and keep up with reporting demands.

About EcoAct

At EcoAct we are driven by a shared purpose to make a difference. To help businesses to implement positive change in response to climate and carbon challenges, whilst also driving commercial performance.

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Factsheet

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:

  • What are the TCFD recommendations?
  • Who are they intended for?
  • What are the risks and opportunities of climate change?
  • What is climate scenario analysis (CSA)?
  • How can the TCFD accelerate your organisation’s transition to net-zero and provide it with an important edge in the fight for capital?

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