Getting ready for the Taskforce on Climate-Related Financial Disclosures (TCFD)

What is TCFD?

The global Task Force on Climate-related Financial Disclosures (TCFD) was set up in December 2015 by the Financial Stability Board (FSB) and is tasked with monitoring and making recommendations on climate-related risks to the global financial system.

In June 2017, the TCFD published recommendations based on four disclosure pillars (governance, risk management, strategy and metrics and targets) and seven principles of effective disclosure.

1. Governance - an organisation’s governance around climate-related risks and opportunities;
2. Strategy - the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning, where such information is material;
3. Risk management - how the organisation identifies, assesses, and manages climate-related risks; and
4. Metrics and targets - the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material.

The recommendations focus on annual report-style disclosures to help investors, insurers and other stakeholders understand the financial implications of climate change. ​TCFD recommendations have guided the development of climate-related corporate reporting requirements globally. ​

Updated guidance, published in October 2021, builds on and strengthens the existing recommendations:

• Guidance on Metrics, Targets, and Transition Plansto support preparers in disclosing decision-useful information and linking those disclosures with estimates of financial impacts; and
• Updates to the implementation guidance on its Recommendationswhich supersedes the 2017 Annex “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures”.

Who is required to make disclosures?

The UK Prudential Regulation Authority’s (PRA’s) Supervisory Statement SS3/19 was published in April 2019 and applies to all UK insurance and reinsurance firms and groups, banks, building societies, and PRA designated investment firms. SS3/19 sets out the PRA’s expectations for in-scope firms to consider engaging with the TCFD framework and other initiatives in developing their approach to climate-related financial disclosures.

Premium-listed issuers were mandated by the UK Government to report on their climate risk exposures in line with the TCFD disclosure recommendations from January 2021. UK-registered companies impacted by these requirements were specified in the October 2021 BEIS Consultation:

• All UK companies that have more than 500 employees and have transferable securities admitted to trading on a UK regulated market, banking companies or insurance companies (“Relevant Public Interest Entities” (PIEs)).
• AIM listed UK registered companies with more than 500 employees.
• UK registered companies that are not included in the above categories, which have more than 500 employees and a turnover of more than £500 million.
• LLPs that have more than 500 employees and a turnover of more than £500 million.

Also in October 2021, the UK Government published its Green Finance Strategy (Greening Finance: A Roadmap to Sustainable Investing). Part of the first phase in delivering the roadmap will be the introduction of UK Sustainability Disclosure Requirements (SDR) for listed issuers, asset managers and asset owners which will be aligned with and build on the TCFD recommendations. In due course SDR will also integrate the global standard being developed by the newly formed International Sustainability Standards Board (ISSB). The Financial Conduct Authority (FCA) is still consulting on SDR, with final policy not expected until the second half of 2022 at the earliest.

The FCA published two Policy Statements in December 2021 confirming further rules and guidance to promote better climate-related financial disclosures. These came into effect from 1 January 2022:

• Issuers of standard listed shares, or equity shares represented by certificates(global depositary receipts) must now include a statement in their annual financial reports setting out whether their disclosures meet the recommendations of the If they do not, they will need to explain why.
• FCA-regulated asset managers and asset owners- including life insurers and pension providers - will have to disclose how they take climate-related risks and opportunities into account in managing investments. They will also have to make disclosures about the climate-related attributes of their products. Asset managers and asset owners will have a phased implementation, with the rules initially applying to the largest firms and coming into effect for smaller firms one year later.

Whilst some timelines (e.g. SDR) are still being developed, Government expects that all UK listed companies and large asset owners will be disclosing in line with TCFD recommendations by 2022.

Disclosures are not yet mandated for my organisation, so why should I consider TCFD alignment?

As mentioned at the start of this article, the objective of TCFD is to help organisations develop their risk management and strategic planning around climate change. Aligning to TCFD can help your organisation monitor and adapt to climate change risks and take advantage of the climate-related opportunities on offer.

As an example, if your business uses large amounts of water, water shortages or higher salinity due to climate change may imply higher operational costs for your business, restrictions on water extraction or requirements to invest in new technology. Proactively setting a game plan to address these climate-related risks is your key to being able to tap into available market opportunities such as investment in clean tech innovation. Planning ahead allows you to adopt alternative business solutions and build better resilience to potential climate-related risks.

Where do I even begin?

We set out below the seven top priorities for setting your organisation up to make TCFD-aligned disclosures:

1. Get your Board “on board” and review your governance arrangements

Obtain board-level buy in and establish roles and responsibilities around the assessment, management and monitoring of climate-related risks and opportunities across the business. In particular, the board and its sub-committees should have clear responsibilities for managing the financial risks from climate change, including individual responsibilities at appropriate senior management function level.

2. Develop a climate strategy

The TCFD recommends that companies consider the impact of climate change on business, strategy and financial planning. Your climate strategy should align with your broader business strategy and there should be a clear view on how this also aligns with your organisation’s operating model in the short, medium and long-term.

3. Build your in-house climate capability

Climate risk roles and responsibilities assigned within the governance framework should be supported with board-level and enterprise-wide training and capability development around climate risk.

4. Review existing disclosures

Carry out a gap analysis to identify areas of focus for disclosure around the four core elements of TCFD reporting.

5. Gather climate data

Identify climate-related physical and transition risks and opportunities that are applicable across your business, considering your exposure to different sectors, sites and geographies.

6. Establish climate KPIs and risk metrics

Key performance indicators and climate risk metrics should be identified and appropriately monitored through your internal reporting channels.

7. Embed climate-related risks

Climate risk should be a formalised and recorded part of stakeholder conversations around identifying and managing business risks. These risks should be embedded within the existing enterprise-wide risk management framework, in line with your board-approved risk appetite.

All companies need to begin making progress towards implementing these changes well in advance of being caught in the net of mandated disclosures. Companies that leave it until the last minute will not only struggle to achieve compliance due to the complexity of the process, but also find themselves losing out on the opportunities that come with being fully aware of your exposure to climate-related risks and being an active contributor towards a more sustainable economy.