With stark climate warnings from the Intergovernmental Panel on Climate Change, and world governments under pressure to live up to the promises of the Paris Agreement, climate reporting requirements are seen as a crucial tool for enabling green investment. The recommendations published by the Task Force on Climate-related Financial Disclosures – or simply TCFD as they’ve become known – are the tip of the spear, having made their way into UK regulations over the past year.

Who has to comply?

Currently, only premium-listed commercial companies are subject to mandatory TCFD reporting. Such companies are required to include a statement in their annual financial report stating whether they have made disclosures consistent with the TCFD framework on a ‘comply or explain’ basis for the first time, for accounting periods beginning on or after 1 January 2021.

In 2021, the Financial Conduct Authority (FCA) and the Department for Business, Energy and Industrial Strategy consulted on introducing mandatory TCFD-aligned disclosures for a wider range of organisations, including asset managers, life insurers, FCA-regulated pension schemes, LLPs and other large companies. Subject to the parliamentary process, these new regulations are set to come into force from April 2022.

What are the recommendations?

TCFD identifies the categorisation of climate risks and opportunities as a key element of a framework for consistent disclosures. Categorising climate-related risks – which can be physical risks, such as extreme weather events, or risks as a result of the transition to a low-carbon economy, such as legislation and increasing energy costs – as well as climate-related opportunities, and the financial impact of these, is a core aspect of TCFD reporting and should inform how a company reports against the recommendations.

The four thematic recommendations

TCFD recommendations are structured around four thematic areas that represent core areas of how a business operates: governance, strategy, risk management and metrics and targets. 

Recommended disclosures

The overarching recommendations are supported by 11 recommended disclosures, shown opposite, which build out the framework with more detailed information that helps stakeholders understand how organisations think about and assess climate-related issues.

Sector-specific supplemental guidance

As well as the four recommendations and supporting recommended disclosures, TCFD includes contextual guidance for all sectors, and specific guidance for the financial sector and non-financial sectors most affected by climate change.

How does TCFD fit with other sustainability frameworks?

TCFD was developed to be aligned to a number of other frameworks, including the GRI standards, CDP Questionnaire, the CDSB framework, the <IR> framework and the SASB standards (see Jargon Buster on page 10). Most of the main standard-setters have published resources on their websites to help companies use TCFD alongside their existing sustainability frameworks.

Given TCFD’s principles-based approach, and its alignment with a range of other frameworks, it is a good starting point for many organisations. Over time, organisations can adopt other frameworks alongside to enhance the quality of their disclosures.

In the UK, the Financial Reporting Council (FRC) has recommended that companies implement the SASB standards as a complement to TCFD. The SASB standards are aimed at helping companies understand their most financially material ESG issues, of which climate issues are a part. Use of these two frameworks together is not only increasingly valued by investors, but may also allow organisations to better understand which climate risks and opportunities have the greatest material impact.

It is worth noting that TCFD forms the basis of the ISSB’s work towards a climate-related disclosure standard to be issued for consultation this year.

TCFD is new to us – how can I get started?

As with any other aspect of reporting, the quality of your reporting is only ever as good as the evidence that underpins it. It is important to establish the necessary processes early, particularly around governance and strategy, in order to produce effective reporting; what I call ‘do, then say’.

The way companies implement TCFD will vary, but here is some initial guidance:

• Get executive buy-in. TCFD emphasises the need for climate-related issues to be subject to the same quality of governance as other financial matters – two of the recommended disclosures are specifically concerned with the role of senior management. As such, it is crucial that executive leadership is committed to the oversight and management of climate-related issues.
• Assign responsibilities. In order to integrate the recommendations across the business, the teams and individuals responsible for the existing operational process should also be responsible for the relevant climate-related issues. For example, risk committees need to understand their responsibility for identifying climate-related risks, while audit committees should understand the need to scrutinise climate-related financial information. Ensure processes are in place that allow teams to collaborate and feed back to the board.
• Understand investor needs. While investors have been urging companies to report climate-related information for some time, the specific information they need to make decisions will vary. Speak to your investors and other stakeholders if necessary, to determine which issues, and therefore which disclosures, should be a priority.
• Set an ambitious but realistic timeline to full disclosure. The challenges posed to businesses by climate change are growing in urgency, but it is vital for investors to have a realistic expectation of the business’s disclosure plans.

We can’t disclose much right now – what should we do?

Investors and regulators understand that TCFD is a journey that many are just beginning. The crucial point is transparency – when do you expect to be able to report against each of the disclosures? What actions are you taking across the business to achieve this? Which aspects are most pressing?

There is an expectation that climate action should be a priority; this should be reflected in the disclosures. But do be honest about the work left to do, and the time it may take to achieve.

I’ve gathered the information – what’s the best way to present it?

The FCA rule requires premium-listed commercial companies to make the required ‘comply or explain’ disclosures in their annual financial report. In practice, this means that they can be presented in any other document or accessible location (for example, a standalone report or corporate website), providing a statement of compliance is included in the annual report, with an explanation of why the disclosures are presented separately.

Assuming that you do not intend to produce a separate TCFD report or statement, then your approach to the annual report will depend to a large degree on your business’s approach to climate action, ie, how truly integrated is climate change into your governance practices, strategy and risk management and sustainability communications?

For companies just starting TCFD reporting, collating the information in one statement may be the most appropriate route initially. As climate change becomes more integrated into governance and operations, a more integrated approach to reporting may follow, with TCFD governance reporting being located in the governance report, TCFD strategy appearing as part of the overall business strategy, and so on. However, companies in the scope of the mandatory disclosures to be legislated for in 2022 are likely to need to present the information in their strategic report.

Irrespective of how TCFD reporting develops, it seems the framework is here to stay. For more on how TCFD fits into your reporting, request a copy of Gather’s Practical Guide to TCFD on our website or contact mei@gather.london

About the author
Mei Ashelford, Director of Reporting Intelligence, Gather, and Financial Reporting Faculty Board member

Recommendations and supporting recommended disclosures

Governance	Strategy	Risk management	Metrics and targets
Disclose the organisation’s governance around climate-related risks and opportunities Recommended disclosures	Disclose 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	Disclose how the organisation identifies, assesses and manages climate-related risks Recommended disclosures	Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material Recommended disclosures
Recommended disclosures	Recommended disclosures	Recommended disclosures	Recommended disclosures
a)  Describe the board’s oversight of climate-related risks and opportunities	a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term	a) Describe the organisation’s processes for identifying and assessing climate- related risks	a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
b)  Describe management’s role in assessing and managing climate-related risks and opportunities	b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning	b) Describe the organisation’s processes for managing climate-related risks	b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas emissions and the related risks
	c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario	c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management	c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets