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Task Force on Climate-related Financial Disclosures (TCFD)

On this page, the Financial Reporting Faculty provides an overview of the Task Force on Climate-related Financial Disclosures and associated recommendations. It also explains how TCFD fits in with UK reporting requirements and the IFRS Foundation’s new International Sustainability Standards Board (ISSB).

Introducing TCFD

The TCFD is the Task Force on Climate-related Financial Disclosures. The Task Force was convened by the Financial Stability Board to produce a common global framework for companies to report how climate change will affect their business.

The TCFD has significant support from businesses, investors, government bodies, asset managers, pension funds, insurers, banks, ratings agencies and accounting firms.

TCFD recommendations

To help investors and wider stakeholders understand how companies are managing climate-related financial risks, the TCFD recommends that companies should make disclosures across four key areas, often referred to as the four pillars. The four pillars are set out below and companies are recommended to disclose:

  1. GOVERNANCE - the 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.
  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 are designed to be applicable to any company in the world. By taking a financial focus they are designed to support more effective decision-making by both investors and companies. The TCFD recommends that such disclosures be included in mainstream filings.

Interaction with UK company law reporting requirements

In early 2021 the Department for Business, Energy and Industrial Strategy (BEIS) issued a consultation paper on mandatory climate-related financial disclosures. Company and LLP regulations are now final and apply to accounting periods beginning on or after 6 April 2022. BEIS have since issued some non-binding guidance to help companies and LLPs better understand the requirements. A summary of the key aspects of the incoming regulations is set out below.

Scope

The regulations introducing new mandatory climate-related financial disclosures will apply to:

  • All UK companies that are currently required to produce a Non-Financial Information Statement. This includes UK companies that have more than 500 employees and are either traded companies, banking companies or insurance companies. 
  • UK registered companies with securities admitted to AIM with more than 500 employees. 
  • UK registered companies which are not included in the above categories that have more than 500 employees and a turnover of more than £500m. 
  • LLPs which have more than 500 employees and a turnover of more than £500m.

Where relevant, the disclosures will be required at a group level. This means the reporting requirements and scope thresholds will apply on a consolidated basis. For example, where a company was a parent company at any time within the financial year, if in that year a group headed by it had more than 500 employees and an aggregate turnover of more that £500m net, then the parent company would be within the scope of the requirements. 

Location

For companies, the information will be required as part of the existing Non-Financial Information Statement (to be renamed the Non-Financial and Sustainability Information Statement or NFSI Statement) within the Strategic Report. 

Not all companies within scope are currently required to produce a NFI Statement. Such companies will now be required to produce a NFSI Statement for the first time but will only be required to disclose the new climate-related financial disclosures elements. 

For LLPs, the information will also be required in a NFSI Statement within the Strategic Report. However, for LLPs not required to produce a Strategic Report (which is likely to be the majority of LLPs) the information will instead be included in the Energy and Carbon Report.

Disclosure requirements

The regulations require in-scope companies and LLPs to   provide a description of:

  • the entity’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
  • how the entity identifies, assesses and manages climate-related risks and opportunities;
  • how processes for identifying, assessing and managing climate-related risks are integrated into the entity’s overall risk management process;
  • the principal climate-related risks and opportunities arising in connection with the entity’s operations; 
  • the time periods by reference to which those risks and opportunities are assessed;
  • the actual and potential impacts of the principal climate-related risks and opportunities on the entity’s business model and strategy;
  • the analysis of the resilience of the entity’s business model and strategy, taking into consideration different climate related scenarios;
  • the targets used by the entity to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
  • the key performance indicators (KPIs) used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those KPIs are based.

Certain reporting requirements, for example those relating to strategy, metrics and targets, may be omitted in full or in part if the directors (or members in the case of LLPs) conclude that, taking account the nature of the business and how it is conducted, the information is not necessary for an understanding of the entity’s business. If this is the case, directors/members will need to provide a clear and reasonable explanation for not providing the information.

Timing

These regulations come into effect on 6 April 2022 and will be applicable for accounting periods that begin on or after this date – so for December year ends, 2023 will be the first reporting period.

Interaction with the Financial Conduct Authority Listing Rules

The FCA listing rules require premium-listed and standard-listed companies to make disclosures under the TCFD framework. Such companies are required to include a statement in their annual report stating whether they have made disclosures consistent with the TCFD framework on a ‘comply or explain’ basis. For premium-listed companies this requirement has been in effective since 1 January 2021 while for standard-listed companies it came into effect from 1 January 2022.

Both the premium-listed and standard-listed rules have been updated to reflect the most up to date TCFD guidance which was released in October 2021. 

Interaction with the International Sustainability Standards Board 

The IFRS Foundation recently announced the formation of its International Sustainability Standards Board (ISSB). The ISSB’s objective is to develop and maintain a global set of sustainability reporting standards which provides information that is material to the decisions of investors and other participants in the world’s capital markets. An overview of these developments is set out here.

There is two-way support between TCFD and the IFRS Foundation on sustainability reporting. The ISSB is to build upon the established work of the TCFD and other climate-related initiatives. 

The UK government has commented in their proposals that it is preferable that climate change reporting is prepared in accordance with international standards and have indicated an intention to subsequently align with international standards. 

Practical tips and next steps

  1. Keep in mind that reporting under the TCFD framework is a journey that will evolve over time and this is something that both investors and regulators understand. The key is to be transparent and clear about where the company is on this journey.
  2. Assess what relevant climate-related information your company already discloses to map out where there are gaps in current reporting compared with the TCFD recommendations.
  3. Perform an appraisal of how your teams already work together (finance, risk, sustainability and  strategy functions) to establish if sustainability and climate-related information can be given the time and resource needed to meet upcoming requirements.
  4. Put together an internal task-force to kick start a company-wide project for TCFD implementation.
  5. Understand the needs of the company’s investors by speaking to them to find out their priorities. 

The ICAEW has produced a practical guide to the TCFD recommendations produced in association with the Carbon Trust here.

Financial Reporting Faculty Guidance

Other guidance