Green finance’s contribution to tackle the climate emergency is being increasingly recognised. The UK Government has committed to mandating the reporting of climate impact and risk of economic activities undertaken by businesses to provide better information to investors and lenders, a lead the rest of the G7 economies are set to follow. Principal consultant Duncan Oswald and junior consultant Laura Moore explain what the new requirements will mean for businesses and what they should do to prepare.

Reporting climate risk

There can be no denying that climate change and its impact upon organisations is increasingly becoming the headline topic of board level meetings and investor calls.  For anyone trying to get to grips with exactly how to integrate climate change into their organisation’s operations, the myriad of standards, protocols, and frameworks is enough to have them reaching for a stiff drink.

A set of requirements gaining increasing importance in the UK are those coming from the Task Force on Climate-Related Financial Disclosures (TCFD) – the G7 countries recently agreed to make these mandatory. For anyone who doesn’t work in the sustainability sector, it may feel like another acronym to add to the already confusing picture. But the TCFD requirements will become more and more important for companies in the coming years as their scope extends and the current voluntary requirements become mandatory.

What is TCFD?

The TCFD was set up by the Financial Stability Board (FSB) in 2015 to develop recommendations for climate-related disclosures and is made up of members from the financial sector and large multinationals. These recommendations, released in 2017, were designed to help companies provide better information to enable informed pricing of climate-related risks and opportunities to investors, lenders and underwriters. In a nutshell, this means standardising how companies disclose the steps they have taken to incorporate climate-related risks and opportunities into their risk management and strategic planning processes.

A TCFD compliant disclosure will provide information on four elements of an organisation’s operations:

• Governance: Disclose the organisation’s governance around climate-related risks and opportunities;
• Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material (where it could influence economic decisions of relevant parties);
• Risk Management: Disclose how the organisation identifies, assesses, and manages climate-related risks; and
• Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

It is also recommended that companies introduce scenario analysis to start thinking about what might happen and to take steps towards building resilience into their strategies and financial plans.

Is it mandatory?

The TCFD has established a Roadmap which sets a path towards incrementally introducing new regulatory or legislative measures to ensure the right information is available across the investment chain.

Currently, the requirement to issue a compliance statement in annual financial reports, detailing whether they have made disclosure consistent with TCFD recommendations, is mandatory for UK premium-listed companies for accounting periods after 1^st January 2021. For other UK companies in the seven categories of organisations featured in the UK Taskforce Roadmap (listed commercial companies; UK-registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes) reporting is voluntary. However, the scope for mandatory disclosure is set to be widened. The government endorsed the recommendations at the end of 2020 and the Department for Business, Energy and Industrial Strategy recently held a consultation on proposals to make the reporting mandatory for the above categories of organisations by 2025, with a significant portion of mandatory requirements in place by 2023.

The UK Taskforce recommends that to prepare for the improved path towards mandatory disclosures, organisations should build their capabilities and refine their climate data and resulting disclosures. In other words, organisations should start making the changes needed to remove potential obstacles towards sharing information throughout the value chain.

Organisations are increasingly incorporating voluntary TCFD-related disclosures into their annual reports, and the need to build resources and stay ahead of the curve becomes ever more apparent. In the 2020 annual report from the TCFD, it was noted that more than 1,500 organisations have expressed their support for the TCFD recommendations; an increase of over 85% since the 2019 status report.

What should companies be doing now?

Given the impending extension of the TCFD requirements to more companies by 2023, sustainability teams should be taking steps now to prepare their company for these changes. These should include:

• Review existing disclosures and carry out a gap analysis to identify areas of focus for disclosure around the four core elements of TCFD reporting;
• Get board level buy-in of climate change risks and opportunities and review existing governance structures;
• Identify physical and transitional risks and opportunities relevant to the organisation;
• Integrate climate risk into existing risk management processes;
• Assess climate impacts on key commodities;
• Carry out scenario analysis to enhance critical strategic thinking and to consider the resilience of organisational strategy to climate change;
• Report emissions in accordance with recognised standards such as the GHG Protocol Corporate Standard and set targets against an agreed baseline; and
• Establish KPIs that include Scope 1 and Scope 2 emissions.

This process is complex and companies will need to begin making headway towards implementing these changes well in advance of the compliance deadlines. Companies that leave it until the last minute to start thinking about how to make the required changes will find achieving compliance very challenging,.

Staying abreast of changes from UK regulators and government departments and following updates of the Green Finance Strategy will be essential for finance teams in all UK-registered companies as the statutory requirements are finalised.

The impact of this will not be limited to the UK, with the large businesses targeted under the TCFD recommendations more likely to have operations around the world. Add to this the recent agreement between G7 countries to mandate climate reporting in line with the TCFD recommendations at the summit hosted by the UK – the UK-led drive to make climate reporting an obligation is going global.

A more standardised approach for climate-related disclosure will facilitate the sharing of information more freely about how to incorporate climate change into organisational strategy, paving the way for a smoother transition into a greener future for us all.

Featured image: James Smith via Wikimedia Commons