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Demystifying climate risk and the TCFD recommendations

Published on 3 Mar 2022

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

Understanding your organization’s climate-related risks and opportunities have never been more critical. The most recent report from the UN’s Intergovernmental Panel on Climate Change (IPCC) on Climate Change Impacts, Adaptation, and Vulnerability is the most comprehensive review of climate impacts – and how much we can adapt to them. It outlines in stark terms the challenges climate change poses globally to every aspect of our society and economy.

Additionally, at the time of writing the Financial Stability Board (FSB) is currently conducting a survey on TCFD reporting by asset managers and asset owners for its 2022 report. This is against the backdrop of the UK’s rollout of mandatory TCFD reporting, with regulations being extended to all large UK registered companies and largely limited liability partnerships (LLPs) on 6 April 2022. Watch this video from The Association of Real Estate Funds on TCFD for real estate professionals.

The Importance of Recognising Climate Change Risks

The IPCC report includes the latest scientific knowledge on impacts, adaptation, and vulnerability relating to climate change. The objective of this report is to provide governments and policymakers with the most up-to-date scientific information, to be used to design and develop effective climate policies.

Research on adaptation to climate change has shown the importance of governance in managing the challenges of climate risk (1). It’s expected that vulnerable organizations could face a difficult transition adapting to the hazards of climate change (both physical and transitional changes), with the risk of an unexpected reduction in asset values. It is therefore imperative that organizations regularly assess their exposure to climate change impacts.

The rise of voluntary reporting using the TCFD framework

The FSB recognized that financial markets need transparent, high-quality information on the impacts of climate change in order to price the risks and opportunities presented by rising temperatures, climate-related policies, and emerging technologies (2). The Board set up the Task Force on Climate-Related Financial Disclosures (TCFD) in 2017 to create a framework for voluntary reporting. This voluntary framework has become the global standard, as organizations increasingly recognize that climate change is a major financial risk.

The TCFD’s recommended disclosures set out four overarching thematic areas: governance, strategy, risk management, and metrics and targets. Disclosures make it easier to compare companies’ exposures to climate-related risks and opportunities and investors can incorporate these risks into their investment and business decisions. This provides information on the impacts, risks, and opportunities of climate change to other stakeholders, allowing them to make informed decisions and take appropriate actions.

According to the TCFD 2021 status report, more than 2,600 organizations globally and 12 governments have now endorsed TCFD disclosures, including the European Union, the United Kingdom, Switzerland, New Zealand, and Hong Kong.

The TCFD Task Force is currently conducting a survey of asset managers and asset owners on their climate-related financial reporting practices, to be published in its 2022 status report. This will help stakeholders understand TCFD-aligned reporting by asset managers and owners. To take part, access the survey here until 25 March 2022.

The UK Government’s roadmap issued in November 2020 (3), sets out a program for the introduction of mandatory climate-related disclosures across the UK investment chain. These disclosures are based on the TCFD recommendations.

The Roadmap sets out a 5-year program toward improved disclosure of climate-related risks and opportunities, based on TCFD recommendations.

UK Government’s roadmap to mandatory TCFD reporting

The Roadmap is being implemented through various bodies: the Financial Conduct Authority (FCA), the Bank of England (through the Prudential Regulation Authority (PRA)), the Department for Work and Pensions (DWP), and the Department for Business, Energy and Industrial Strategy.

The first mandatory TCFD-aligned disclosures were introduced in 2021, affecting premium listed companies, banks, building societies, insurance companies, and large occupational pension schemes. The rollout of mandatory disclosures will be completed in 2025.

Note that there is potential for overlap between the categories. Some firms may be in scope for more than one reporting framework under different regulators. For example, UK companies with more than 500 employees that are within the scope of FCA rules will be subject to both the regulations coming into effect on 6 April 2022 (see below) and the relevant FCA rules. Since both sets of requirements are based on the TCFD’s recommendations, there is a high degree of consistency in the requirements.

Requirements for the large UK registered companies and large Limited Liability Partnerships (LLPs) from 6 April 2022

This requirement will bring the largest number of organizations into the scope of mandatory reporting. Amendments will be made to the Companies Act 2006 through the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. Changes to reporting by LLPs are through the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022. 

The main features of the regulations are outlined below. The summary is indicative and should not be relied on for compliance purposes. A link to the BEIS guidance is provided above.

Who is in scope?

  • All UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have either transferable securities admitted to trading on the UK regulated market or are banking companies or insurance companies (Relevant Public Interest Entities (PIEs));
  • UK registered companies with securities admitted to AIM with more than 500 employees
  • The UK registered companies not included in the categories above, have more than 500 employees and a turnover of more than £500m
  • Large LLPs, which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500m
  • Traded or banking LLPs which have more than 500 employees

Will disclosure be required at the group or subsidiary level?

Companies are expected to report at the group level, or at the company level if not included within a consolidated group report.

Subsidiaries included in a consolidated group report of a UK parent that complies with the climate-related financial disclosures requirements are not required to report separately.

What are the requirements?

Companies and LLPs within the scope will be required to disclose:

  • The governance arrangements in relation to assessing and managing climate-related risks and opportunities
  • How climate-related risks and opportunities are identified, assessed, and managed
  • How processes for identifying, assessing, and managing climate-related risks are integrated into the overall risk management process
  • A description of— (i) the principal climate-related risks and opportunities arising in connection with operations, and (ii) 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 business model and strategy
  • An analysis of the resilience of the business model and strategy of the company or LLP, taking into consideration of different climate-related scenarios
  • A description of the targets used to manage climate-related risks and to realize climate-related opportunities and performance against those targets
  • The key performance indicators used to assess progress against targets used to manage climate-related risks and realize climate-related opportunities and the calculations on which those key performance indicators are based

When will reporting start?

The regulations will apply to the annual reports and accounts of companies and LLPs within scope for accounting periods that start on or after 6th April 2022. So, the first annual reports containing the disclosures will be published in 2023.

Where will the disclosures be made?

Companies should include these disclosures in the Non-Financial and Sustainability Information Statement in the Strategic Report. LLPs should include their disclosures in either the Energy and Carbon Report of their Directors’ Report or, for those LLPs which prepare a Strategic Report, in that report. 

Will UK companies be required to report on their global operations or just their UK operations?

When a UK group is in scope, the top UK parent is expected to report on the global operations of the UK group (regardless of whether activities are conducted through a UK subsidiary or an overseas subsidiary.

The future: Linking national and international reporting

The UK government’s strategy aims to ensure that information is provided to allow organizations to take climate change and sustainability factors into account in their financial decisions. Therefore, in the future, international companies will also be required to report against international standards.

The International Sustainability Standards Board (ISSB) is expected to issue climate disclosure substantially based on the TCFD recommendations; BEIS is working on measures that will allow the government to adopt these international standards for use in the UK. International standards for sustainability disclosures will help achieve consistent and comparable reporting worldwide (4).

This article was written by Alison Mungall, Director of Compliance at Carbon Intelligence. 

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The transition to net-zero will require a long-term strategic plan and CI is here to help. Contact CI’s team today to understand more about how they are supporting organizations to develop their net-zero roadmaps and ensure climate success.

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