The government intends to make all reporting recommendations by the Task Force on Climate-Related Financial Disclosures mandatory before 2025. Companies would be well advised to start preparing for this now
Within two years, companies in the UK could be legally obliged to disclose the risks (and opportunities) presented to their business by climate change. In November 2020, the chancellor, Rishi Sunak, announced a package of policies aimed at boosting the sustainability of the financial markets. This included a plan to make some of the measures recommended by the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory as soon as 2023.
Established in 2015, the TCFD has produced a voluntary protocol that encourages enterprises to publish a range of climate-related information, covering aspects such as their greenhouse gas emissions, energy consumption and waste management practices, within an agreed set of reporting guidelines.
If the government’s plan goes ahead, the UK would become the first country to impose such a regime. Sunak has described the move as necessary to “bolster the dynamism, openness and competitiveness” of the nation’s financial services sector after Brexit.
What effects would this have on businesses?
Rich Hall is head of sustainability and stakeholder assurance at MHA MacIntyre Hudson, a firm of accountants and business advisers. He believes that “the introduction of the TCFD’s reporting requirements will be a game-changer for organisations, in terms of both the level of information required and the work they’ll need to do to make their disclosures compelling”.
Given that investors and the wider public are becoming increasingly interested in companies’ environmental records, such disclosures “may prove key for a brand’s reputation and its access to finance”, he adds.
For companies that are ahead of the curve on sustainability reporting, it may merely be business as usual. According to the TCFD, 384 companies in the UK are already following its guidelines, with the likes of Barclays, BP and AON already committed to making climate-related disclosures.
But it’s likely to prove a wake-up call for those firms that have failed to consider climate change in their reporting so far, particularly given the tight implementation schedule.
In its 2019 Green Finance Strategy policy paper, the government stated an expectation that all listed companies and large asset owners would be disclosing in line with the TCFD protocol by 2022. And, in a roadmap published last year, it revealed its plan for most other affected businesses to be making disclosures by 2023, with the following two years set aside for making refinements to the measures.
Changes planned within this timeframe will probably apply only to large companies, according to Hall, who explains: “To be deemed ‘large’, a company has to meet two out of three of the following criteria: an annual turnover of at least £36m, balance-sheet assets totalling at least £18m and a workforce of at least 250 employees.”
All large companies in the UK will be affected by the TCFD requirements within the next 18 months, according to Vanessa Havard-Williams, partner and global head of environment and climate change at law firm Linklaters.
“The net effect is to require the reporting entity to provide emissions data and also explain the financial impacts of climate change on its strategy, risk management and governance,” she says.
How can businesses prepare?
Under these four broad headings, the TCFD guidelines set out 11 more detailed disclosure requirements. These cover aspects ranging from the resilience of the firm’s strategies in various climate-change scenarios to the board’s oversight of climate-related risks.
“That might all sound pretty dull, but it’s a cornerstone of effective climate policy. Over time, it will be transformational,” Havard-Williams predicts. “Unless you know how a company is exposed to climate change and how it is managing that exposure, you cannot properly assess its long-term financial resilience.”
But it could create significant new burdens for some companies. For instance, it will entail understanding risks and opportunities throughout the whole value chain, notes Stuart Lemmon, MD (northern Europe) at climate consultancy EcoAct. That includes a firm’s scope-three greenhouse gas emissions – ie, those from sources beyond its direct control.
The scope-three emissions of a food retailer, say, would encompass the carbon footprints of ingredients and products sourced, as well as their use by customers. Emissions in this category, which can account for up to 90% of a company’s total carbon footprint, present the biggest data-collection challenge.
Lemmon adds that affected businesses will need to use complex analysis methods to model long-term changes under various climate scenarios. Such techniques, he says, “were not initially designed to be used by companies, many of which will lack the right data, tools and experience. What’s more, they typically don’t know how to link scenarios to business needs.”
Nonetheless, the TCFD itself has said that “it’s important to get started”, given the government’s clear signals of intent. But how? A spokesman for the task force recommends that companies “read our publications and evaluate the areas where they already make disclosures, which ones they want to improve and where new reporting is needed”.
He continues: “Based on their analysis, they can consider how best to address each area and which groups to engage with, internally and externally. We recommend accessing the TCFD Knowledge Hub online for additional resources, including free courses in how to make disclosures.”
It’s important to remember that, for all the extra work and cost involved, there are significant benefits to be gained from compliance. Firms that already disclose their climate-related risks obtain “better access to capital by increasing investor and lender confidence”, according to the TCFD, which has “also heard from companies that found the reporting process helped them to capitalise on opportunities that could come from the transition to a low-carbon economy”.
In other words, although it may seem a daunting task, the disclosure of climate-related risks is good for business and, ultimately, good for the planet.