The Task Force on Climate-Related Financial Disclosure (TCFD) requirements have become mandatory for many UK large businesses since April 2022. Sounds even more daunting than global warming? Don’t you worry, we've digested them for you into 6 key points summarising everything you should know.
1. What are the TCFD recommendations?
Back in 2015, the Financial Stability Board (FSB) introduced the TCFD concept to harmonise the way companies, banks and other financial institutions share their climate-related financial risks with their stakeholders. Their aims were to maximise transparency and awareness of the financial impacts of climate change, thus creating a more resilient and stable financial system.
2. Does mandatory climate disclosure apply to your business?
According to the UK government, the mandate's first stage will cover more than 1,300 large companies. If you tick any of the following boxes, your business will fall in this group:
- Listed companies, banks or insurers with over 500 employees (these were already required to produce a non-financial information statement);
- Companies listed in the Alternative Investment Market (AIM) with over 500 employees;
- Non-listed companies with over 500 employees and a turnover of more than £500m;
- Traded or banking Limited Liability Partnerships (LLPs) with over 500 employees;
Any other LLP with over 500 employees and a turnover of more than £500m;
If you fit in any of the above categories, you’re obliged to disclose your climate-related financial risks. If you don’t comply with this new regulation, your company may face a penalty of up to £50,000. On the other hand, exempt businesses should still go ahead with a voluntary disclosure for a couple of reasons. First, it’s a way to safeguard your future revenues. Secondly, the mandated scope will be likely extended in 2025.
3. What does your company need to disclose?
Let’s get to the meat of climate disclosure. Here’s a list of what you’re required to describe to fulfil your TCFD requirements in the UK:
- How you identify, assess, and manage your climate-related risks and opportunities, including relevant governance arrangements;
- How and to what extent you to integrate climate risks into your overall risk management system;
- The main climate change physical & transition risks and opportunities related to your operations, the time frames (short, mid, and long-term) you considered for their assessment, and their impacts on your business (e.g., which assets may be affected by a major flood event and to what extent? How important are these assets for your business? Are you going to implement any risk mitigation strategies (e.g. flood defence)?);
- Your business resilience to climate risks based on different warming scenarios (e.g., business as usual, 1.5-degree C);
- The targets you set to manage climate risks and realise climate opportunities and the timeline to meet those goals;
- The key performance indicators (KPIs) you used to measure your progress against the defined targets and how you calculated those KPIs.
4. Where should you disclose your climate-related information?
If you work for an LLP, you can include your climate disclosures either in your Energy and Carbon Report or Strategic Report. Any other company can embed them within the Non-Financial and Sustainability Information Statement section (previously called Non-Financial Information Statement) of their Strategic Report.
5. Which documents should you refer to?
Updating and superseding the 2017 version, The 2021 "Annex" includes the latest guidelines on how to implement the TCFD recommendations, which build on 4 pillars: Governance, strategy, risk management, and metrics & targets. Take this blueprint as your climate bible. On top of that, there are a few more useful documents you want to keep in your TCFD library:
- The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities: This provides information on the types of warming scenarios you should consider and how to adopt a TCFD-aligned climate change risks scenario analysis;
- Guidance on Metrics, Targets, and Transition Plans: This tells you how to define effective climate risks metrics (e.g., share of your real estate portfolio in an area subject to flooding) and targets (e.g. flooding risk reduction), and develop plans for shifting to a low-carbon business model;
- Guidance on Risk Management Integration and Disclosure: This explains how your company can integrate climate-related risks into your risk management process and disclose them.
6. Will your company need anything else other than TCFD resources?
While being extremely detailed, TCFD guidelines don't get you fully covered on the technical aspect of climate risk assessment. For instance, they won’t grant you access to high-resolution (postcode-level) climate risk models. And that’s essential to achieve a granular quantification of your impacts under different scenarios and over multiple time horizons and geographical locations.
To add to that, you’ll require the expertise to interpret those data and turn them into effective adaptation and resilience strategies. In short, you should tap into climate intelligence, like that provided by Climate X, as well as harnessing powerful predictive tools such as Spectra. Leveraging this climate-proof package, you’ll go beyond TCFD compliance and unleash new business avenues.
There you go
Hopefully, you now have a clearer idea of what TCFD-aligned mandatory climate disclosures mean for your company. However, being a new regulation and including plenty of technicalities, we understand you may be still feeling unprepared.
Yet, Climate X Spectra is coming to the rescue. Our asset-level TCFD-based climate risk assessment tool will give you the insights you need to streamline your financial disclosure. If you want to secure your TCFD compliance and discover invaluable business opportunities, contact our team of climate experts today to assess your portfolio.