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Introduction

The Task Force for Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB). It established the TCFD to develop recommendations for more effective climate-related disclosures that could promote more informed decisions and enable stakeholders to better understand concentrations of carbon-related assets in the financial sector and exposures to climate-related risks.

The TCFD has four core elements:

  • Governance.
  • Strategy.
  • Risk management.
  • Metrics and targets.

Beneath these four elements there are eleven supporting recommended disclosures that provide further detail on the information to be disclosed.

When do the requirements become mandatory?

In its Green Finance Strategy last year, the UK government set an expectation that all listed issuers and large asset owners (among others) would be disclosing in line with the TCFD recommendations by 2022.

On 9 November 2020, HM Treasury published an indicative “Roadmap” for the introduction of mandatory TCFD-aligned disclosure standards by 2025. This provides a waterfall for the planned implementation of regulatory actions and legislative measures across different businesses as follows:

Year  Timeline of planned or potential regulatory actions or legislative measures
2021
  • Occupational pension schemes (>£5bn)
  • Premium listed companies
  • Banks, building societies and insurance companies (deadline for supervisory expectations)
2022
  • UK-registered companies
  • Occupational pension schemes (>£1bn)
  • Largest UK-authorised asset managers, life insurers and FCA-regulated pension providers
  • Wider scope of listed companies
2023
  • Other UK-authorised asset managers, life insurers and FCA-regulated pension providers
2024-25
  • Other occupational pension schemes (subject to review)
  • Potential further refinements to measures across categories, including in response to evolving best practice
   

How can I practically seek to implement the recommendations across my business?

Set out in the table below are some practical insights and perspectives for organisations to consider. We have aligned these to each of the eleven recommended disclosures across the four core TCFD elements.

TCFD Core Element
 Recommended Disclosure
 Practical Considerations
Governance
 “Describe the board’s oversight of climate-related risks and opportunities”
  • The process, frequency and depth of climate-change reporting
  • How climate-related matters inform strategy, risk management, objectives and reward
  • How the board oversees and challenges progress towards climate-related targets

“Describe management’s role in assessing and managing climate-related risks and opportunities”
  • Which management positions and committees are responsible
  • How does the organisational structure enable / facilitate effective management and discussion of climate-related risks and opportunities
  • How climate-related issues are monitored (at individual and committee level)
Strategy

“Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term”
  • How the organisation defines time horizons
  • The climate-related risks / issues across each time horizon
  • Which risks and opportunities have a material impact
  • How they may vary across business lines and geographies
“Describe the impact of climate-related risks and opportunities on the organisation’s business lines, strategy, and financial planning”
  • Strategic impacts across products and services, supply chain and operations
  • Financial planning impacts across operating costs,  revenues, capital expenditure, acquisitions / divestments, access to capital
“Describe the resilience of the organisation’s strategy, taking into consideration a 2°C or lower scenario”
  • How resilient the strategy is to climate-related risks
  • How the strategy may change to address potential risks and opportunities over time
Risk Management

“Describe the organisation’s processes for identifying and assessing climate-related risks”
  • How risk management processes operate in practice for climate-related risks
  • How the relative significance of climate-related risks versus other risks is determined
  • How current and emerging requirements relating to climate change have been considered

“Describe the organisation’s processes for managing climate-related risks”
  • How climate-related risks are analysed and prioritised in practice
  • How decisions are made with respect to the mitigation, transfer, acceptance or control of climate-related risks
  • How each of the risks relevant to businesses articulated in the TCFD report are addressed (e.g. policy and legal risks, technology risk, reputational risks, physical risks)
“Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management”
  • How embedded climate risk management processes are across the overall risk management cycle
  • What key actions are required to fully embed processes for managing climate-related risks
Metrics and targets “Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process”
  • Determining metrics across water, energy, land use and waste
  • Metrics that measure revenue from products / services designed for a lower-carbon economy
  • How metrics can be incorporated into existing business and performance measures
“Disclose scope 1 (all direct emissions), scope 2 (indirect emissions from electricity purchased and used) and (if appropriate) scope 3 (all other indirect emissions) greenhouse gas (GHG) emissions and related risks”
  • Determining emissions by scope category relevant to the business
  • Ensuring GHG emissions are calculated in line with the GHG protocol methodology
  • Providing emissions and associated metrics for historical periods to enable trend analysis

“Describe the targets used by the organisation to manage climate-related risks and opportunities”
  • Describing targets relating to GHG emissions, water, energy and land use, waste management
  • Describing financial targets for products / services designed for a lower-carbon economy
  • Timeframes for achieving targets, base year from which progress is measured and KPIs used
 

Key actions and next steps in the UK

In respect of implementing the TCFD recommendations in the UK, for accounting periods beginning on or after 1 January 2021, companies with a UK premium listing are required to include a compliance statement in their annual financial report stating whether they have made disclosures consistent with the TCFD recommendations. Where disclosures are not consistent with TCFD recommendations, such companies will be required to explain these inconsistencies.

The FCA also plans to separately consult on potential client-focused TCFD-aligned disclosures by UK-authorised asset managers, life insurers and FCA-regulated pension providers and other persons in 2021.



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