In April 2022, the UK implemented mandatory requirements aligned with TCFD (Task Force on Climate-related Financial Disclosures) recommendations for Britain’s largest companies and financial institutions.
The recommendations are already used widely by public companies across the world. The last TCFD status report in late 2021 found the disclosures used in 89 countries globally by over 2,600 companies., This includes 73 of the FTSE 100, according to the FRC.
The principles-based nature of the framework makes the recommendations highly adaptable. In fact, TCFD alignment can be found in everything from the CSRD (Corporate Sustainability Reporting Directive) proposal in the EU to the prototype ISSB standards.
So what can we learn from the widespread use of TCFD recommendations and the companies already making changes to comply with them? What does the mandatory use of the TCFD recommendations really mean in the longer term for UK businesses?
A compliance-only approach vs seeing the bigger picture
One of the first decisions a company needs to make is whether it views the mandate as a compliance exercise or a broader opportunity. The recommendations provide companies with four pillars of disclosure (i.e., governance, strategy, risk management, plus metrics and targets) and a set of principles for good disclosure.
Using these pillars as guidance, organisations need to have a clear understanding of climate-related risks and opportunities, a strategy to minimise those risks and take advantage of opportunities, solid governance plus the metrics and targets to achieve their strategic aims. A compliance-only approach may mean missing out on the wider benefits the TCFD-aligned approach brings to climate risk management.
Even without a mandate to produce the disclosures, a company with a clear understanding of the risk is in a much better position to mitigate it, manage the impact and improve the outlook for the business. And that picture does not include the potential opportunities that exist for many companies as they look for ways to transition to more sustainable and profitable activities.
Prioritising the key principles at the start
There are many potential ways to organise a company and its activities to align with the new mandates. However, no matter how it is done, it’s worth bearing some key principles in mind:
- Don’t expect to get to perfect immediately. It might be an oft quoted cliché, but it is more important to make a good start than to get everything right the first time. Climate, and ESG reporting in general, is also a very dynamic environment. Changes will have to be made, strategies adapted, and disclosures updated.
- Pick the right starting point. For some it might make sense to build a full risk and opportunity picture first; for others it will be more important to get the right governance structure in place and start with a strategy identified for a few key risks and opportunities.
- Don’t forget the metrics and targets. It may seem hard to identify good targets but there are many projects underway to help companies get started including the Science Based Targets initiative and industry level projects working on net zero targets for some sectors. The TCFD recommendations themselves include seven categories of cross-industry metrics and additional guidance on metrics, targets and transition plans.
- Start thinking about the skills and tools needed early on. Climate risk assessment can be a data-heavy process, involving analytics and information from across the business. A well connected, controlled, agile and collaborative working environment will be an essential part of any implementation. This may require a change to the tools and technology you deploy as well as additional training for your team.
- Look for local guidance. BEIS and the FRC have both published guidance to help companies with approaches, examples of disclosure and how the mandate interacts with existing requirements (such as SECR, Streamlined Energy and Carbon Reporting).
What happens next?
Companies must work with the resources available to get their strategies in place now. This will not only ensure they are in a strong position for imminent changes but help them navigate changes in the broader ESG landscape.
Standard-setting initiatives such as the new International Sustainability Standards Board (ISSB) and the EFRAG work on European Union ESG standards will start to contribute to the detail below the framework. With the existing work under the SASB contributing to these efforts, we can hope to see more comparable metrics being developed, giving companies a position to start from and aim towards. Alongside the TCFD, work has started on the Taskforce for Nature-related Financial Disclosures (TNFD) recommendations. Businesses will also need to keep an eye on how these will affect their reporting requirements so they can quickly implement any changes needed.
It is worth bearing in mind that even with the ISSB, this isn’t necessarily a risk-free journey. Alternative performance metrics are still a hot topic on agendas and even with good scenario planning and risk assessments, the future remains uncertain. UK businesses should focus on preparations now to help them navigate further regulation changes and shifts. In this way, poor performance against any additional metrics is prevented in future and the rewards of positive progress are reaped sooner.