The Task Force on Climate-Related Financial Disclosures (TCFD) develops consistent climate-related financial risk disclosures for companies, banks, and investors to inform stakeholders.
The TCFD started as voluntary recommendations but soon became critical for the climate disclosure regulatory framework. Many jurisdictions follow the TCFD recommendations, including the European Union, Singapore, Canada, Japan and South Africa. Following these countries, the United Kingdom and New Zealand are mandating climate-risk disclosure in line with the TCFD, starting in 2025 and 2023, respectively. As part of efforts to comprehensively address global climate change, these regulations are essential steps in the right direction. Thus, it is only a matter of time before businesses are mandated to act on the TCFD's recommendations.
To support corporations and financial institutions in complying with the TCFD, Plan A's policy experts have developed a comprehensive factsheet on the TCFD, including what the TCFD is about and how companies shall comply in line with its recommendations.
What is the Task Force on Climate-Related Financial Disclosures (TCFD)?
The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the international Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors. The aim is to provide financial stability globally, as climate change will negatively impact our economy.
The main objective of TCFD reporting is to disclose the climate-related risks and opportunities of a company as well as the financial impact those might have on the company's operations and business model.
Increasing transparency makes markets more efficient and economies more stable and resilient.
- Michael R. Bloomberg
The TCFD reporting frameworks provide consistent and transparent information to all financial actors and global markets. Firms' climate-related disclosures are made more consistent and comparable under this initiative. Also, the TCFD believes that better information will allow companies to incorporate climate-related risks and opportunities into their risk management, strategic planning and decision-making processes. It also enables better ESG management and induced performance.
The TCFD is not a corporate reporting standard but a way of understanding how firms approach the financial risks and opportunities related to climate change.
Which companies are subject to TCFD-aligned reporting?
The TCFD is still mainly a voluntary framework for companies of all sizes, industries and jurisdictions. However, more countries are considering making TCFD-aligned climate-risk reporting mandatory. Companies need to start aligning with the TCFD to stay ahead of the competition, develop a future-proof roadmap for their operations to comply with current and future climate policies and access advanced financial resources such as corporate green bonds.
🇬🇧 Mandatory TCFD-aligned reporting in the UK
From 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions must disclose climate-related financial information on a mandatory basis.
As of April 2022, UK companies with the following criteria are obliged to TCFD-aligned reporting:
1. All UK companies that are currently required to produce a non-financial information statement:
- UK companies that have more than 500 employees and
- Transferable securities admitted to trading on the UK regulated market, banking companies or insurance companies (Relevant Public Interest Entities (PIEs)
2. UK registered companies with securities admitted to AIM with more than 500 employees.
3. The UK registered companies which are not included in the categories above have more than 500 employees and a turnover of more than £500m
4. LLPs which have more than 500 employees and a turnover of more than £500m
What do companies disclose in their TCFD-aligned report?
A TCFD-aligned report should contain all relevant information on a company's climate-related risks and opportunities as well as the resulting financial impacts of those.
Core reporting elements and recommendations in line with TCFD
The TCFD requires companies and LLPs to disclose climate-related financial information in line with the four overarching pillars of the regulation's recommendations on a mandatory basis (Governance, Strategy, Risk Management, Metrics & Targets). Now, let's explain how these recommendations are defined:
- Governance: The organisation's governance around climate-related risks and opportunities;
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy, and financial planning;
- Risk Management: The processes used by the organisation to identify, assess, and manage climate-related risks;
- Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
These necessary disclosures help investors and others understand how reporting organisations consider and assess climate-related risks and opportunities and their economic impacts.
Find more information on the TCFD Guidance on Metrics, Targets and Transition Plans, and TCFD Recommendations of the Task Force on Climate-related Financial Disclosures.
Principles for reporting
The TCFD defined seven principles for adequate disclosures:
- Represent relevant information;
- Be specific and complete;
- Clear, balanced and understandable;
- Consistent over time;
- Comparable among others within a sector, industry or portfolio;
- Reliable, verifiable and objective;
- Provided on a timely basis.
How must companies disclose their TCFD-aligned report?
- The TCFD-aligned reports will be published together with a company's mainstream financial filings.
- TCFD-aligned reports shall be issued within four months of a company's financial year-end.
- Companies must report climate-related financial information in the non-financial statement, which forms part of the Strategic Report.
- LLPs will be required to report climate-related financial information in either the non-financial notice that forms part of their Strategic Report or the Energy and Carbon Report that forms part of their Annual Report.
The application date of the TCFD
Regulations are to be made by the end of 2021, with rules coming into force on the Common Commencement Date of 6 April 2022 and applicable for accounting periods starting or after that date.
Thus, most companies with a calendar financial year will need to include the mandatory climate-related financial disclosures for the first time in their annual report and account for the financial year commencing on 1 January and ending on 31 December 2023.
Non-binding Q&A will be produced to support companies in applying these requirements.