TCFD reporting on the rise, but what is next?

TCFD reporting on the rise, but what is next?

TCFD reporting on the rise, but what is next?

In October last year, the Task Force on Climate-related Financial Disclosures (“TCFD”) issued its annual report, in which it stated that globally, one in three companies reviewed disclosed climate-related information aligned with the TCFD’s recommendations in 2020. We expect the number of companies reporting against the TCFD’s recommendations to increase significantly this year.

New Regulatory Requirements

Here in the UK, with the Government’s roadmap for mandatory disclosures and the Financial Conduct Authority (“FCA”)’s accompanying requirements, commercial companies with a premium listing are required to report against the TCFD’s recommendations for accounting periods beginning on or after 1 January 2021. This is being extended for standard listed companies for accounting periods beginning on or after 1 January 2022.

Additionally, the Prudential Regulation Authority (“PRA”)’s requirements for Banks and Insurers required climate risk management frameworks to be fully embedded by 31 December 2021, which included reporting under TCFD from that date. Other financial institutions will be required to report under TCFD for accounting periods beginning on or after 1 January 2022, 2023 or onwards depending on size and type of institution.

Disclosures to date

The seemingly most common approach to TCFD reporting is to embed the disclosures within the strategic report of the annual report; however, we have seen many examples of companies producing standalone TCFD reports either alongside the publication of annual reports or outside of financial year end reporting dates.

We have also observed varying levels of detail within the disclosures themselves, with reports ranging from two pages to above 50, with the shorter disclosures seeking to cross-refer to other areas of the company’s annual report, with the aim of evidencing the integration of climate-related strategy and risk management throughout the company.

The FCA’s and PRA’s expectations are that companies disclose against the 11 recommendations within the TCFD framework on a comply or explain basis. For the most part, disclosures to date have addressed each of the 11 TCFD recommendations; however, we have seen many cases where companies have disclosed using the concept of explain, rather than comply. For example, companies are not always able to articulate the use of climate-related scenarios to quantify the potential impacts of climate change given the lack of empirical data related to the physical risks of climate change and particularly the transitional risks. Additionally, whilst we have found that most companies disclosing under TCFD report on their scope 1 and 2 greenhouse gas (“GHG”) emissions, many companies are not yet calculating and / or disclosing scope 3 emissions, nor setting specific targets to define by how much the company is seeking to reduce GHG emissions.

What is next?

As the volume of publicly made disclosures under TCFD increases, we expect that companies will seek to enhance the quality of their disclosures by absorbing the additional publicly available information and ensuring that future disclosures clearly demonstrate positive progress in terms of meeting previously disclosed targets.

Additionally with the increased volume of disclosures, we are seeing heightened demand from investors, customers, regulators and other interested stakeholders for formal assurance over the climate-related disclosures that companies are making, especially as a result of the potential accusation of greenwashing, given the increased scrutiny due to publicly made climate disclosures.

How BDO can help

We have helped a number of clients with respect to their TCFD reporting in many ways, such as:

  1. Advising and supporting companies in the drafting of TCFD reports;
  2. Providing assurance under a recognised standard such as the International Standard on Assurance Engagements 3000 (Assurance engagements other than audits or reviews of historical financial information), over quantifiable elements of TCFD such as carbon emissions, recycling and water usage; and
  3. In our capacity as external auditors providing limited audit procedures over companies’ TCFD reports within strategic reports.

If you would like further information, please contact Richard Weighell or Mark Spencer.