Why Should TCFD Requirements Be a Priority for Boards?
The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) in December 2015. It consists of 31 members drawn from across the G20 nations, and it made its first recommendations in 2017.
Its creation was prompted by a recognition that financial markets need clear, comprehensive, high-quality information on climate change impacts to mitigate the financial risks these changes pose to the global economy.
As a result, the TCFD was set up to improve and increase reporting of climate-related financial information. Its goal is to:
“Develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions[.] And, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”.
What Are the TCFD Reporting Recommendations for Boards?
The TCFD’s 11 reporting recommendations are grouped under four themes:
- Risk management
- Metrics and targets
The four themes require organisations to determine how they can embed climate change considerations into two fundamental areas. Firstly, strategy and systems. Secondly, the roles and responsibilities of the board and management.
Increasingly, investors – both institutional and retail – and other stakeholders expect to see climate-related disclosures in annual reports and financial statements. The TCFD intends that its reporting recommendations create a structured framework for companies wanting to communicate and mitigate their climate risks.
The creation and growth of the TCFD came in tandem with an increased focus on climate and environmental reporting across the regulatory landscape. In December 2020, the UK Financial Conduct Authority (FCA) published reporting requirements for commercial companies with premium listings on the London Stock Exchange. These companies now need to confirm in their annual report whether the report includes climate disclosures in line with TCFD. Their report must also state where these are published, and if it’s not published, why they have not published them.
The Role of TCFD Reporting in Your ESG Strategy
Few organisations do not understand the importance of implementing and demonstrating an active environmental, social and governance strategy. ESG-related reporting shows that you are taking climate risks seriously, whether within your supply chain, activities, investments or client solutions.
But understanding the importance of ESG action and reporting and putting in place the strategies and tactics to address them are two different things. Advancing ESG from acronym to action is essential as ESG moves from a “nice to have” to a competitive imperative.
The board and each of its directors play a vital role in guiding their organisation through the maze of ESG reporting requirements. But operationalizing your ESG principles is not without its challenges.
Finding the right framework for reporting is recognised as one of the main ESG challenges facing boards. By bringing a degree of standardisation and unifying disclosures to ESG reporting, TCFD helps businesses develop a consistent, user-friendly approach to the climate-related disclosures they are increasingly expected to provide.
Why Boards Should Prioritise TCFD
- TCFD positively impacts roles across the whole organisation. The scope of the TCFD requirements includes areas that fall under the auspices of the board – such as the need to embed TCFD reporting into the business’s strategy and systems – and specifically require that TCFD requirements are embedded into board and management roles and responsibilities.TCFD compliance, therefore, not only impacts areas where the board has accountability for decision-making; it can fundamentally impact the composition of directors’ roles.
- TCFD reporting will soon be mandatory in the UK. While including TCFD-aligned disclosures in your annual reports and financial statements is currently optional, UK Chancellor of the Exchequer Rishi Sunak announced in November 2020 that they would become mandatory across the economy from 2025. Accountants Deloitte claims that this “marks an important step in establishing consistent global climate and sustainability reporting standards”.
- Compliance ensures boards are committed to ESG. Does the 2025 deadline for mandatory compliance mean that boards can be complacent about their adoption of the TCFD recommendations? Far from it. Compliance with TCFD reporting requirements is rapidly becoming the norm, and an expectation of shareholders and other stakeholders. Recent research from Deloitte found that 90% of companies referred to climate change in their 2019 annual report, with 64% referring specifically to the TCFD. Companies that want to evidence their commitment to ESG concerns need to ensure they are not left behind.
- TCFD is increasingly intertwined with other regulatory obligations – therefore increasing the imperative for companies to comply.As we mentioned above, TCFD considerations now form part of the FCA’s reporting requirements for certain commercial companies. Clearly, TCFD reporting requirements are informing the decisions of other regulators and the obligations they place on the organisations they govern.And it’s not only relevant in the UK. Numerous jurisdictions are signing up to support the TCFD, with Switzerland being the latest, officially becoming a supporter on 12 January 2021, in line with the country’s policy on sustainable finance.
TCFD and ESG reporting form only one part – albeit an essential one – of an organisation’s wider social conscience and governance. Every organisation’s board should play a central role in the social purpose of their business – something that extends far beyond climate, but where climate considerations are increasingly central.
The Role of TCFD in Supporting and Driving Your ESG Reporting Strategy
It’s clear, then, that TCFD plays a key role in supporting and lending structure to your ESG reporting. And that while it may be voluntary now, organisations in the UK at least should prepare for mandatory TCFD reporting within the coming years – and those elsewhere should be alive to the growing pressure to meet shareholder and investor expectations on ESG achievements.
Boards ignore the TCFD requirements at their peril – both for the obligations they represent and the help they can give in directing ESG reporting.
Diligent’s range of ESG Solutions provides clarity and structure to organisations’ work to measure and track their ESG goals. You can find out more about how they could help you comply with ESG standards and regulations, evaluate risk controls, benchmark your governance practices and keep pace with new frameworks and developments here.
November 25, 2020
Measuring What Matters: Why and How UK Boards Must Continue Driving the ESG Agenda
Increasingly, consumers, investors and the public are scrutinising the actions (and inactions) of corporate entities and demanding that they go beyond simply a tick-box approach to meeting regulations. Boards are being challenged to adopt an environmental, social and governance (ESG)-focused mindset and apply it to every aspect of business strategy