THE HEAT IS ON

How prepared are you for TCFD-aligned environmental reporting?

Can companies really afford not to engage with the push for environmental disclosure?

Corporate environmental reporting has been a requirement in the UK for a number of years now. In recent years, however, this has been ramped up.

From 2013, the strategic report prepared by directors had to contain information about environmental impacts, and disclosures concerning greenhouse gas emissions were required of quoted companies. From 2019, the requirement for greenhouse gas disclosures became much more widespread. Streamlined Energy and Carbon Reporting, or “SECR,” was introduced for large unquoted companies and large limited liability partnerships.

It seems that companies are nervous about revealing their environmental position.

Despite this, studies and commentary have consistently highlighted a lack of detailed environmental reporting, specifically in relation to the risks and opportunities associated with climate change. These issues seem to have persisted into the 2021 reporting season. It seems that companies are nervous about revealing their environmental position, perhaps because they do not know or understand enough about it, or alternatively because they do and they are embarrassed by it.

But things are about to change with the introduction of TCFD-aligned reporting.

TCFD (the Task Force on Climate-Related Financial Disclosures) was put together in late 2015 to develop climate-related disclosures that could promote more informed investment, credit, or lending and insurance underwriting decisions. In 2017, TCFD developed four widely adoptable recommendations tied to governance, strategy, risk management and metrics/targets. TCFD’s recommendations are as follows:

  1. disclose the organization’s governance around climate-related risks and opportunities
  2. disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material
  3. disclose how the organization identifies, assesses, and manages climate-related risks; and
  4. disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

These recommendations are supported by key climate-related financial disclosures, referred to as recommended disclosures.

In recent months, the UK has developed a “Roadmap” that sets out an indicative path, over the next five years - with most action occurring over the first three years - towards mandatory TCFD-aligned disclosures across the following organisations: listed commercial companies; UK-registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes.

TCFD-aligned reporting is forward looking, not backward looking

From April 2021, premium listed companies, banks and building societies, insurance companies, and large occupational pension schemes were required to start reporting in a TCFD-aligned manner. From April 2022, more of the largest UK-registered companies and financial institutions will be drawn into the net and will have to disclose climate-related financial information on a mandatory basis. This will include private UK-registered companies with over 500 employees and £500 million in turnover. Yet more organisations will be drawn in as 2025 approaches.

TCFD-aligned reporting is forward looking, not backward looking: a crucial difference from the mandatory reporting required to-date (e.g. under SECR). Further, it requires something other than simply providing data on environmental impacts. TCFD-aligned reporting requires information on climate change risks and opportunities to the company and how they are being addressed. Finally, the formal metrics and targets used to assess the risks and opportunities are essential to disclosure in a TCFD-aligned reporting process and need to be selected with great care.

The trend towards stakeholders increasingly wishing to see proper environmental information shows no sign of abating.

It is very clear indeed that TCFD-aligned reporting of the nature described will not be possible without a solid corporate infrastructure that provides reliable forward-looking information to underpin the disclosure process. Companies need to get this infrastructure in place. For many, this, rather than the reporting itself, will be the difficulty.

TCFD-aligned reporting is a challenge, but the challenge will have to be embraced. The trend towards stakeholders (shareholders, funders, customers, and employees) increasingly wishing to see proper environmental information shows no sign of abating.

CONCLUSION

TCFD-aligned reporting is arriving in the UK. It is different to what has gone before, and companies need to prepare themselves for it. As the climate changes, detailed and forward-looking environmental disclosure on emerging risks and opportunities will assume even greater importance to stakeholders.

Share this article:

MEET THE AUTHOR

AIDAN THOMPSON

Partner, London

Link to bio >

HOW PREPARED ARE COMPANIES FOR A CARBON TAX?

Just one of the questions we explore in our latest Emerging Themes in Financial Regulation 2022 Horizon Report, How can businesses balance sustainability & agility?

We deep-dive into six themes:- Sustainability & ESG; Talent & People and Inclusion & Diversity; Governance; Regulatory Risk & Enforcement; Technology; and Changing Markets.

Share #BCLPEmergingThemes

Stay in the know and sign up for future updates

This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

Legal notices Privacy notice Modern Slavery Act Connect with us Stay informed Our locations © 2022 Bryan Cave Leighton Paisner LLP. All rights reserved.