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Task Force on Climate-Related Disclosures Reporting

Name: MHA
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Posted on: July 12th 2022 · read

What is TCFD?

TCFD stands for the Task Force on Climate- related Financial Disclosures. It is a strategic framework (not a disclosure checklist!) that organizations can use to publicly disclose the material climate-related risks and opportunities affecting the operations (including value chain).

From 6th April 2022, more than 1,300 UK Registered companies will be required to disclose climate – related financial information in line with recommendations published by the taskforce on climate related financial disclosures, This is the first time UK businesses will be under legal obligation to report on financial risks associated with climate change.

The BEIS climate disclosures are based on TCFD, but do not directly mirror the recommendations from the Task Force. The TCFD’s recommendations have been adapted so that they are suitable for inclusion in UK legislation.

For many SME’s, exposure to climate risk is closely tied to the assets they own or rely on. Buildings, Infrastructure, and supply chains are already vulnerable to disruption due to climate change, with creating significant business disruption. For example, research published by credit ratings agency S&P Global showing that physical risks could impact 4% of global GDP by 2050 without stronger emissions-reduction policies.

What you need to know about TCFD?

The Taskforce for Climate Related Financial Disclosures includes 4 key pillars (governance, strategy, risk management and metric & targets) with 11 recommended disclosures to assist organisations report on climate change.

The disclosures are intended to provide the market with decision- useful, forward-looking information about how organisations are addressing climate – related risks and opportunities.

The UK government has announced climate disclosures will be mandatory across the UK economy by 2025 and SMEs should take this area seriously and ensure sufficient time is allocated as it is not a simple task.

A key challenging area affecting all organisations is understanding scenario analysis which is a requirement in the TCFD for the organisation to create plausible scenarios to test the resilience of the climate strategy. There is no organisation which is currently fully aligned with TCFD and there a number of good best practice under each individual pillar (for example the banking sector is perceived as the sector which includes good governance and risk management disclosure requirements.

4 key Pillars with 11 recommended disclosures

Governance: An organization that gets climate governance wrong almost invariably makes bad decisions on climate strategy, risk management and metrics and targets. There are two recommended disclosures here and we recommend a flowchart is implemented explaining the roles and responsibilities of the board and management.

SME considerations to ask internally!

What is the process and the cadence by which the board and its committees are informed about climate-related matters?
What is the extent to which climate is integrated into the board’s responsibilities?
What are the processes, if any, that are in place to support the board’s monitoring of key initiatives and any climate-related targets set by the company?
Who at the management (non-board) level has climate responsibilities?
What degree of climate expertise does management have access to?

Strategy: No organization can develop a strategy on climate risks and opportunities (strategy recommended disclosure B) until you have identified what those risks are (strategy recommended disclosure A). And you can’t assess the resilience of a company’s climate strategy against different plausible climate futures (strategy recommended disclosure A) until you have accurate and reliable information from Strategy A and Strategy B.

SME considerations to ask internally!

How does your organization define short, medium and long-term time frames when considering climate related risks and opportunities?
Is there a process to determine which climate-related risks and opportunities might have a material impact on your organization? What is it?
Have climate-related risks and opportunities impacted the way your organization sets its strategy? If so, how?
How are climate-related issues used in financial planning decisions?
How do you plan to evolve your strategy to minimize risks and leverage the opportunities that arise under these different scenarios?
What could be the financial impact of a specific climate future on your business?

Risk Management: This is focus on risks only and not opportunities. The 3 recommended disclosures under this pillar can assist SMEs in implementing an effective communication process as to how the SME identifies, assesses, and manages climate risks, and how these risks relate to the SME operations. Don’t forget the supply chain and speaking to your consumers and capital providers on their Net Zero path!

What processes and controls are in place to identify, monitor and manage material climate risks?
What process and controls over the completeness of the risk register? Should we consider a separate sustainability risk register?
Have we consider documenting the design and implementation of the controls to monitor mitigation and/or adaption actions? And controls over the prioritization of climate related risks?
Have we consider compensating controls in the event current controls fail to identify a material error?

Metrics and Targets: The 3 recommended disclosures under this pillar can assist SME disclose the metrics determined by the SME to assess climate related risks and opportunities in line with its climate strategy and risk management processes.

Do we understand the methodologies used to calculate metrics? Document and disclose!
Do we understand what are the boundaries and scope under Scope 1, 2 and 3 emissions? Have we agreed a carbon baseline internally with all relevant stakeholders?
What are the metrics that are relevant to the SME industry and business? (e.g. water, energy, and, if applicable, any internal carbon pricing) These should be consider as starting point
What processes and controls are in place to identify, monitor and manage the metrics and targets?

What do the BEIS regulation requires to disclose?

How the company identifies, assesses and manages climate related- risks and opportunities.
How processes for identifying assessing and managing climate related risks are integrated into the company’s overall risk management process.
The principal climate related risks and opportunities arising in connection with the company’s operations.
The time periods by reference to which those risks and opportunities are assessed.
An analysis of the resilience of the company’s business model and strategy, taking into consideration different climate –related scenarios.
The targets used by the company to manage climate related risks and to realise climate – related opportunities and of performance against those targets.
The key performance indicators used to assess progress against targets used to manage climate related opportunities and of the calculations on which those key performance indicators are based.

Where should I disclose this?

SME should include their disclosures in the Energy and Carbon Report or, if a Strategic Report is prepared, within that report.

Key challenges and limitations?

Challenge 1: The BEIS climate disclosures are based on TCFD, but do not directly mirror the recommendations from the Task Force. The TCFD’s recommendations have been adapted so that they are suitable for inclusion in UK legislation.

Challenge 2: Understanding Scenario analysis

Should we create our own scenarios or use something off-the-shelf?

The official TCFD advice on this point isn’t particularly strong – they note that companies can use publicly available scenarios, develop their own, or a combination of both. If anything, the TCFD guidance appears to lean towards companies developing their own scenarios, especially for heavy emitters that need to stress test specific business risks.

Which existing scenarios should we use?

The main two sets of scenarios that companies tend to use are published by the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC). The IEA scenarios have become much more useful for this purpose since the release of the Net Zero Emissions by 2050 Scenario (NZE), which is compatible with a 1.5-degree warming target. The IPCC now has two sets of scenarios – RCP (Representative Concentration Pathways) and SSP (Shared Socioeconomic Pathways). The latter are more recent and robust, but the former have been around for longer and are therefore more integrated with the broader literature. There are also scenarios produced by other bodies such as the Network for Greening the Financial System (NGFS) that might be worth considering

Should we combine or group existing scenarios?

It's useful to combine IEA, IPCC and potentially other scenarios together for use in scenario analysis as each source provides insight into different physical and transition risks. For example, the IPCC scenarios provide more insight into physical impacts while the IEA scenarios provide better insight into transition risk, particularly as it relates to changing supply and demand of energy from different sources.

Unfortunately, all scenario sets are slightly different – taking a different view to how emissions will come down over time and what the different chances of different warming levels are.

What temperatures to use?

Scenarios for TCFD reporting generally anchor around specific warming levels. TCFD requires that a 2-degrees or lower scenario is used but otherwise is flexible in the choice of warming levels. Common warming levels in the latest reports are around 1.5 degrees, 2 degrees and 3 degrees. 4 degrees or higher scenarios were once more common but thankfully policy developments in recent years have made that outcome too unlikely to be of as much value in scenario analysis.