Disclosures on climate change are becoming increasingly commonplace due to stakeholder pressure, a desire to futureproof businesses and now an increase in legislation mandating companies measure and report their climate risk.
As we outline below, disclosure mandates are centred around the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), but there are other avenues available to disclose greenhouse gas emissions and climate-related risks – for example CDP which is broader but which is also TCFD-aligned.
Where are disclosures now mandated? The UK is the latest country to take the step to mandate climate risk reporting. Under UK legislation for the private sector, which was agreed upon in the run-up to COP26 and which came into effect on 6 April 2022, companies that are currently required to produce an annual non-financial information statement – i.e. listed companies, banks or insurers with more than 500 employees – will be required to fulfil climate reporting requirements that are aligned with TCFD recommendations.
If you’re a private organisation with over 500 employees and £500m or more in turnover, you also need to comply.
A summary of the rules from the UK government can be found here, and a handy breakdown can be viewed here. Non-compliance with the requirements can result in a maximum fine of £50,000 and a potential trip to court, along with reputational risks.
Meanwhile, in the EU, listed companies, banks, insurers and other “public interest entities” with more than 500 employees are now required to make disclosures on environmental and social matters, which also include the treatment of employees, respect for human rights, anti-corruption and bribery and board-level diversity. The EU’s Corporate Sustainability Reporting Directive (CSRD) will extend these rules to more firms and will also incorporate TCFD recommendations.
In New Zealand and France reporting in line with TCFD is already mandatory, and this will also soon be the case in Switzerland. The G7 has agreed to introduce mandatory TCFD reporting in the coming years.
What is the TCFD? TCFD was created in 2015 by the UK’s Financial Stability Board (FSB) to create a framework for climate-related financial risk reporting so that companies, banks and investors can all provide consistent and comparable information on climate change risks. Without this kind of standardised information, stakeholders will struggle to compare how different companies, reporting under different requirements, are progressing on climate change.
TCFD specifically focuses on companies disclosing information on climate change governance, strategy, risk management and metrics and targets (i.e. plans for net zero), and encourages businesses to engage with the tangible impacts of climate change by mapping the risks and opportunities different climate scenarios pose to their value chains. The full detail of the recommendations can be found here.
What else is out there? Other climate disclosure frameworks also exist. CDP (formerly the Carbon Disclosure Project), for example, runs a disclosure system for investors, companies, organisations and governments. This includes a mechanism to disclose information on greenhouse gas emissions and climate change, but also allows firms to disclose data on their water use and water risks, as well as information on deforestation. CDP’s system and questionnaires are aligned with TCFD, so firms that go through the CDP process should be able to produce a TCFD-friendly disclosure report.
Alongside reporting and scoring, CDP also provides guidance tools, such as workshops and action plans for companies – even those that aren’t required to make disclosures – to improve their measurement, reporting and understanding of climate risk.
What about the future? There is continuing alignment between the various frameworks and standards out there to report climate and wider sustainability information. For example the International Sustainability Standards Board (ISSB), established by the IFRS Foundation, is a framework built on the foundations of the Climate Disclosure Standards Board and the Value Reporting Foundation, among others. The reporting requirements of ISSB and its equivalent the Global Reporting Initiative are both aligned with TCFD.
In terms of future trends, there is a push for more disclosures around companies’ nature-related risk. The Taskforce on Nature-related Financial Disclosures (TNFD) launched a beta framework in March that is based on the principles of TCFD. This is now undergoing a pilot testing phase and is due to be rolled out in September next year.