TCFD in the Financial Sector: Mandatory and Best Practice Reporting
This article is the first of a series of articles that will be published by Orbis Advisory. The series will cover the latest TCFD updates, mandates and examples in the sector.
What is the TCFD?
The Taskforce for Climate-related Financial Disclosures (TCFD) provides a framework for organisations to consistently assess and disclose the transitional and physical risks and opportunities associated with climate change. To report performance aligned with the TCFD recommendations, a company must provide information on four thematic areas: Governance, Strategy, Risk Management, and Metrics and Targets. For more information on TCFD, see our previous articles: ESG, TCFD and Climate Resilience and Building a Practical TCFD Approach.
In 2019, the UK Government announced that TCFD-aligned reporting would become mandatory, starting with large, listed companies and financial organisations. According to the recent mandates by the UK government, from 6th April of this year, over 1,300 of the largest UK-registered companies and financial institutions are obligated to report on climate-related risks and opportunities. This regulation forms part of actions by the government and several regulators to mandate TCFD-aligned climate-related financial disclosures.
“The 2022 Status Report by TCFD show that 80% of companies disclosed in line with at least 1 of the 11 recommended disclosers”
Scope of the mandate
The mandate applies to all companies that:
Are currently required to produce a non-financial information statement;
UK registered companies with securities admitted to AIM with more than 500employees;
UK registered companies not included in the categories above, which have more than 500 employees and a turnover of more than £500m employees;
Large LLPs, which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500m;
Traded or banking LLPs which have more than 500 employees.
What makes a good TCFD report?
As a recently mandated standard, the selection of prior exemplary reports to refer to as best practise is still fairly slim. None-the-less, companies can still access the information they need to ensure that their first report is up to mark. A successful TCFD report will:
Contain clear reporting progress against all TCFD recommendations.
Where no progress has been made on specific recommendations, it is outlined how these will be focused on in future years.
Outline the areas where no progress has been made on specific recommendations and describe how these will be focused on in future years.
Be fully integrated with all climate-related reporting.
Be integrated within everyday operations.
Align with the best practice standard for responding to the recommendations, where relevant. For example, by using the most up to date climate data from the Intergovernmental Panel on Climate Change (IPCC) and the Bank of England’s Climate Biennial Exploratory Scenario.
What is the level of reporting to date?
Based on the 2022 Status Report by TCFD, 80% of companies disclosed in line with at least one of the 11 recommended disclosures; however, only 4% disclosed in line with all 11 recommended disclosures and only around 40% disclosed in line with at least five. Furthermore, it was reported that larger companies are more likely to disclose TCFD-aligned information than smaller ones. Based on the report, almost 49% of companies with a market capitalisation of $12.2B disclosed on TCFD compared to only 29% of companies disclosing with a market capitalisation less than $3.4B.
KPMG has analysed and benchmarked how 35 major global banks’ climate-related disclosures compare with the recommended disclosures of the TCFD. Overall, it found that the progress banks are making in disclosing climate-related matters has slowed down in 2021. The three key takeaways as mentioned in the report are:
Banks have put in place governance structures and risk management frameworks – however, their impact is not yet clear.
Many banks have committed to achieving net-zero by 2050 – however, metrics are not yet disclosed at a granular level which makes it challenging for users to understand and assess how banks have progressed towards their targets.
There’s limited quantitative disclosure of scenario analysis – making it challenging to use the information disclosed to assess the resilience of their strategies.
More positively, banks have already enhanced their governance structures to embed climate-related risks and opportunities at the board and management level. Banks are also integrating climate-related risks into their wider risk management frameworks. However, granular risk assessments remain more focussed on credit, reputational and operational risks, while market and liquidity risks are often absent.
The report found it hard to determine the level of success of structures and frameworks implemented by banks, as disclosures are generally lacking quantitative information. Further information about the analysis in the report can be found in the link at the end of the article
What needs to be done to increase the level of reporting?
Looking at the data we have about Banks’ current TCFD disclosures, there is still a way to go before banks meet the key quantitative aspects of the suggested ISSB proposals [1]. This new Board released two proposed IFRS [2] Sustainability Disclosure Standards in March 2022, that sets out general sustainability-related disclosure requirements and specific climate-related disclosure requirements. Some of the key observations include:
Many banks do not report their climate-related information in the other standalone reports at the same time as the financial statements, a requirement of the proposals.
Jurisdictions, including the US and EU, are proposing mandatory assurance, meaning they will require sufficiently rigorous processes and controls to produce high-quality information punctually.
Under the ISSB proposals, connectivity between sustainability reporting and financial reporting is important but currently there is a disconnect between the financial statements and climate-related information in the front part of the annual report and other standalone reports. In order to bridge this gap, companies need to:
Report climate-related information in the other standalone reports at the same time as financial statement;
Have sufficiently rigorous processes and controls to produce high-quality information punctually; and
Provide more quantitative disclosures
How we can help
Orbis Advisory work across a broad range of sectors to develop and support ESG strategies to meet investor demands, prepare for upcoming legislative changes, and create tangible benefits both now and in the future. Please see our website to explore our full range of services. For any inquiries, send an email to info@orbisadvisory.com, or fill out an online enquiry form.
[1] The International Sustainability Standards Board (ISSB) provides comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies sustainability-related risks and opportunities to help them make informed decisions
[2] The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.