Mandatory Taskforce for Climate Related Financial Disclosure 

Since 2022, reporting against the Taskforce for Climate Related Financial Disclosure (TCFD) standards has been mandatory for large companies and limited liability partnerships (LLPs). Simultaneously, the Financial Conduct Authority (FCA) listing rules require premium and standard-listed companies to make TCFD disclosures on a ‘comply or explain’ basis leading to challenging and potentially confusing reporting environment.

Crowe’s Risk Consulting team continues working collaboratively with our Audit team in reviewing climate risk assessments being conducted as part of audit planning. This article follows on from previous papers looking at TCFD best practices in 2022 disclosures and a deep dive into Technology and Media companies’ 2023 disclosures.

We have identified five key learning points that are widely applicable to organisations required to provide public climate-related disclosures against the TCFD frameworks.

1. Understanding what needs to be reported.

Getting the basics right is important. Organisations need to navigate the current regulations and listing rules to understand what they need to disclose and how best to deliver this in practice.

Put simply, this means:

• all UK companies with more than 500 employees have a mandatory requirement to report against TCFD in their annual financial reports if they:
  • are publicly listed
  • have issued listed debt instruments
  • are a private company with a turnover exceeding £500 million
  • are an insurance company or bank.
• all UK LLPs that are a traded or banking entity, or with a turnover exceeding £500 million, also have a mandatory requirement to report in their annual financial reports.
• additionally, listed companies have a separate requirement, under the FCA Listing Rules to report against TCFD on a ‘comply or explain’ basis regardless of their employee headcount.
  • This disclosure does not necessarily need to be within their annual financial report.

These requirements for smaller listed companies or privately owned insurance companies will undoubtedly become challenging to navigate. Organisations are starting to receive regulatory feedback for having provided insufficient disclosures, in some cases on a ‘comply or explain’ basis; when the regulators expected mandatory reporting. Equally, overseas organisations with a dual London Stock Exchange listing may have been caught out by failing to provide disclosures in the required structure.

These findings are consistent with The FCA’s own public reflections published in 2022.

• Year-on-year disclosures are improving, however, many fall short of complying with TCFD expectations.
• The most common gaps relate to the more quantitative and scenario-based requirements.
• Many organisations’ disclosures are limited in scope and not sufficient to evidence compliance.

2. Demonstrating compliance with expected TCFD disclosures.

TCFD-related disclosures are required against four key pillars.

• Governance.
• Strategy.
• Risk management.
• Metrics and targets.

We are starting to see consistent regulatory feedback challenging a narrative approach to disclosure. Listing rule 143.27R is being used to suggest that listed companies annual financial reports need to clearly state if their disclosures have been made consistent with the TCFD recommendations. Best practice disclosures: •

• clearly state, alongside the narrative explanation, whether the organisation:
  • complies fully
  • complies partially
  • does not comply.
• clearly explains, as required by listing rules 14.3.R (2) (b) where non-compliance exists and outline:
  • specific plans in place to ensure these disclosure requirements will be met in the future
  • specific periods by which these disclosure requirements will be met.

Therefore, it is best to avoid long principles-based narrative statements that do not outline how the organisation is complying. Regulators are looking for any action plans to relate directly back to addressing the areas of partial or non-compliance.

3. Providing a clear narrative thread.

A clear overarching message on an organisation’s climate strategy is helpful in providing a consistent narrative. It is becoming increasingly hard to provide a credible response to the TCFD strategy section, without putting this in the context of the wider strategy or chairman’s sections of the annual report.

Ongoing management commitment is demonstrated by the allocation of resource and board time to the topic. Hence the strongest reports indicated that a materiality assessment of sustainability issues had been used to prioritise efforts. Credibility was enhanced by the securing of external accreditations and indicating that external consultants had supported management in its deliberations.

Stronger reports take the opportunity to ensure the TCFD metrics section integrates other reporting requirements such as the Streamlined Energy and Climate Reporting (SECR) disclosures to provide a more joined up picture.

4. Make sure climate disclosures are aligned to principal risk disclosures.

TCFD disclosures require consideration of key climate-related threats and opportunities facing the organisation. It makes sense for these to be consistent with how the principal risks facing the organisation are articulated. If climate risk is considered within the TCFD section to be important, it should be clearly described as a principal risk.

If climate is not considered material, the rationale should be captured consistently with the principal risk descriptions elsewhere in the annual financial report. Equally, if an organisation has a heavily outsourced business model, then its supply chain and information security risks should be described, and this related back to the materiality of greenhouse gas emissions (GHG) outside its direct control (known as Scope 3 emissions).

5. Look to the future and prepare for enhanced disclosures.

Financial Stability Board established TCFD in 2015. Standards and expectations continue to mature and these reporting requirements will be replaced by the IFRS S2 Climate-related Disclosure standard launched by the ISSB in 2023. This standard will be more demanding on strategic and metric related requirements.

Specific additional disclosures relate to:

• exposure to physical and transition risks
• scope 3 GHG emission disclosures related to financing and supply chain activities
• enhanced quantitative metrics
• transition plans, where these exist
• alignment of executive remuneration to climate-related targets, where this exist
• sector specific metrics.

The UK Department for Business and Trade (DBT) will be coming forward with UK Sustainability Reporting Standards (SRS) that implement the ISSB standards in practice. Detailed guidance is expected by July 2024, with an anticipated timetable for reporting from year end 2025. It is possible that the employee headcount related reporting thresholds are lowered, in line with the European Union Corporate Sustainability Reporting Directive 250 employee threshold.

In other words, organisations coming to terms with the current TCFD requirements need to use 2024 to progress their climate strategies and prepare for these enhanced disclosures. The next cycle of reporting for year end 2024 provides a great opportunity to undertake a dry-run of these enhanced requirements and test the organisation’s ability to respond.

Through our practical and experienced team, Crowe continues to support our clients in setting their own agenda to address rapidly changing sustainability and climate-related reporting requirements. Please get in touch with Alex Hindson or your usual Crowe contact for more information.