4 Jan 2021

A beginner's guide to TCFD (Part II)

Our top tips for creating a useful and credible climate disclosure.

Justine Dixon, Head of Corporate Reporting

It's now been 2 years since TCFD first came on to our radar, as one of many new reporting acronyms. Since that time, we've seen many companies become supporters of TCFD, and adopt the reporting framework with their Annual (or Sustainability) reports. For those of you that are new to TCFD, head over to our original article that explains what TCFD means here

Despite the ongoing turmoil caused by the COVID-19 pandemic, expectations for companies to properly articulate how they address climate risk continue to increase. November and December 2020 saw a flurry of TCFD-related activities from UK regulators and oversight bodies:

  • UK Chancellor Rishi Sunak announced that the UK would become the first country to make TCFD mandatory by 2025, launching an ambitious roadmap that promises regulation for the UK's premium listed companies in 2021. 
  • The FRC published an extensive review of climate reporting, concluding that "corporate reporting needs to improve to meet the expectations of investors and other users on the urgent issue of climate change" and encouraging companies to adopt TCFD and SASB to support disclosures. 
  • In his annual letter to CEOs, CFOs and Audit Committee Chairs, the CEO of the FRC, Sir Jonathan Thompson encourages reporters to ensure there isn't a disconnect between narrative reporting and financial statements. 
  • In December, the FCA published a new Listing Rule requiring Companies to report against TCFD on a 'comply or explain basis' in annual reports for financial years commencing on or after 1 Jan 2021. 

So in short, now isn't the time to ignore TCFD for another year. For those looking to develop a first disclosure, or improve on an existing one, see our top tips below:

1. It's a journey

No company has all of the answers. Even some of the biggest FTSE 100 organisations, and those in the energy or financial sectors who have larger exposure to climate risk and have been reporting under TCFD for 2 years are still openly acknowledging there is more work to do. Don't let this hold you back - disclosing nothing (or something vague) can suggest that you are thinking about and reacting to climate risk less than you actually are. 

Sit down with the disclosure requirements, work out what you could say today, and what you'd like to be able to disclose in the future. It can also be helpful in reporting to set out your plans or a 'roadmap' to full disclosure. 

2. Assign a disclosure owner

One of the biggest challenges of TCFD is the number of different parts of the organisation that need to feed into the response. In some cases, this will require new skills, processes and ways of working. Many companies have set up cross-functional working groups to achieve this, but it's always helpful to have a single owner to retain responsibility for ensuring coordination, a cohesive disclosure and a completion of agreed actions. 

3. Don't forget the numbers

TCFD itself is a narrative disclosure, but investors and analysts need information on how the disclosure relates to the numbers - both current and future. Investors want to know whether there has been an impact on current year financial statements (e.g. impairments to assets), or whether they should reasonably expect one in future periods and need to factor this into their modelling (e.g. capital expenditure, or changes to revenue or costs). 

4. It's not just about carbon emissions

We're still seeing many companies only disclosing CO2 emissions in the 'Metrics and Targets' section of their disclosure. TCFD is about understanding how climate risk can impact the company, no the other way around. Try to develop and disclose targets that measure progress against the specific risks and opportunities identified, as a starting point, think about what metrics management and the Board look at when they assess risk of climate to the business. 

5. Be as specific as possible

Generic statements explaining risks and opportunities, or only generally linking climate risk into the overall ERM process doesn't help readers assess the quality of your organisation's response. Aim to be as specific as possible, providing evidence or examples. 

6. Don't overwhelm with information

Having said 'be specific as possible' this point may seem counterintuitive, but developing a disclosure that focuses on giving a good amount of detail around the most material information, with links to more detail for those who need it really aids good communication. 

It is worth bearing in mind that most readers of the Annual Report won't be climate experts or scientists. Most investors are just looking for a sensible, rational disclosure that explains the risks, how you're addressing them, and informs them in terms of how they need to think about it when deciding whether to invest in your company. Keep the detail and the technical stuff in a separate - but easily accessible - document for those who want to dive into the detail. 

7. Get in touch

And last but not least...please don't hesitate to get in touch if you'd like to discuss your disclosure, or ask us for an independent review of your latest draft. We'd be more than happy to help. 

If you would like to discuss how we could help with your corporate reporting and sustainability communications please contact: 

Jayne Bull, Client Director

Jayne.bull@superunion.com