Climate-related financial disclosures (CFD) in the consumer sector

In this article we answer some of the key questions around TCFD and CFD disclosures, unpicking what they are, the challenges they present and how they can add value.

What is the regulation on the TCFD and CFD?

Disclosing in line with the Taskforce on Climate-related Financial Disclosures (TCFD) has been mandatory for premium and standard listed companies since 2021 and 2022 respectively, under the Financial Conduct Authority’s (FCA) listing rules.

However, in 2022, the UK government also embedded TCFD-aligned disclosures into the Companies Act 2006, broadening the scope to include large corporates and LLPs (defined as those with over £500 million of annual turnover), financial institutions, and listed entities, if they have over 500 employees. This climate-related financial disclosure framework is known as the CFD and is closely aligned to the TCFD. In practice, a premium or standard listed entity may be in scope of both TCFD and CFD regulations, though the frameworks are very similar.

What do companies need to disclose?

Companies should consider 4 main areas in their disclosures:

Governance

This is about tone from the top. If climate-related risk is not a priority for the board, it is difficult to properly embed it into the future strategic direction of an organisation. Consideration is given to how climate-related responsibilities are allocated at board member and board committee level, and how these are funnelled down the management pyramid to those managing climate-related risk at an operational level.

Strategy

Here, the focus is on how climate-related risks are integrated into strategic decision-making. This could include significant investment decisions, capital allocation, or business expansion. Scenario analysis plays a crucial role in this, challenging the resilience of business strategy against a range of different, plausible future warming scenarios.

Risk management

Climate-related risks do not operate in silos, but instead are often intertwined with wider business risks. For example, supply chain disruptions, which may be caused by non-climate-related events like a pandemic or geopolitical tension, can be exacerbated by climate hazards, and therefore amplify the threat of business disruption. As such, an important facet of this bucket is not only how climate-related risk is identified, assessed and managed, but also how this is woven into wider risk management practices.

Metrics and targets

This area is about demonstrating to your stakeholders that you are monitoring the development of your climate-related risks. This includes disclosing key metrics, such as Scope 1, 2, and 3 emissions, and setting relevant targets. Not only is this expected by stakeholders, but it also allows for the assessment of exposure to carbon tax, which is a significant risk to many organisations. Indeed, the UK Emissions Trading Scheme (ETS) already places caps on the emissions that different carbon-intensive sectors can produce, requiring companies to trade allowances through financial auctions if caps are exceeded. In addition to this, the UK government is now consulting on the introduction of a Carbon Border Adjustment Mechanism (CBAM): a tax on imports into the UK from carbon-intensive sectors, placing importers under comparable carbon pricing mechanisms to domestic producers.

What are the challenges organisations may face?

One significant challenge for organisations is the historically fragmented approach to climate-related risks across different organisational functions. Sustainability has often been treated as a stand-alone function or has been enveloped into the marketing function. However, TCFD and CFD disclosures extend far beyond marketing and sustainability in their remit. Their financial and strategic focus compels involvement from representatives across an organisation, including, at a minimum, finance, risk and operations. For organisations that previously viewed sustainability as a peripheral activity, getting buy-in to the reporting process from across the organisation can be difficult, as can aligning the perspectives of multiple stakeholders.

Additionally, it is not uncommon for the board to display some initial resistance to being involved in the process. This generally stems from a lack of cognizance of the importance of climate-related risk to financial returns. We have found board training, and their involvement in the scenario analysis process so that they are able to visualise the potential financial impact of climate-related risk, is effective in securing buy-in.

For consumer sector organisations, supply chains also pose a particular challenge. This is because several of the most severe climate-related risks often sit in the supply chain, especially for organisations dependant on raw materials of manufactured components. The complexity and lack of transparency in global supply chains means that many organisations have limited visibility beyond Tier 1 suppliers, making it difficult to identify and assess climate-related risks affecting the lower tiers of their supply chain. These risks could still lbe business-critical, should they manifest. Engaging with suppliers at all levels is essential to address these risks.

The final, and often most significant challenge for organisations is conducting scenario analysis. This is due to a lack of understanding of the methodologies, and the fact that often little data will have been collected for the purposes of modelling. We cover this topic in more detail, including the steps that an organisation can take to get started on the journey, in our article titled “Climate risk modelling in the Consumer sector: why start now?”.

How can climate-related reporting add value to an organisation?

While the challenges of climate-related reporting are significant, the increase in stringency around climate-related reporting requirements should not be seen as merely a burden for companies. When done properly, climate-related reporting is a driver of organisational value through improved risk mitigation and the ability to harness opportunities.

To report against the TCFD / CFD, an organisation must have identified its material climate-related risks and opportunities. This process encourages organisations to consider risks beyond the usual checklist of business risks and the typical risk planning horizons, diversifying risk management practices and enabling better planning for a changing operating environment.

For example, one of our clients used scenario analysis to model the impact on sales of an upsurge in the number of days exhibiting heat extremes. By understanding the potential financial materiality of this risk, they were able to consider mitigation strategies, which included engaging with the wider industry to gain a picture of how resilience is being established among their peers.

Additionally, organisations that use TCFD / CFD disclosures to measure and report on their emissions can realise financial benefits by identifying and reducing emission hotspots. For instance, clients have identified that minor behavioural changes, such as switching off lights, can lower both carbon emissions and costs.

Finally, TCFD / CFD disclosures drive transparency, which helps organisations to build credibility with their stakeholders. In an environment in which greenwashing proliferates, gaining the trust of stakeholders through clear reporting is valuable.

What are the key steps an organisation should take to get started on the journey?

There are 4 key steps to get started on your reporting journey:

Identify your current position: Unite stakeholders across your organisation to conduct a gap analysis of where you are against the TCFD / CFD recommendations. Clearly signpost in your reporting where you are compliant, and where you are still working towards compliance, including when you expect to be compliant. Regulators recognise that TCFD / CFD reporting is a journey, and organisations are not expected to have done everything perfectly in their first year of reporting.
Think about your ‘easy wins’: When it comes to your areas of non-compliance, consider where important changes can easily be made. For instance, if your board does not have the required expertise to oversee and manage climate-related risk, consider providing targeted training.
Assign responsibility and set tone from the top: Consider which individual or committee at a board level is best-placed to provide effective oversight of climate-related risk. Ensure that it is embedded into the Terms of Reference of the relevant committee. Consider the reporting lines between the individual / committee and senior management, and whether updates are frequent enough.
Set long-term objectives: Develop a clear plan for compliance and own it in your disclosures. Outline the steps you are taking to address areas of non-compliance, and set realistic timeframes for completion.

Key takeaways

To sum up, climate-related risk reporting is a valuable exercise for future-proofing your organisation in the face of a changing operating environment and ensuring that your risk management processes are resilient despite future uncertainty. Take the time to properly understand your climate-related risk exposures, integrate these into your risk management, and construct a meaningful report for your stakeholders, and the process will benefit your organisation.

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We are committed to working with organisations intent on embarking on and evolving, their sustainability journeys; not only because it makes good business sense, but also because we believe in collectively striving to create a more just and equitable society.

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