Climate-related Financial Disclosures

What are TCFD or Climate-related Financial Disclosures?

Understanding corporate environmental impact; both the impact on companies and the impact that they have on the environment, is now widely considered to be a necessity by investors and also sought by governments and civil society. It is not easy, however, for companies to understand their own impact or for their investors and other stakeholders to understand them. The Task Force for Climate-related Financial Disclosure (TCFD) recommendations help to achieve and systematise this, and have become a widely accepted framework for companies to report on the environment.  The two categories of UK regulations (see below) are based on this framework.

Which companies have to report and what requirements do they need to follow?

Listed commercial companies (equity and non-equity shares but not debt listings), AIM-listed companies and 'high turnover' companies with more than 500 employees are required to provide Climate-related Financial Disclosures.

The requirements for companies listed on the main market are set out in the UK Listing Rules.

Companies are required to state whether they have included disclosures consistent with the TCFD recommendations and, where they have not included particular recommendations or disclosures, to explain what is omitted, why, and the timescale over which they expect to achieve compliance.

For TCFD disclosure 'report and explain' is a more accurate description than 'comply or explain'.

Many companies are not yet able to provide all the information required by the TCFD framework, but achieve compliance with Listing Rules by explaining where they haven’t yet met the TCFD requirements and how and when they expect to get there.

Non-­commercial companies; essentially investment trusts and OIECs, are exempt from the regulation, although certain fund managers will have to report under their own regime.

AIM-listed companies and 'high turnover' companies with more than 500 employees

Companies within more than 500 employees that are either listed on AIM or have turnover of more than £500 million ('high turnover' companies) are captured by The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021. While the disclosures here are based on the TCFD requirements, the requirements are laid out under different headings and those relating to metrics are omitted as they are partly covered by earlier requirements under the energy and carbon reporting regulations (SECR).

Where do companies have to report?

Listed companies reporting under the UK Listing Rules need to provide disclosures in their annual report but no more specific location is given. For companies falling under the Companies Act regulations, the disclosures are required to be included as part of the Non-Financial and Sustainability Information Statement, and thus will be part of the company's Strategic Report. Many companies subject to the listing rules will also be subject to the Companies Act requirements.  In this case the specific requirement of the Companies Act to put this disclosure in the Strategic Report must be followed.

It is permissible to produce a separate report on TCFD compliance or sustainability more broadly where the information in this is too extensive to fit comfortably within the annual report.  This can be referred to from the annual report but there must be sufficient information within the report to meet the requirements of the Companies Act or UK Listing Rules requirements.  This required information cannot be provided by cross-reference to a source outside the annual report, 

What are the requirements?

The information content of the two sets of disclosures (those under the Companies Act and the UK Listing Rules) is similar, as both are based on the TCFD Framework. The principal differences between the two are that the UK Listing Rules specifically require a “Compliance Statement” and the Companies Act Regulations exclude the disclosure of “metrics” as these are partly covered by the Streamlined Energy and Carbon Reporting Regulations (SECR) included in a separate part of the Companies Act.

The Compliance statement for listed companies must clearly and concisely lay out the extent of compliance with the TCFD framework recommendations and, for areas not yet compliant, indicate why not and when/under what circumstances compliance will be achieved. The TCFD Framework lays out a set of recommended disclosures under four pillars of: Governance, Strategy, Risk Management and Metrics and Targets.

1.   Governance should describe how, and how often, the board and its committees consider climate issues, how these are integrated with its other planning activities and how it monitors goals and targets related to climate. These disclosures should also cover which committees, or members of the board, or management are responsible for climate issues.

2.  Strategy should describe the climate-related issues impacting strategy in the short, medium and long-term. It should cover both risks and opportunities and give the timeframe for each time horizon, taking into account the life of the company's assets or resources (including those not recognised in financial statements), and ensuring the period considered runs far enough out to capture the impact of climate change. Information should be provided in sufficiently granular form (e.g. product/service or geography) to capture issues affecting particular areas or products. Impacts outside the direct control of the company shouId also be considered, such as supply chain issues.  The disclosures should indicate which, if any, of the risks described are expected to be material to the company’s financial performance or position.

Strategic disclosures should cover major investments taken or considered in response to climate change, possible future changes to operating costs and consideration of different climate scenarios. Early scenario analyses were largely qualitative, but more companies are now producing quantitative analyses, at least in some risk areas. Impact should include both direct physical effects on the company and those known, or expected, to result from adaptation and transition activities.

In particular, regulators expect that analysis should include scenarios incorporating the impacts of the actions required to meet Paris-aligned scenarios or achieve a temperature increase of less than 2°C in the long-term.

3.  Risk Management should describe how the organisation identifies, monitors and mitigates risks related to climate change, ideally indicating the size and scope of the risks considered and covering both physical and transition risks. The TCFD documents provide some useful lists of examples of potential risks to consider.

The TCFD Report summaries the recommendations disclosures of the four pillars, along with the eleven supporting recommended disclosures, as follows:

4.  Metrics and Targets should provide evidence of the company's progress in controlling its climate impact or mitigating the impact/seizing of opportunities of climate change. While older legislation (the energy and carbon reporting requirements of Schedule 7 of the Large and Medium-sized Companies and Groups Regulations also commonly known as SECR) provided for measurement of controlled measures in terms of energy use (scope 1 and 2), there is an increasing expectation that companies covered by the UK Listing Rules will disclose estimates of scope 3 emissions, such as those arising from corporate supply chains. Disclosures should aspire to be consistent across time and, as far as possible, between peers, with sufficient historical data to see trends arising. This has been difficult thus far as measurement methodology and available information are still changing rapidly.  Metrics covered are likely to include energy use, as this is already a UK requirement, but may also include less geographically consistent issues, such as water use that may apply only, or principally, to some operations or regions. Targets should be disclosed giving: base years, time frames, key performance indicators (KPls) used to follow progress and, as the Financial Reporting Council (FRC) noted in its Thematic Review: Streamlined Energy and Carbon Reporting, intermediate milestones to indicate progress toward claimed long-term goals.

TCFD - Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures. Figure 6: Recommendations and Supporting Recommended Disclosures.

Listed companies¹ covered by the UK Listing Rules

The FCA's guidance, in its Listing Rules, refers directly to the TCFD Report. Also referred to are:

• Two documents published at the same time in conjunction with the TCFD Report:
  • Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures - an annex setting out guidance on implementation, and;
  • The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities - technical guidance on the use of scenario analysis
• Three documents adding additional recommendations (notably a transition plan to achieve net zero) and a list of potential metrics:
  • Guidance on Risk Management Integration and Disclosure;
  • Guidance on Metrics, Targets, and Transition Plans (updated), and;
  • Guidance on Scenario Analysis for Non­-Financial Companies.

¹Four categories of UK listed companies are required to provide TCFD reporting in their annual report: equity shares (commercial companies), equity shares (international commercial companies secondary listing), non-equity shares and non-voting equity shares, equity shares (transition).

Companies covered by Companies Act Regulations

The regulations for high turnover companies and AIM-listed companies are more specific and ask for disclosures under the following eight headings.

a. A description of the company's governance arrangements in relation to assessing and managing climate-related risks and opportunities.

b. A description of how the company identifies, assesses, and manages climate-related risks and opportunities.

c. A description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company's overall risk management process.

d. A description of: (i) the principal climate-related risks and opportunities arising in connection with the company's operations, and (ii) the time periods by reference to which those risks and opportunities are assessed.

e. A description of the actual and potential impacts of the principal climate-related risks and opportunities on the company's business model and strategy.

f. An analysis of the resilience of the company's business model and strategy, taking into consideration different climate-related scenarios.

g. A description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.

h. A description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.

The Department for Business, Energy & industrial Strategy (BEIS) has produced non-binding guidance: Mandatory climate-related financial  disclosures by publicly quoted companies, large  private companies and LLPs explaining the objectives of the disclosure requirements and the content and detail expected to be disclosed by companies.

Exemptions within the Companies Act regulations

There are two classes of exemptions:

• Nature of the business: Where the directors believe that any or all of the disclosures set out in (e) to (h) are not necessary for an understanding of the company's business, these disclosures (in all or part) may be omitted, however a clear and reasoned explanation of why the directors believe this to be the case must be stated.
• Subsidiaries: As already noted above, subsidiaries need not report if they are included in a group Non-Financial and Sustainability Information Statement of a parent. While this is useful within the UK it won't be available for subsidiaries of a non-UK parent and will not be available for subsidiaries of parents which do not produce a UK consolidation.

Why have these requirements been introduced?

Users, particularly investors, want to understand how the company might be affected by the direct and indirect effects of climate change to understand the risks they face as investors, both for individual companies and for their portfolio as a whole. They would like to understand how the company plans for climate change and both the physical results, such as higher temperatures, increased sea level, weather volatility, water scarcity, and transition results, such as new products, regulations and taxes changing the costs of, or ability to produce, new and existing products along with changing consumer preferences. Additionally, as well as details of how the company manages risks and its future plans, users would like evidence of achievement, such as measurement of progress for those future plans in the same way that financial statements provide evidence of success or failure in financial terms.

Users understand that a company cannot be certain about what the effects of climate change will be and how they will impact commercially, but they want to understand how a company uses reasonable scenarios for the future in its planning and produces information on how they are delivering against those plans.

Users would also like comparable information between different companies. While this is more difficult, it can be achieved to some extent for quantified historic information, such as carbon emissions. It is more challenging to produce, or aggregate, information about future plans as this is likely to contain a variety of different scenarios, assumptions and timescales. For areas such as water use, even aggregation within a company may be problematic as the degree of water scarcity and type of impact on water is likely to vary between countries, sites and activities.

How does a company implement these requirements?

There is no 'one-size-fits-all' solution to implementing these climate-related financial disclosures, as the impact of climate change, the detail of operations and the existing level of preparedness will vary between each company.

Companies that must comply with the UK Listing Rules and the Companies Act regulations

BEIS (the Department for Business Energy and Industrial Strategy, now the Department for Business and Trade) commented that, if a company provides its disclosures under the UK Listing Rules and they are consistent with all of the TCFD recommendations and recommended disclosures, then these disclosures should also meet the statutory disclosure requirements under the Companies Act regulations. However, a company that currently omits certain disclosures under the UK Listing Rules would need to assess whether additional disclosures would be required to achieve compliance with Companies Act regulations. We note, however, the additional disclosures would not necessarily have to provide the data required under the TCFD Framework.

It is also worth noting that, for companies within scope of the Companies Act regulations, the disclosures must be in the Non-financial and Sustainability Information Statement in the Strategic Report.

Disclosures on transition plans

A listed company is encouraged to assess and disclose, under the UK Listing Rules, the extent to which it has considered its emissions commitments by developing and disclosing a transition plan that is aligned with the country in which its headquartered in, or operates in  Where this has not been done the issuer is encouraged to explain why it has not done so.

Implementation guidance from regulators

Disclosures have now been reviewed both specifically by the FRC and FCA and more recently as a part of the FRC’s annual review of corporate reporting.  In 2024 quality of climate-related disclosure was one of the top ten issues raised by the FRC’s Corporate Reporting Review team.

While the FRC have noted that disclosures have improved here the most common issues raised were incorrect or unclear compliance statements (for listed companies.  The FRC also noted that it saw examples where it felt reporting was unbalanced as a result of excessive focus on minor green initiatives combined with minimal reporting on more emission intensive areas of businesses.   They have also noted that they do not expect to see long term (e.g. 2050) targets stated without any supporting intermediate targets or transition plans.

Implementation

Here we offer some thoughts and considerations for planning to implement the requirements.