The Minister of State for Business, Energy and Clean Growth, and
UK International Champion on Adaptation and Resilience for the COP26 Presidency;
The Minister for Climate Change and Corporate Responsibility;
Department for Business, Energy, and Industrial Strateg
1 Victoria Street
Dear Ms. Trevelyan and Lord Callanan,
Consultation on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and Limited Liability Partnerships (LLPs)
About the IoD
The IoD was founded in 1903 and obtained a Royal Charter in 1906. It is an independent, non-party political organisation of approximately 21,000 individual members. Its aim is to promote good governance and ensure high levels of skills and integrity among directors of organisations. The membership is drawn from right across the business spectrum, as well as the public and third sector. 49% of FTSE 100 companies and 45% of FTSE 350 companies have IoD members on their boards, but the majority of members, some 70%, comprise directors of small and medium-sized enterprises (SMEs), ranging from long-established businesses to start-up companies. IoD members’ organisations are entrepreneurial and growth-orientated, and more than half (61%) export goods and services internationally.
The IoD welcomes the opportunity to participate in this consultation on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and limited liability partnerships (LLPs). Issues of this nature are of considerable interest to the IoD and its membership, and we are therefore pleased to present our views in respect of your proposals.
Background – the need for a common reporting framework on climate change
The climate crisis poses an existential threat to the global economy and wider society. It is therefore imperative that business acts to minimise any further impact on climate trends. As directors, we are committed to playing a leading role in this process. We support the government’s world-leading efforts to de-carbonise the UK economy, such as the 2008 Climate Change Act introducing carbon budgets, the commitment to achieving net zero by 2050, and the recent target to cut emissions by 78% by 2035.
When it comes to addressing the risks posed by climate change, many directors already recognise the role that their organisations must play. The government has raised the bar by setting a challenging emissions target, but it can only be achieved if businesses respond, with boards setting a clear direction which is embedded throughout their organisations.
Although the voluntary disclosure of climate-related financial information has increased in quantity and quality in recent years, we agree that now is the time to introduce a common reporting framework to support the UK’s transition to net zero and help cement the UK as a global centre of excellence for green finance.
The adoption of a common reporting standard is a development that is supported by IoD members. Notably, 70% of IoD members have expressed support for companies moving to a common reporting standard on disclosures relating to climate change and environmental impact. Additionally, 75% of IoD members believe either some changes or significant reform to the UK's corporate governance framework is required to take greater account of climate change (Policy Voice Survey, February 2020).
We agree that disclosure of material climate-related financial information by a wide range of companies can potentially help support investment decisions aligned with the UK’s transition to a low-carbon economy. In this spirit, implementing mandatory climate-related financial disclosures through a framework such as that of the Taskforce on Climate-related Financial Disclosures is a
necessary step towards combatting the climate crisis.
The Taskforce on Climate-Related Financial Disclosures (TCFD)
In 2015, the Financial Stability Board, the international body that monitors and makes recommendations about the global financial system, established the TCFD to develop recommendations for more effective climate-related disclosures. The aim is to promote more informed investment, credit, and insurance underwriting decisions. It is hoped that stakeholders will use the resulting data to understand better the corporate sector’s exposures to climate-related risks and their proposed mitigation strategies.
In 2017, the TCFD released its final report setting out 11 recommended disclosures structured around four thematic pillars that represent core elements of how organisations operate. As of September 2020, the TCFD recommendations were supported by over 1440 organisations, representing a market capitalisation of over $12 trillion. The proposed disclosure categories are as follows:
Figure 1 - TCFD Pillars and Recommended Disclosures. Source: TCFD
Governance Strategy Risk Management
Metrics and Targets
Disclose the organisation’s governance around climate-related risks and opportunities.
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
Disclose how the organisation identifies, assesses, and manages climate-related risks
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Describe the board’s oversight of climaterelated risks and opportunities.
Describe the climaterelated risks and opportunities the organisation has identified over the short, medium, and long term.
organisation’s processes for identifying and assessing climate related risks.
Disclose the metrics used by the organisation to assess climate-related risks and opportunities in
line with its strategy and risk management process
management’s role in assessing and managing climaterelated risks and opportunities.
Describe the impact of climate related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
organisation’s processes for managing climaterelated risks.
Disclose Scope 1, Scope
2, and, if appropriate,
Scope 3 greenhouse gas (GHG) emissions, and the related risks
Describe the resilience of the organisation’s strategy, taking into consideration different climate related scenarios, including a 2°C or lower scenario.
Describe how processes for identifying, assessing,
and managing climaterelated risks are integrated into the organisation’s overall risk management.
Describe the targets used by the organisation to manage climate related risks and opportunities and performance against targets.
The work of the TCFD has thus resulted in a toolkit that will potentially be useful for directors in helping them to consider the impact of climate change on their organisations. An appropriate framework of disclosure can help boards in terms of focusing their own internal discussions as well as increasing their accountability to stakeholders.
Scope of TCFD requirements
As an initial step, we agree that TCFD disclosure requirements should apply to all UK companies that are currently required to produce a non-financial information statement. These include:
- UK companies that have more than 500 employees and have transferable securities admitted to trading on a UK regulated market, including banking or insurance companies;
- UK registered companies with securities admitted to AIM with more than 500 employees;
- UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m;
- LLPs which have more than 500 employees and a turnover of more than £500m.
However, the IoD believes that the scope should be extended to a wider range of companies within a reasonable timeframe, e.g. by 2025.
Specifically, it should be noted that under the Companies (Directors' Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018, the Streamlined Energy and Carbon Reporting (SECR) threshold for reporting is 250 employees. We would expect the scope of TCFD reporting to align to that threshold after several years to maintain consistency across different government regulatory requirements. However, we encourage companies of all sizes, small, medium, or large, to understand and voluntarily implement TCFD as soon as possible rather than wait for government intervention to compel them to do so.
Large unquoted companies and LLPs should be subject to the same reporting requirements under SECR as quoted companies. The scope should also include companies trading on unregulated markets and Multilateral Trading Facilities (MTFs).
Additionally, care must be taken to ensure that listed subsidiary entities with non-listed parent companies report on TCFD reporting in their own filings. Subsidiary companies should not be able to bury their report in a parent company’s filings. Subsidiary reporting should form a fundamental part of the group-wide report to promote transparency across the components of a business group.
We also wish to ensure that disclosures do not overlook the cumulative impact of small and medium-sized enterprises (SMEs) with respect to carbon emissions. However, care must be taken to minimize the onerousness of immediate reporting requirements on smaller entities given the disparity in their resources relative to larger enterprises.
The use of headcount and turnover as eligibility criteria runs the risk of failing to reflect the level of climate risk. Businesses with very low numbers of employees but with very large footprints due to the technology inherent within their business models should be considered for inclusion within the disclosures based on more relevant inclusion criteria. Furthermore, the quality of disclosures should matter more than the quantity; boilerplate reporting must be avoided as much as possible.
The IoD is not persuaded by the consultation proposal to require disclosure solely on the four pillars of the TCFD framework rather than on the basis of all 11 recommendations. Explanations based on the 11 recommendation levels would provide granular reporting detail and would help to avoid more vague and generic disclosures.
We would also encourage scenario analysis within a company or LLP’s accounts, although we accept that it should only be a mandatory requirement for the largest enterprises. Scenario analysis can potentially play a useful role in demonstrating how each individual company and LLP has considered how they are affected by climate change alongside suggested actions to mitigate the consequences.
Materiality assessment for governance and risk management disclosures
We believe that TCFD’s focus on governance should support the wider integration of climate-related issues into strategic considerations. Disclosures regarding the board’s consideration of these issues, including relevant risks and opportunities, are often qualitative. The company is in the best position to provide its own view of the challenges it faces, to support such a view with additional information, and to disclose the way in which risks and opportunities are being monitored and managed by the board.
What constitutes financial materiality varies by industry sector, and the materiality of particular indicators only becomes clear in the medium-long term. A company’s assessment of the materiality of information should not prevent it from publishing what it considers non-material information because that information could be material for external stakeholders.
Location of disclosures
LLPs and companies should locate their disclosures within the equivalent section of the annual report depending on the regulatory requirements they are subject to. For those organisations that are subject to the SECR requirements, they should place their disclosures in their Energy and Carbon Report. All others should be made within the Strategic Report.
These reports should clearly signpost not only to the TCFD disclosures, but to directly related sections and any relevant externally located content, such as climate impact reports hosted on a company’s website. We hope that such reporting can be incorporated into companies’ annual reports in a cohesive way that avoids unnecessary repetition.
It is important that there is sufficient guidance, education, and support for companies and directors to ensure they are able to make meaningful disclosure under a new reporting regime.
There may also be opportunities for government assistance in reducing the cost of disclosure, such as by producing common sets of assumptions (e.g. the future price of carbon) that could be used to help reduce the cost of forecasting or specialist modelling that each organisation may otherwise be required to produce.
Businesses and directors should be provided with the skills, data, and perspectives that they need to help them meet the risks and opportunities caused by the climate crisis. The IoD stands ready to work with the government to deliver such a programme.
We note that the proposals in this consultation are intended to be consistent with the proposals set out in the recently published white paper ‘Restoring Trust in Audit and Corporate Governance’. Related to that consultation, we believe that auditors could play an important role in confirming that statements made on climate-related financial disclosures are accurate and not unspecific or misleading. Audit firms should develop dedicated specialists who can examine the climate impact of a company’s statements within an annual report, both financial and non-financial, as part of the audit process.
The TCFD framework is a step towards tackling the climate crisis through its impact on climate finance and investment. Its litmus test is whether it provide investors, regulators, and other stakeholders with sufficient information to assess the climate-related risks and opportunities facing a company or financial institution. However, it must be recognized that good disclosure is only one aspect of the business response to the climate crisis – it must be complemented by action in other areas, many of which will involve an ongoing partnership between business and government.
We hope you have found our comments helpful. If you require further information about our views, please do not hesitate to contact us.
With kind regards,