Governance Perspective Response to the government's TCFD consultation
The IoD recently submitted a response to a government consultation on mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and limited liability partnerships (LLPs). This Governance Perspective will give some background on what TCFD is, the key issues within the consultation, and cover some of the views that we submitted to the government.
Background – 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
Key issues within the consultation
The TCFD consultation posed several questions on how TCFD could be implemented alongside the government’s preferred options. The key issues covered included the following:
- Disclosure requirements – what form the TCFD disclosures should take and the framework to be reported against
- Location of disclosures – whether any TCFD disclosures should be detailed within an annual report or in an alternative external location
- Scope – who TCFD should apply to and what thresholds should be used to assess that.
The consultation proposed requiring disclosure solely on the four pillars of the TCFD framework rather than on the basis of all 11 recommendations. However, we were not persuaded by that argument – as explanations based on the 11 recommendation levels would provide granular reporting detail and would help to avoid more vague and generic disclosures.
The government also proposed that scenario analysis – where companies describe in their annual reports scenarios concerning the impact of the climate crisis on their business, the actions that they would take, and the outcomes that would result in – would be encouraged, but not required. On this, we agreed with the government, but we argued that it should be a mandatory requirement only for the largest companies.
Location of disclosures
The government proposed that LLPs and companies should locate their TCFD disclosures within the equivalent section of the annual report. Our view is that companies that are subject to the Streamlined Energy and Carbon Reporting (SECR) requirements should place their disclosures in the Energy and Carbon Report that they are required to publish. All others should be made within the Strategic Report section of the annual report.
Scope of TCFD requirements
The government set out the proposed following scope for companies that would have to report on TCFD requirements:
- 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.
As an initial step, we agreed with the government that TCFD disclosure requirements should apply to all UK companies that are currently required to produce a non-financial information statement.
However, the IoD believes that the scope should be extended to a wider range of companies within a reasonable timeframe, e.g. by 2025. 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.
Additionally, we noted that 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.
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).
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.
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 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.
Ultimately, 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.
Amin Aboushagor is a Policy Advisor at the IoD.