Mariam Mohiuddin, a Corporate Responsibility and Sustainability Consultant at Superunion, explores practical strategies for companies to avoid information overload and build a strong foundation for their climate-related financial disclosures in this insightful guest post.
Note to reader: Following a series of formal declarations at COP28, the TCFD has been officially dissolved. Effective 2024, the International Sustainability Standards Board (ISSB) will assume the mantle of responsibility for climate-related financial reporting.
Uncertainty is the enemy of well-judged decision-making. The Task Force on Climate-Related Financial Disclosures (TCFD) was set up to provide financial markets with clear, comprehensive, high-quality detail on the impacts of climate change – that is to say the climate-related impacts, or potential impacts, on UK businesses.
But half-a-decade later and despite more than 3,900 organisations supporting and using the TCFD as a framework for their disclosures, less than half of companies produce climate-related disclosures that are useful for effective investment decision-making, according to a Manifest Climate Report.
The TCFD’s aims are to be applauded. But the guidance and advice it gives companies about disclosures needs to be streamlined and made digestible if it is to be helpful. To illustrate the point, the TCFD recently published both a 79-page “Guidance on Metrics, Targets, and Transition Plans” and an 88-page 2021 update titled “Implementing the Recommendations of TCFD”.
Meanwhile, in the same period the Financial Reporting Council (“FRC”) and Financial Conduct Authority (“FCA”) also released a 129-page report. With such an avalanche of information it’s no surprise companies are finding it hard to navigate the TCFD guidance and provide information that meets their investors’ needs without obscuring what’s most important.
And this landscape is about to get even more complex with the impending launch of the International Sustainability Standards Board (ISSB’s)’s climate-related disclosures. Although rooted in the TCFD framework, the ISSB standards aim to go beyond the requirements of TCFD to provide an additional level of disclosure.
So how can companies overcome this information overload? It is crucial for businesses to establish a solid foundation in their TCFD disclosures, so it’s time to take it back to basics and identify the key steps to preparing a robust disclosure within an annual report.
What are you being asked?
First things first, to be clear, TCFD reporting, otherwise known as “climate-related financial disclosure,” is not about a company’s impacts on the global climate, it is about climate-related impacts, or potential impacts, on the company. These disclosures are targeted at mainstream investors, governments, and regulators, and are intended to help them assess whether climate risk is appropriately priced into the valuation of a company.
Disclosure is required in four areas:
● Risk Management
● Metrics & Targets
Addressing these can be made easier with planning. Perhaps the biggest challenge of the TCFD exercise is providing meaningful disclosure without becoming too technical. It is not an assignment purely for sustainability teams to put together – it specifically calls for a coming together of sustainability and financial skill sets in a way that hasn’t been required in the past.
The initial and arguably most important first step for all companies (regardless of size or sector) is to identify and disclose governance activities related to climate risks and opportunities – and then secondly, the risk management process for identifying these.
Reporting on the capabilities within the business and the process taken to understand and report on climate-related financial disclosure will set the foundations for developing a comprehensive statement in the future.
How to address Strategies, Metrics, and Targets
Avoid restating what the target readerships knows – they have expertise on climate change, so focus on your strategy and on material information. And avoid generic statements on risks and opportunities – aim to be as specific as possible, providing evidence and examples.
The Financial Conduct Authority provided an update on its ongoing monitoring of climate-related financial disclosures in its latest market bulletin in December and re-emphasised that:
“Where climate-related matters represent material risks and opportunities for the business, they should consider those matters in financial statements and disclose material information”.
Explaining how you define ‘material’ will matter for your company – it will help investors have more confidence in the completeness of information and transparency. Put simply, you need to disclose the following information for your company where it could have a material impact on the business – even if it cannot be accurately priced yet.
The points you need to cover are best summed up as:
● Transition and Physical risks and opportunities – identify not only how extreme climate-related events are likely to have a material impact on the business, but also the consequences of evolving climate change policy.
● Decarbonisation strategies – show where the company is taking an approach to reduce emissions in its value chain and the consequence this will have on the business. It is worth noting that companies are required to disclose data on Scope 1 and 2 GHG emissions, regardless of materiality.
● Targets and commitments – explain science-based targets and net zero commitments made, and any industry-specific metrics used to assess progress against these. Most large businesses in the UK will need to produce transition plans, outlining how they will reach net-zero by 2050 and the annual report will need regular progress updates.
Create your disclosure to be clear and transparent
These requirements may sound daunting if you are new to reporting on this area, but for a common-sense approach get the C-suite engaged by encouraging discussion at the Board level, and make sure the right teams are involved. Conduct a gap analysis on the information you can surface. What can you say right now, where are the gaps, and what needs to be done to resolve them?
Transparent reporting on actions taken and how targets are going to be achieved should be the watchword, so answer as honestly as possible, whilst acknowledging that companies are on a journey. And make sure your report does link to Net Zero as transition plans become increasingly important, with the UK government implementing regulation for large firms to publish these plans by 2023.
Remember, the ultimate aim is to deliver a ‘decision-useful’ disclosure for investors, along with transparency and context in the compliance statement for regulators.
As a Senior Consultant at Superunion, Mariam Mohiuddin brings extensive experience in corporate and ESG reporting to the table. With a deep understanding of reporting frameworks, Mariam advises international and global businesses on how to create impactful annual and supplemental reports that achieve best practice in regulatory disclosures, particularly in TCFD reporting.
Mariam has also developed skills in net zero reporting, having created a Net Zero pathway white paper, and stays up-to-date on upcoming regulations to provide high-quality solutions and recommendations of best practice. With a collaborative approach, at Superunion we help clients create meaningful and impactful disclosure in their annual reports and ensure compliance with listed company requirements.
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