Climate-Related Risks and Opportunities - The Evolution of TCFD-Aligned Reporting
Our data shows the number of AIM firms reporting climate-related risks and opportunities, in line with the TCFD framework, is likely to increase significantly, from 13% to 25% by the end of 2024, including several firms reporting on a voluntary basis. Climate-related reporting creates both challenges and opportunities for firms. In this article we explain what TCFD reporting is, the evolving regulations, insights from our data on current reporting by AIM participants, and recommendations from our experience supporting our clients to meet these new mandatory reporting requirements.
What is TCFD?
The Financial Standards Board (FSB) developed the TCFD framework in 2015, with the aim to improve disclosures, by both investors and investees, on their climate related risks and opportunities.
Companies are required to report against four pillars:
Governance: How a company’s senior team oversee and take accountability for climate-related risks and opportunities.
Strategy: How the company’s strategy stands up to climate related risks and opportunities, including scenario analysis against potential future states.
Risk Management: How a firm’s climate related risks and opportunities are identified and managed.
Metrics and Targets: How the company is monitoring its climate-related risks and opportunities, and ultimately its progress towards Net Zero.
TCFD requires companies to consider both the risks and opportunities that result from the transition to a net zero world, where greenhouse gases are largely eliminated, as well as those that arise from physical climate change, including acute events, e.g. flooding and fires, and chronic events e.g., rising temperatures and sea-levels.
Who is in scope of mandatory reporting?
The FCA phased in mandatory TCFD reporting for main market participants and FCA registered companies (e.g. asset managers and insurers, including AIM-quoted firms) from 2021.
Via an amendment to the 2006 Companies Act, TCFD aligned reporting became mandatory for UK incorporated AIM firms with over 500 employees, for financial years starting on or after 5 April 2022, according to our data, this amendment to the Companies Act impacts 135 AIM participants.
The UK government stated its intention in its 2020 TCFD Roadmap to expand mandatory reporting to a wider scope of firms but timelines have yet to be confirmed.
Following the inclusion of TCFD reporting requirements in the International Financial Reporting Standards (IFRS) S2 standards released in June 2023, the oversight of TCFD transitioned to the IFRS’s International Sustainability Standards Board (ISSB). The UK and many other jurisdictions have stated their plans to mandate the IFRS sustainability standards, under ISSB, and therefore TCFD aligned reporting. The UK's initial analysis of the ISSB standards is expected this summer.
The evolving TCFD implementation by AIM participants
According to our data, 12.7% of all AIM participants are reporting climate-related risks and opportunities, at least in part, against the Taskforce for Climate-Related Disclosures (TCFD) framework. This is only a 1.1% increase year-on-year; however, we expect this to increase by 12.3%, to 25.1% of firms in the next reporting cycle. 9.8% are in scope of the new regulations but not yet reporting, and 2.5% have stated plans to report voluntarily.
Our data shows the number of AIM firms reporting climate-related risks and opportunities is likely to increase significantly in 2024
The sectors with the greatest proportion of firms reporting, or intending to report voluntarily, are from the following industry sectors: Consumer Staples, Utilities, Basic Materials, Finance and Energy.
Our recommendations for your climate-related reporting
Confirm if the firm is in scope of mandatory reporting. There are nuances in the regulation that are worth exploring. The 500-employee threshold for UK incorporated firms includes all employees including those in subsidiaries and globally, not just the UK as with some other regulations. The requirements for FCA regulated firms are stricter and include Asset Managers with £5bn or more Assets Under Management.
Understand the regulatory minimum reporting requirement. Not all the TCFD recommendations are mandated in the Companies Act. For example, the quantification of scenario analysis is not required to meet the regulation and certain recommendations are removed as already covered by other areas of legislation, e.g. specific requirements to disclose Scope 1, 2 and 3 (if material) greenhouse gas emissions which are already covered by SECR. For FCA regulated firms, disclosures against all 11 TCFD recommendations is mandated.
Determine the depth of analysis and reporting up front. TCFD aligned reporting can be a considerable undertaking for a firm, and it may not be required. There is a significant range in quality and depth, as well as approach to reporting being taken across AIM and main market companies. Some firms have chosen not to report at all, stating their reasons. Others have conducted in-depth quantitative scenario analysis and produced standalone TCFD-reports in addition to reporting a summary in the Annual Report. There are several factors to consider when deciding the level of reporting, however setting a guiding principle upfront will avoid unnecessary analysis and re-work later in the process. Considerations should include the importance, or materiality, of climate-related opportunities and risks to the firm; whether the firm needs to meet mandatory disclosures; peer reporting; client and investor pressure; existing risk management and reporting; and how the analysis and reporting can be developed overtime with available resource.
Involve executive team and board representatives in the scenario analysis. Undertaking scenario analysis may seem like a level of detail that can be delegated with the findings presented to the executive and board. However, there are several benefits to involving representatives from the board and executive team in the process, especially when undertaking scenario analysis for the first-time. Benefits include improved engagement and prioritisation of preparation from the wider team; improving accuracy into determining the impact of risks and opportunities; and building executive understanding, improving the chances of successful climate-related risk mitigation and opportunity realisation.
Take the opportunity to enhance risk and opportunity management processes across the company. For AIM and small-cap firms, TCFD aligned disclosures can result in a somewhat skewed annual report, where climate-related risks and opportunities take-up disproportionate annual reporting real estate when considering their relative importance to a firm’s full risk and opportunity landscape. However, it’s not the annual reporting space that should be of the biggest concern, but the effort required into identifying and the ongoing management of these risks, over the other, more material items. Firms could instead use this opportunity and the TCFD recommendations, to enhance their current risk and opportunity management processes for all areas, building resilience and longer-term sustainability across the firm, and maximising the output for the effort input.
The silver lining
Reporting in line with the TCFD recommendations will likely feel strange to firms as the analysis requires longer-term thinking, and the reporting requires deeper disclosures into business controls. However, using the opportunity to evolve a company's risk and opportunity framework will also help to meet the new QCA Corporate Governance code's focus on risk management, due for implementation from April this year. It will also serve your longer term ESG reporting thinking and effort, as the common global consensus of reporting across the ESG spectrum is aligning to the 4 recommended areas as pioneered by the TCFD - Governance, Strategy, Risk Management, and Metrics and Targets.
To understand more, please get in touch with the team.
Never miss an update from Addidat. Subscribe to our monthly Newsletter by following this link.
