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New legislation relating to ESG disclosures have been snowballing into parliaments worldwide. As ESG continues to grow in momentum, climate-related regulations have been slower to follow. In a major legislative move, the UK has officially started mandatory TCFD disclosures from 6 April 2022 onwards. The UK is becoming the first G20 member state to implement climate disclosure requirements within its borders.
Find out more about the TCFD reporting in the UK here.
The Task Force on Climate-related Financial Disclosures (TCFD) recommendations are a set of guidelines for climate reporting. They assess climate risks and opportunities and its related financial impacts. The recommendations are grounded in the science behind the IPCC report and the GHG Protocol.
TCFD-aligned disclosures apply to the annual reports of qualifying public-listed companies and LLPs for reporting periods on or after 6 April 2022. With this new law already in effect, technicalities are all of a sudden urgently relevant to UK companies.
The new law was announced on October 29, 2021. Since then, companies have had less than six months to adjust. They must prepare for new ways they must report information, which requires skills or experience or help from outside experts.
Alternatively, they could train their own staff. Either way, they need to understand the new rules about reporting on climate-related issues.
On one side, this new rule will make things simpler and provides a clear path to follow for reporting about the climate. This will make it easier to compare different companies.
On the other side, companies have a lot of work to do. They need to carry out detailed tasks, which include climate stress tests and evaluating physical risks. Both of these are crucial parts of this new reporting process.
Companies need to ensure reporting follows the four pillars of the TCFD recommendations:
Identifying risks and impacts requires scenario analysis, looking at adaptation strategies for the IPCC’s multiple possible future pathways where the climate will warm by 1.5 °C up to 4 °C. Companies need to show that they are taking steps towards decarbonisation as part of the risk management and strategy pillars of the TCFD.
The mandate requires companies to report on Scope 1 and 2 emissions, and Scope 3 if it is a material risk or constitutes 40% or more of total emissions. This is a significant step towards greater emissions responsibility and also a challenge, since Scope 3 concerns emissions beyond the operational control of an entity.
In 2020, only 154 companies in the UK referenced the TCFD, ranging from fleeting references to extensive disclosures including reduction targets. In the 2022 reporting year, that number is expected to total 1,300 as reporting deadlines roll around the corner. This number will include the biggest companies in the UK with employees topping 500 and annual turnover of more than £500 million. Banking and insurance companies fall firmly within the mandate.
There is no set format for TCFD disclosures. For now, the lack of structure creates the biggest challenge for companies. They might find it difficult to include climate information in their regular reports.
The TCFD recommendations cover a wide range of issues. Because of this, the new rule will make companies answer for their carbon emissions. This is all part of the UK's plan. The goal is to have zero net emissions by the year 2050.