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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 and a win for the climate, the UK has officially started mandatory TCFD disclosures from 6 April 2022 onwards, becoming the first G20 member state to implement climate disclosure requirements within its borders.
The Task Force on Climate-related Financial Disclosures (TCFD) recommendations are a set of guidelines for climate reporting that assesses 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 such as science-based targets and carbon accounting are all of a sudden urgently relevant to UK companies.
Since the announcement of the new legislation on 29 October 2021, companies have had less than half a year to prepare themselves for the new reporting requirements. Companies that lack expertise or experience will have to seek help from external consultants or develop internal capabilities for navigating climate reporting practices. On one hand, the mandate will standardise practices by providing a clear-cut way forward for climate reporting and enable consistency and comparability across companies. On the other hand, companies have their work cut out for them, what with rigorous modelling exercises including climate stress testing and physical risk assessments forming such an important part of the entire disclosure exercise.
Companies need to ensure reporting follows the four pillars of the TCFD recommendations: governance of climate-related matters; climate adaptation strategies; management of climate risks; and the metrics and targets used to manage those risks and opportunities. 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 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 particular format for TCFD disclosures to be made, and this may present another challenge to companies seeking to fit climate information into their usual report structure. Due to the comprehensive scope of the TCFD recommendations, this mandate will force companies to be accountable for their carbon footprint - all part of UK’s drive for a net-zero transition by 2050.