In 2020, the UK outlined its roadmap to implementing the recommendations of the Taskforce on Climate-related Financial Disclosures ("TCFD"). With the first wave of premium listed companies already having prepared reports, the second wave will see standard listed companies, the largest asset managers and very large companies issuing TCFD reports or TCFD-aligned reports under the Companies Act this year. Smaller asset managers with over £5bn of assets under management will already be thinking about how to make their first firm-level reports next year.
Further guidance for effective TCFD reporting
The FCA and FRC issued helpful guidance in July 2022 analysing the first set of reports by listed companies. These provided examples of best-in-class reporting and indicated where the regulators would exercise some discretion, recognising the scale of the challenge that some elements of TCFD reporting present (see our briefing for further details).
In a similar vein to the July 2022 reports, the Climate Financial Risk Forum ("CFRF"), an industry forum jointly convened by the FCA and PRA, has published a report providing useful guidance on how companies may practically approach their reporting obligations depending on the scale of their ambition and reporting readiness.
As a reminder, the TCFD's reporting framework establishes four core pillars, Governance, Strategy, Risk Management and Metrics and Targets, under which eleven recommended disclosures are set out. Each pillar can be viewed through a lens of both outside-in impacts (climate change's effect on the undertaking) and inside-out impact (the undertaking's effect on climate change). This is notable as it moves the approach of the UK regulator towards "double materiality" - a current hot topic in EU reporting and a particular focus under the EU's Corporate Sustainability Reporting Directive which also incorporates climate reporting.
The CFRF's report looks at five distinct aspects of the TCFD disclosures - transition risk, physical risk, financed emissions and portfolio alignment, financing the transition and engagement. These aspects of reporting are both critically important and can be difficult to tackle. Undertakings are guided in producing and disclosing "decision-useful" metrics for these disclosures (further described below).
In common with the TCFD's own approach to guidance, the CFRF report provides additional considerations for asset managers, banks and insurers in relation to each of the categories, including areas to focus on and additional sector-specific reporting hints and tips.
The table below highlights how CFRF categories and example metrics interlink, and how they fit into the various disclosures required by the TCFD, ISSB and the UK's Transition Plan Taskforce Implementation Guidance (see our briefing).
Example metrics have been provided for each of the CFRF categories within the guidance, supplying undertakings with a helpful benchmark or, for those at the beginning of their disclosure journey, ideas for what data to work up. The metrics are designed to be jurisdiction-agnostic, therefore standardising the disclosure process to some degree, regardless of domestic implementation of the TCFD.
The CFRF has also acknowledged that some undertakings will be more advanced than others or have more of an appetite to engage with the review and reporting processes, recognising that ESG reporting is often an evolutionary journey. As such, it has designed 'levels' of metrics for each category, defined as 'Foundation' (good), 'Stretch' (better) and 'Advanced' (best). Example metrics at each level highlight the standard of reporting that will be required.
The table below defines each of the levels.
As an example, in relation to the 'transitional risk' category, the three categories of metrics are shown below.
Metrics such as the one above should be viewed as illustrative rather than prescriptive; despite that, using the example metrics is likely to give reporting organisations some comfort that they are adequately disclosing on these specific aspects.
What is clear from the CFRF guidance is that, even reporting at 'foundation' level can be challenging and will require a significant lift internally, the use of external data and resources, and careful consideration of a broad spectrum of information in order to meet mandatory reporting standards in line with TCFD recommendations.
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