The proposals aim to increase both the quantity and quality of climate-related disclosures. Behind the disclosures, the Government expects entities to use the reporting not as a check-box exercise but as a trigger for climate risk assessment and reflection of the entity's climate impact, with a view to future improvement. It is not yet clear whether historical reporting will be required, to demonstrate that the entity is following the right trajectory.
Unlike the EU, which has started from a blank page in drafting its sustainability disclosure requirements under the SFDR and Taxonomy Regulation, the UK adoption of TCFD recognises that TCFD is already widely used in voluntary disclosure programmes and as such, the value of TCFD disclosures has already been proven. TCFD lacks the high degree of granularity present in the SFDR, rather disclosures focus on four core pillars: governance, strategy, risk management, metrics and targets. All four will have to be disclosed against in the entities' reports, but reporting of the further 11 voluntary recommendations is not required (note that this further reporting will be required on a comply-or-explain basis for companies with a premium listing, under the FCA listing rules). Even though not technically required, organisations are likely to find it helpful to review the voluntary disclosure recommendations to get at least a feel for how and what to report under the four main recommendations.
The consultation also acknowledges that the existing SECR requirements will result in data collection and reporting practices useful for TCFD reporting. The Government is considering whether to align SECR requirements for quoted companies and unquoted companies/LLPs, with the latter currently under fewer disclosure requirements than the former. If unquoted companies are bound to measure and report all direct emissions under TCFD, it would seem sensible that the same metric should be reported under SECR.
Briefly, the consultation states that the content of the TCFD report will include:
- Governance: a description of governance arrangements in place to identify and manage risks and opportunities from climate change, who has operational responsibility, and whether climate change is considered by the entity's audit committee, if any.
- Strategy: a description of the entity's business model and strategy if not disclosed elsewhere, and how it may change in response to climate change.
- Risk management: a description of principal risks and opportunities relating to transition risk, physical risk and regulatory risks of climate change, and how the company manages them, including risk management and due diligence policies.
- Metrics and targets: KPIs and targets relevant to the entity's exposure to climate change.
Scenario analysis will be encouraged but not required.
The absence of detailed disclosure metrics in the consultation is in contrast to recent developments around TCFD disclosures for the pensions sector. The Department of Work and Pensions published draft regulations in January which will introduce new duties for UK pension scheme trustees to report in line with TCFD. The draft Regulations, however, specify that the report must include an absolute emissions metric, an emissions intensity metric and an additional climate change metric. It is possible that the draft regulations which follow the present TCFD/non-financial reporting consultation will be more specific as to the metrics required to be disclosed, but there is no indication currently that they will be so prescriptive. It is proposed that BEIS produce guidance in the form of non-mandatory Q&As to support companies and LLPs in their application of the proposed requirements.