Recent data (for example, EY’s 2021 Global Climate Risk Disclosure Barometer) indicates that while more companies than ever are now reporting on climate-related risks and opportunities, many may be doing so purely as a "tick box" exercise.
We explain below what the current ESG reporting requirements are for UK companies and how and why you should be reporting now, regardless of whether the existing requirements currently apply to your business.
What are the TCFD reporting requirements and who do they apply to?
The global Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board, released its climate-related financial disclosure recommendations in 2017. The recommendations were designed to help companies improve and increase reporting of climate-related financial information to support informed capital allocation; enable more effective climate-related risk assessments by companies, suppliers and competitors; and improve strategic planning over the short, medium and long term. The UK Government was one of the first to endorse the recommendations and announced its intention to make TCFD-aligned disclosures mandatory across the UK economy by 2025. Its UK Taskforce’s Interim Report and accompanying Roadmap were published in November 2020.
The table below sets out the UK Government’s plan for the rollout of mandatory reporting to all companies and financial institutions registered in the UK.
In line with the roadmap for 2021-2022:
- The FCA’s December 2020 Policy Statement requires all premium listed commercial companies to provide a statement in their annual financial report, for accounting periods beginning on or after 1 January 2021, to explain whether their ESG disclosures are consistent with TCDF recommendations, and if not to explain why not.
- The Pension Schemes Act 2021 requires schemes of over £5bn to make TCFD disclosures in their annual reports from 1 October 2021. Schemes of over £1bn will be required to do the same from October 2022.
- The Department for Business, Energy and Industrial Strategy published a consultation document in March 2021 proposing to mandate ESG disclosure in line with TCFD recommendations for:
- publicly quoted UK companies; and
- all other UK companies and LLPs with more than 500 employees and turnover greater than £500m.
These regulations are expected to come into effect by the end of 2021 and would apply to accounting periods starting on or after 6 April 2022.
Why should you report?
"Climate change isn’t just a serious and growing threat to people’s health and livelihoods – it’s a major economic risk. Especially as countries build greener, more resilient economies in the wake of the pandemic, it’s encouraging to see them support Task Force recommendations for reporting climate-related financial risks and opportunities."
Michael R. Bloomberg, TCFD Chair
For those businesses who fall under the 2021 mandatory rules, the question above has an obvious answer. However, just because a company is “complying” with the rules does not mean it should ignore the central reasons for reporting, and more importantly for reporting accurately. These are explored in further detail below.
For those companies not yet reporting, there are significant benefits of doing so, even if it is not yet mandatory.
"There will be industries, sectors and firms that do very well during this process because they will be part of the solution. But there will also be ones that lag behind and they will be punished." "Companies that don’t adapt will go bankrupt without question."
Mark Carney, Former Bank of England Governor
Reporting helps businesses future proof against the risks that climate change presents. It supports improved internal risk evaluations and strategic planning, while also enabling businesses to gain a competitive advantage. By getting on the front foot and addressing the concerns and demands of their customers and investors, businesses not only reduce the number of climate-related information requests but can assure customers and investors of their financial resilience over the short, medium and long term, leading to increased capital investment and profits.
Reporting under the TCFD framework can also help businesses find new opportunities for climate and ESG-related action.
Transparency and clear action in response to the public’s rising environmental concerns can also have great reputational benefits for businesses. By utilising a widely accepted framework, such as the TCFD, businesses send a clear message to customers, investors and other stakeholders that they are taking climate-related risks seriously and incorporating them into their strategic planning.
The clear benefit of knowing the UK’s roadmap, set out above, is that businesses can now plan to implement processes and practices which work, develop the expertise needed and upskill staff before TCFD reporting becomes mandatory.
With these benefits in mind, businesses should be aware that they only apply if reporting is done properly and accurately. Businesses that are unable to stand behind the figures and statements provided in their annual disclosure statements expose themselves to claims for misrepresentation, stemming from the discrepancy between what a business says it will do and what it actually does. Activists and interested shareholders will be looking carefully at this distinction in the coming months as the first mandatory UK reports are filed.
In summary, with reporting comes accountability and with greater accountability comes a much higher risk for disputes. It is critical that businesses understand the process, seek proper legal advice and get it right, to minimise litigation risk and maximise the clear benefits of proper and accurate climate-related financial reporting.