By Gavin Hinks
When it comes to mandatory climate-related risk reporting there isn’t as much time as recent headlines might suggest. The government has said the legal framework to make it compulsory will be in place by 2025. But a detailed look at government timelines reveals for premium listed companies the changes will come in as soon as next year.
“The real time scale is from next year and that should focus a few minds,” says Veronica Poole, head of accounting for north and south Europe at business advisory firm Deloitte. She adds that work on preparing climate-related risk disclosure should be starting now. “If it hasn’t started already, you’re way behind what you’re competitors are likely to be doing.”
The urgency comes after ministers revealed last week that the government would push ahead with mandatory reporting based on a framework published by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was set up by the G20’s Financial Stability Board (then led by former Bank of England governor Mark Carney) and revealed its reporting guidelines in 2017.
The guidelines were voluntary but many have been advocating for mandatory measures for some. Progress on adoption has been reasonable, though the TCFD has consistently called for faster action by companies.
In May this year Mark Carney, former governor of the Bank of England, said it was time for the reporting system to be mandated. The UK government had already indicated it was moving in that direction back in February.
It’s not hard to see why. There has been a growing sense that companies are not yet disclosing the right climate change information. Recently, the Financial Reporting Council (FRC), the UK’s corporate reporting watchdog, concluded in a report that companies were failing to meet investor expectations.
FRC chief executive Sir Jon Thompson said it was time to “raise the bar” in company reporting. An investor told the FRC: “There are too many conversations where the board doesn’t get it.”
TCFD reporting roadmap
TCFD is not the only sustainability reporting system available. There are a raft options for companies to choose. However, in recent months there has been movement. Five bodies (IIRC, SASB, CDP, GRI and CDSP) have announced a project to align their reporting standards. Elsewhere, the body that produce international financial reporting standards has launched a consultation on whether it should begin work developing new sustainability reporting guidelines.
At this point, however, the Treasury has thrown its weight behind TCFD and made clear that it will amend the Companies Act 2006, the UK’s most important piece of governance legislation, to enshrine the guidelines in legislation. But the timeline is tight.
A diagrammatic roadmap published by the Department for Business, Energy and Industrial Strategy (BEIS), says it will have the regulations in place for pension schemes bigger than £5bn, banks, building societies, insurance companies and premium listed companies by next year.
That means accounts departments will need to hit the gas if they are to be ready. And there is much to review. TCFD guidelines range across four areas: governance, strategy, risk management, metrics and targets.
When TCFD reported on their adoption in October it said energy and materials companies were leading the way; 60% of the world’s largest 100 companies were supportive and report in line with TCFD recommendations, while 700 more had become supporters in the past 12 months.
But there is also concern. While disclosure of climate-related financial information has increased since 2017, there is more to do. Specifically, more companies should be revealing the potential financial impact on their strategies. In fact, disclosures on the resilience of company strategies “was significantly lower than that of any other recommended disclosure”, said the report.
That implies openness about strategy is either particularly difficult to do, or a little too sensitive to confront. And that’s an issue. The key to TCFD reporting, according to Richard Spencer, head of thought leadership at chartered accountancy body ICAEW, is understanding that it’s not just a disclosure exercise.
“Good disclosure has to be rooted in good practice. It’s not really going to have anything to report if you aren’t taking account of the impact that dramatic climate change is having on you or your contribution to that problem,” says Spencer.
For Veronica Poole, TCFD asks how companies have changed course after measuring and weighing climate risks.
“One of the things that is in TCFD is a recognition that you’ve got to change your business model. It says, ‘tell me how you think about your decision-making within the business, incorporating climate considerations,” she says.
And that may mean changing behaviours, placing a premium on urgent action for companies that have yet to engage with climate risks.
“The question starts really from: What is the TCFD? What does it really require me to do? Is it just a set of disclosures that we will have to comply with? Or, is it actually considerably more, is it an expectation of a behavioural change within the business?” Poole asks.
“The point with TCFD is that it is both. It requires both. You actually need to embrace, if you will, TCFD principles in your business before you can report.”
That means putting in place the right climate governance to identify climate risks and opportunities for strategic decision making, as well as deciding the right things to measure. That may make uncomfortable decision making, decisions that may not have been taken had TCFD not been around.
Poole says non-executives need to boost their knowledge levels on climate change, then identify how the board will lead its climate work: the whole board, a committee or an individual non-executive director.
While skills may be important, Spencer says data will be key. Some companies may have legacy systems collecting diverse kinds of data for different climate-related reasons, which all needs to be brought together in a coherent way to address TCFD questions. “It’s an enormous task,” says Spencer.
But companies must remain focused on avoiding a simple reporting checklist. “Whatever you’re going to report on in compliance with TCFD needs to be reflective of what’s actually happening in the business, it can’t be just be a climate disclosure checklist of some type,” says Poole. “It needs to reflect the actual governance process and decision-making process that is happening in the business.”
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