CFD - Considerations for first-time reporters

Last year, as part of the UK Government’s Greening Finance roadmap, climate-related financial disclosure requirements (CFD) were introduced for year-ends starting on or after the 6th of April 2022 for UK companies with over 500 staff and a £500 million turnover (as well as for all Alternative Investment Market (AIM), large limited liability partnerships (LLPs), and certain financial services entities). Many companies with December and March year-ends are only now starting to think about these new disclosures. This blog covers our thoughts on key aspects to consider.

Previous Deloitte publications have covered the detail of the CFD requirements – what they are and whom they apply to – and the Q&A document published by the Government provides further information. We have also produced a blog for existing Task Force on Climate-Related Financial Disclosures (TCFD) reporters who now must meet the CFD requirements.

So as a first-time CFD reporter, what are the key considerations? Our thoughts below are based on what we have seen through our audit and assurance work on other climate-related disclosures and how the lessons transfer to CFD reporters. Whilst not an exhaustive list, we hope these thoughts provide a helpful starting point.

It is mandatory

The introduction in recent years of climate-related disclosures for Listed Companies on a comply or explain basis has resulted in a general impression of climate disclosures being a “best efforts” endeavour. CFD is different; as a Companies Act requirement, the disclosures are mandatory and no longer comply or explain. And as with any Companies Act requirement, a failure to make sufficient disclosures could result in anything from regulatory action to a qualification of part of the audit opinion. Something most will be keen to avoid.

It’s also worth noting that whilst the strategy and CFD disclosures (e-h) can be omitted if the directors deem the disclosures unnecessary to understand the business, as outlined below (see Connectivity), such an omission appears unlikely for many companies. Approaching CFD based on only needing to adhere to parts a-d should be considered carefully.

Lead time

Scenario analysis – a key component of CFD disclosures – takes time. Most have taken at least three months, and many have taken more than six months. Those who have left scenario analysis until year-end have been unable to meet the disclosure requirements.

Beyond scenario analysis, the time and resources required to create disclosures should not be underestimated. As outlined below (see Hand-offs & sign-offs), with climate becoming an ever more integral part of most companies’ strategies and with financial considerations that impact the financial statements, the number of stakeholders and connections is significant and requires time to manage correctly.

Connectivity

Climate disclosures are not standalone. As the Financial Reporting Council (FRC) identified in their climate thematic last summer, there should be appropriate connections to other parts of the annual report and the financial statements. For example, the governance arrangements articulated in the climate disclosures should tally with the broader governance arrangements described in the director’s report – a CFD disclosure reporting climate being discussed at every board meeting should tally with the standing items described under the board activities section. Likewise, climate disclosures articulating, for example, additional expenditure or reduced asset lives need to connect with the financial statements with appropriate back-half disclosures.

The most frequent connection that has arisen for TCFD reporters is where climate is identified as a principal risk. For most, a principal risk is one that could have a material financial impact in the short term. However, the risk and opportunity analysis within the climate disclosures often shows no material risks within such a timeframe. There are many reasons for this, but the apparent inconsistency and disconnection need to be addressed – and the FRC’s climate thematic provides some best practice examples.

Hand-offs & sign-offs

CFD disclosures are a Companies Act requirement and, as such, require sign-off by the company’s directors. Given the significance of climate – both as a risk and an opportunity – for most businesses, the attention paid to those disclosures has increased significantly. Allowing sufficient time for the sign-off process is essential and should not be underestimated. Many TCFD reporters have found it most efficient to involve directors throughout preparation to avoid any last-minute issues.

Similarly, the CFD requirement to quantify risks and opportunities – albeit CFD, unlike TCFD, does not mandate financial quantification – creates the need for a hand-off between the finance and sustainability teams. All parties need to be confident that the process for quantification is robust and appropriate and that the disclosed impact has been incorporated into any relevant financial planning.

Ownership

The topic of who should own climate disclosures will likely continue for some time. As a Companies Act requirement with ever-growing connectivity with the financial statements, the finance function has a notable role to play. Similarly, the need for credible transition plans and relevant reporting makes the sustainability teams’ role equally important. What is clear is that a single owner needs to be established early and that owner needs to be given the appropriate mandate and resources. Without this clarity, connectivity, hand-offs, lead time, and mandatory requirements outlined above, it is unlikely to be dealt with appropriately.

Where to start?

It goes without saying that starting early, having clear ownership, and understanding the connectivity and hand-offs will stand you in good stead. If CFD reporters adopt a similar approach to TCFD reporters, many will undertake an initial gap analysis exercise – often commissioning a third party such as their auditor – to consider the gaps between existing information and the disclosure requirements. Forming an early picture of your “theoretical disclosures” helps understand the areas that require immediate focus and the level of resources needed to achieve the appropriate disclosures by year-end.