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CFD vs TCFD – spot the difference

Climate-related Financial Disclosures (CFD) for UK Companies

For many UK companies, the landscape for climate-related reporting has become more complicated. Why? Last year the UK Government introduced climate-related financial disclosure requirements (CFD) 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).

The introduction of CFD means that many companies will face new reporting requirements, and those already reporting under Task Force on Climate-related Financial Disclosures (TCFD), will require an extra layer. The requirements apply to year ends starting on or after 6th April 2022, meaning the impact of CFD needs to be considered now.

Previous Deloitte publications have covered CFD requirements – what they are, whom they apply to – and the Q&A document published by the Government (Government FAQs) provides further details.

This blog looks specifically at the interaction between CFD and TCFD requirements, what it means for companies caught by both, and what changes CFD implies for TCFD. This blog is not an exhaustive list, but we’ve tried to capture the most significant areas.

Mandatory versus comply or explain


TCFD disclosures are a Listing Rule requirement implemented on a comply or explain basis. CFD, however, is a Companies Act requirement and is mandatory with some exceptions (see next section). So how should companies resolve this apparent contradiction? To answer this, companies need to look at the requirements common to TCFD and CFD and those that are not. For example, within the governance disclosure requirements, both reference the need to detail the frequency of board meetings, whereas only TCFD references the need to describe the organisational structure for governance. It’s reasonable to assume that the frequency requirement should be considered mandatory, whereas the organisational structure remains comply or explain within TCFD. Given the extent of the overlaps, it appears as if companies caught by CFD, but disclosing using TCFD, will find “material and relevant” elements of TCFD should be considered mandatory rather than comply or explain.

Permit to omit (but not contradict)


The CFD requirements allow directors to omit some or all of the strategy and metrics/target disclosures (e), (f), (g) and (h) “where these are not considered necessary for an understanding of the business, but if information is omitted as a result of relying on this exemption, directors must provide a clear and reasoned explanation of their belief as to why it is appropriate to omit the information.” Companies seeking to use this omission route need to be alert to the connectivity – and subsequent contradiction – such omissions may cause with other parts of the annual report and accounts. For example, many companies now have climate in some guise as a principal or emerging risk or see climate activities as a key part of the business strategy or goals. Omitting some or all of disclosures e, f, g, and h while reporting climate as a principal risk creates an inconsistency that would need clear justification.

Use by dates


While the TCFD recommendations include undertaking scenario analysis to identify risks and opportunities and test resilience, TCFD, crucially, does not specify when or how often the analysis needs to be conducted. CFD requirements state: “the climate scenario analysis should normally be renewed at least every three years to ensure the user of the accounts is provided with up-to-date and relevant information.” For those who have reported under TCFD for several years, this could create an additional requirement for this coming year-end, as it will be their third year of reporting (it should be noted that TCFD requires financial quantification, CFD only requires quantification of sufficient granularity).

Tell me why


The TCFD recommendations are notable for the lack of guidance regarding the “why” – why particular scenarios were chosen, why metrics have been altered year on year, and why targets are different. But whilst TCFD focuses on the “what” and the “how”, CFD requirements introduce the need to explain the “why”. In particular, within the strategy disclosures, companies must explain why they have chosen their specific scenarios (e.g., Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and World Business Council for Sustainable Development (WBCSD)). Within the metrics/target disclosures, companies must comment on trends/performance (per TCFD) and articulate why any changes have been made to the KPIs being used, explaining why these are more effective than the previous measurement.

Location, location, location


As a Listing Rule rather than a Companies Act requirement, companies have had flexibility concerning the location of their TCFD disclosures. And given the scale of the disclosures, a sizeable minority have provided their TCFD disclosures as a standalone document and only included their compliance statement in the Annual Report. As a Companies Act requirement, CFD or equivalent disclosures must be made within a company’s annual report, with clear signposting from the renamed non-financial information statement.

Next steps


The differences between the CFD requirements and the TCFD recommendations may be relatively small in number, but they are large in impact. CFD turns much of TCFD from a comply or explain requirement to a mandatory one and introduces crucial extra requirements like scenario analysis updates and choice/change justifications.

As the Government FAQs have pointed out, the introduction of CFD should make little difference for companies that fully comply with TCFD. But as the Financial Conduct Authority (FCA) reported last year, companies, on average, explained non-disclosure for one of the eleven TCFD disclosures, which means many companies have gaps to close to ensure their TCFD disclosures also meet the new CFD requirements.

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