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Year End 2022 TCFD Trends

The FY22 reporting season is upon us, and we have seen premium listed companies publishing the second iteration of mandatory Taskforce on Climate Related Financial Disclosures (TCFD). With the introduction of the TCFD’s 2021 Status Report, coupled with the additional requirements outlined in the Financial Reporting Council’s (FRC’s) Climate Thematic and the Financial Conduct Authority’s (FCA’s) Review of TCFD-aligned disclosures, expectations have increased compared to last year.

With early reporters already having published their reports and many other firms having finalised their disclosures, we thought we’d look at the key trends we have identified so far:

1. More explaining. TCFD is a “comply or explain” reporting requirement. Last year the FCA found that, on average, companies explained one out of eleven disclosures. Early indications are that there will be more explaining this year, with an average of two or three disclosures out of eleven. What’s driving this? The need for quantification, transition plans, and additional metrics and targets – the TCFD's 2021 Status report requirements – may have surprised some firms. Actions to meet these requirements have a lead time, so those who hadn’t prepared well in advance have found their ability to reach a “comply” position challenging.

2. Much more granularity. The need for more detail, specificity, and granularity was one of the key themes in the FRC’s Climate Thematic, and, in the main, companies have responded accordingly. Last year’s TCFD disclosures often addressed only the headline recommended disclosure requirements. This year, companies have largely been considering the Guidance for All Sectors and treating the “should consider” items more closely in line with the FCA’s guidance.

3. Quantification of climate-related risks and opportunities. How companies respond to the requirements for quantifying climate-related risks and opportunities has always been a key consideration of the requirements. From describing qualitative impacts, as most did in prior period reporting, to measuring and reporting a financial number against each impact requires notably more effort. It marks a significant step up in disclosure which, in the main, companies are embracing. In terms of how companies are approaching quantification, a more common approach has been “impact = low = 0-3% [GM]” rather than “impact = £10.5M” and are doing so on the key/material and short/medium term risks and opportunities, rather than across every issue in all scenarios.

4. Greater front-half connectivity. One of the five headline messages in the FRC’s Climate Thematic concerned the “interlinkage with other narrative disclosures”. This interlinkage appears to have become much stronger in this year’s disclosures, perhaps driven partly by the increase in granularity and specificity outlined above. For example, greater detail in governance disclosures around the roles of different committees has created connectivity with their respective sections in the annual report. Another example is when a TCFD statement notes that climate is a standing item on the board agenda, the board reporting section supports this statement. Greater connectivity between the risk management disclosures and the annual report risk management/principal risk sections has also been observed.

5. Greater back-half connectivity. As with the front half connectivity, the FRC identified the need for “connectivity between TCFD and the financial statements disclosures” as the final of their five themes. In the first year of mandatory disclosure, quantification of risk and opportunities tended to be limited to a basic “low/medium/high” impact, making a connectivity with the financial statements more challenging. This year’s introduction of financial quantification changes this and makes connectivity with the financial statements clearer. For example, a quantified short-term impact on a given risk of 5-8% of earnings before interest, tax, depreciation and amortisation (EBITDA) can be more readily connected to financial statements than an unquantified “medium” impact.

6. Additional metrics and targets reporting. In prior period reporting, some companies focussed solely on reporting metrics and targets associated with greenhouse gas (GHG) scope 1 and 2 emissions. This year, the incremental requirements of TCFD have led firms to consider not only the cross-industry metrics/targets but also expand their scope 3 GHG reporting to include material scope 3 categories. There is an acknowledgment of the cross-industry and sector-specific TCFD metrics by firms, with a focus on adopting/adapting those that are material and relevant and aligned to the risks and opportunities identified within the scenario analysis.

7. Plans for transitioning. Transition plans take time to create, need robust oversight, and many are subject to senior executive and Board approval, given the commitments they often contain. Therefore, companies who have not previously published transition plans have tended to explain this requirement, in some cases noting a commitment to add create a transition plan to their “to-do” list in early 2023. Some firms have the TCFD’s “plans for transitioning” as just that and have provided high-level information on the key activities they intend to carry out. For those who have reported, the number of firms who have provided a year-by-year, action-by-action granular transition plan is limited (although early indications from the Transition Plan Taskforce are that such plans will eventually be required).

The increased role of the finance function (or at least the role of those with a financial reporting skill set), working in partnership with sustainability teams on these disclosures, along with greater oversight from Those Charged with Governance and connectivity with the financial statements, are catalysts to this change. The net result of all these trends is that this year’s TCFD disclosures are more detailed, more quantified, and more connected, reflective of how seriously firms are taking these disclosures and, most importantly, management’s attention in taking positive action to address them.

For further insights, visit FRC Thematic Review of TCFD and Climate Disclosures | Deloitte UK