TCFD - the way forward

TCFD will provide a framework to ensure that climate-related disclosures deliver the right information to investors.

The Financial Stability Board established the Taskforce on Climate-related Financial Disclosures (TCFD) to develop recommendations for companies to make more effective climate-related disclosures. The intention is that these disclosures will enable more informed investment, credit and insurance underwriting decisions to be made. In June 2017, the Financial Stability Board published its recommendations under four disclosure elements – governance, strategy, risk management and metrics and targets. The recommendations were initially intended to apply to financial-sector organisations on a voluntary basis.

In 2018, the Financial Reporting Council’s Lab started a project to understand what investors were looking for in climate-related reporting. The resultant report – Climate-related Corporate Reporting: Where to Next? – highlighted two main findings. The first was that investors overwhelmingly supported the TCFD framework and its use for all public companies, not just in the financial sector, and the second was that they wanted companies to better reflect climate considerations in their financial statements.

Regulatory developments

Since the report was published, the UK government has signalled its intention to mandate the use of TCFD by a wide range of companies. The FRC also called for more action by companies, boards, investors, auditors and professional bodies in response to the climate emergency and issued a series of reports in November 2020 setting out recommended actions. At the same time, prompted by the announcement of the International Financial Reporting Standards (IFRS) Foundation’s intention to develop a common set of sustainability standards, the FRC encouraged UK public interest entities to voluntarily report against the TCFD recommendations.

We are now seeing the first reports being published under the FCA’s rule on climate-related disclosures. This rule, introduced on a comply or explain basis, applies to premium listed commercial companies for accounting periods beginning on or after 1 January 2021. It will be extended to standard listed companies for years beginning on or after 1 January 2022. The UK government has also published legislation for a wider group of companies to report under the TCFD framework – including large private companies – for years beginning on or after 1 April 2022.

But, it is not just the UK that is responding. At COP26, the IFRS Foundation announced the establishment of the International Sustainability Standards Board which will issue standards on a range of sustainability topics. The first standard will be for climate-related disclosures. A prototype standard has already been issued, structured around the TCFD framework, and an exposure draft is expected soon.

Companies are already adopting the TCFD framework. The Lab reported on the uptake of TCFD in the UK, finding that 384 organisations had expressed support for the TCFD recommendations and 204 companies had made extensive reference to TCFD in annual reports published in 2021. More than 75% of these were FTSE 350 companies.

Many have said that it is a helpful framework to engage more seriously with climate change and actively consider both the impact it has on their business, as well as the impact the business has on the environment. This, of course, should be the main driver for companies rather than a reporting compliance exercise.

Starting out

The Lab’s recent publication on climate-related reporting, Taskforce on Climate-related Financial Disclosures (TCFD): Ahead of Mandatory Reporting – Developing Practice, suggests boards consider the topics listed below when starting to look at the impact of climate change.


  • What arrangements are in place for assessing and considering climate-related issues?
  • What information helps the board to understand the company’s climate risk profile?
  • What arrangements do the executive committee and divisional management have in place for assessing and considering climate-related issues, and who has responsibility for them?
  • Does the board consider the company’s climate-related reporting to be fair, balanced and understandable?

Business model and strategy

  • What opportunities and risks concerning climate-related issues are most relevant to the company’s business model and strategy?
  • What will the company look like in the future and how will it continue to generate value?
  • What strategy has been put in place to reach net zero or other targets, and what operational or capital expenditures are needed to address any necessary business model changes?
  • How are the risks and opportunities reflected in the financial statements?

Risk management

  • What systems and processes are in place for identifying, assessing and managing climate-related risks?
  • How are the risks from climate change being monitored, including decisions around mitigation, transfer, acceptance and control?
  • How is the assessment of the company’s viability over the longer term taking account of climate-related issues?
  • When undertaking scenario analysis, how did the company decide which scenarios to use, and what assumptions have been made?

Metrics and targets

  • What performance information is most relevant to monitoring and managing the impacts of climate-related issues (both on the company and of the company)?

The report provides further detail on how companies can best address these points and includes some practical examples of how companies have done so.

Investor expectations

The report also sets out what investors are looking to understand from corporate reporting and highlights areas where improvement is needed. In particular, investors are looking to assess:

  • how boards consider and assess climate-related issues
  • how the business model may be affected by climate-related issues, whether it remains sustainable and how the company may respond to the challenge posed by climate change, including what changes the company might need to make to its strategy
  • the risks and opportunities presented by climate change, including the prioritisation, likelihood and impact, what scenarios might affect the company’s sustainability and viability, and how the company is responding
  • how climate-related issues, and their impact, are measured.

Reporting on scenarios is an area of disclosure that needs to develop; it is important to provide sufficient detail on the approach to scenarios, particularly where these affect viability. Where the company has pledges related to net zero, it should make it clear whether these are ambitions or policies which are actively being pursued and included in business plans and budgets.

Companies need to make climate-related information easily accessible. This is best achieved by including it in the annual report, although there may be a case for cross-referencing the more detailed data and information to a separate sustainability report.

Continued regulatory focus

The FRC is continuing to focus on this area of reporting. The Lab has an ongoing project looking at how companies collect and process environmental, social and governance (ESG) data. Systems for collecting this data will need to mature quickly to provide information that is reliable and useful to investors. Consistent sustainability standards for reporting should help this and the Lab hopes to establish and share some good practices in the summer.

During the first year of mandatory reporting under the FCA’s requirements, the FRC – in collaboration with the Financial Conduct Authority (FCA) – will be carrying out a thematic review of TCFD disclosures provided by premium listed companies. It will also look at the extent to which the financial statements reflect the impact of climate change.

Continuous improvement

As systems and processes to collect information mature and investor confidence in the reliability of the information they are receiving grows, we expect further developments in sustainability reporting. The UK government is currently developing sustainability disclosure requirements which will include a requirement for companies to start publishing transition plans by 2023 as part of the UK’s plans to be the world’s first net zero-aligned financial centre. Reporting on net zero commitments is a topic at which the Lab is currently looking. The government has signalled its intention to adopt international sustainability standards as they develop, triggering an evolution in reporting last seen when International Financial Reporting Standards were adopted in the UK in 2005. Reporting against TCFD recommendations will provide a foundation for these future reporting requirements.

Phil Fitz-Gerald, Director of the Financial Reporting Lab

Phil will be speaking at our upcoming ESG Summit.

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