Climate-related reporting: is your business ready?

The global movement towards mandatory climate-related financial disclosures is picking up pace. Companies across the UK and Europe will need to be ready yet our research shows that the majority are not prepared. Sustainability experts Eleanor King and Laura Brankin share the headline findings, and explain why an understanding of climate risks and opportunities is of value to business.

The global movement towards mandatory climate-related financial disclosures is gaining momentum, especially in the UK where last year the government made it mandatory for UK-listed companies, large asset owners, LLPs, and large private companies to report on how climate change impacts their business, and vice versa, in line with Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

However, research suggests that the majority of businesses across the globe are not yet doing this successfully.

Companies that are required to comply will need to address this unreadiness. In this article, we share headline findings from our own research conducted on behalf of the Department for Business, Energy & Industrial Strategy (BEIS) in 2021 that sheds valuable light on trends, barriers, and drivers with TCFD recommendations.

Watch the video to see the headline findings.

What are TCFD recommendations? Why are they important?

TCFD recommendations are globally recognised by investors, the financial community, and increasingly, the wider public as best practice in climate reporting.

They are designed to allow organisations to report consistent information to stakeholders and investors that is useful for decision-making. This information can include an organisation’s exposure to transition and physical climate risks as well as their strategy to both mitigate these risks and harness opportunities to decarbonise.

The TCFD recommendations encourage organisations to fully embed climate risk into the way they do business, placing as much importance on effective governance, leadership commitment and financial risk management as other aspects such as collecting data and setting targets on greenhouse gas (GHG) emissions.

Companies report against four main pillars: governance, strategy, risk assessment, and metrics and targets.

Why do companies need to know about TCFD recommendations?

Companies need to know about TCFD recommendations because:

• Understanding climate risks and opportunities can add real value to businesses
• There is a global movement towards mandatory climate-related financial disclosures

What do UK businesses need to know?

In the UK, disclosing on TCFD has been a legal requirement for many organisations for some time, including banks, building societies and Financial Conduct Authority (FCA) premium listed companies.

In April last year however, BEIS extended this requirement to all UK listed companies, large asset owners, Limited Liability Partnerships (LLPs), and large private companies (defined as those with more than 500 employees and a turnover of more than £500m).

To be fully aligned, those companies must now include climate-related information in mainstream annual financial filings, (the location is slightly different for LLPs).

The government will extend the TCFD-aligned reporting requirement to all UK companies by 2025.

Our research shows that companies in the UK are not yet prepared

In March 2021, we conducted an assessment of climate-related reporting by large private UK registered companies on behalf of BEIS.

The research revealed that only 27 per cent of the 150 companies assessed had a ‘reasonable’ or ‘strong’ alignment with TCFD recommendations in their disclosures. In contrast, 56 per cent had little or no disclosure on climate-related matters.

These results are mirrored at a global level where research shows that the percentage of companies disclosing TCFD-aligned information continues to grow, but more urgent progress is needed.

According to the Financial Stability Board’s annual status report that covers fiscal year 2021 reporting, 80 per cent of global companies disclosed in line with at least one of the 11 recommended disclosures; however, only four per cent disclosed in line with all 11 recommended disclosures and only around 40 per cent disclosed in line with at least five.

Other findings from our own research include:

• ‘TCFD’ as a keyword search was only found in the disclosures of eight companies indicating that disclosure explicitly linked to TCFD is uncommon amongst UK Limited companies (or parent companies reporting on their behalf).
• Larger companies (by turnover) are disclosing information that is better aligned with TCFD recommendations than smaller companies. Our research also suggests that those companies with a dedicated Sustainability or ESG team have a higher quality of disclosure.
• In general, stronger disclosure was identified in the TCFD pillars of ‘Governance’ and ‘Metrics and Targets’ rather than for the TCFD pillars of ‘Strategy’ and ‘Risk Assessment’, suggesting that the forward-looking, future perspective of TCFD as well as embedding climate risk into business strategy and financial risk appraisals may be less mature.

Drivers and barriers

Following our assessment of the quantity and quality of disclosures amongst the 150 companies included in the survey, we then interviewed 38 companies from a range of sectors for further clarity and granularity on the drivers behind the disclosures, the recognised benefits, and barriers experienced.

Several common barriers to corporate climate reporting were raised regardless of size, sector or maturity of reporting: lack of time and resources; costs associated with disclosure; data collection issues; and insufficient internal expertise or knowledge. The government’s non-binding guidance published in February 2022 is welcome, however the extent of unreadiness highlighted in our research suggests that many companies will struggle to overcome these barriers without significant organisational change, external support, and learning from others.

Furthermore, ‘requests from stakeholders and investors’ and ‘a regulatory requirement’ were identified as two of the four most common drivers for companies to be reporting. The latter will only increase in importance as governments across the world start to mandate.

An opportunity for business

Companies who view the mandatory requirements as simply an annual report-writing exercise will be missing the point.

Those who view these requirements as an opportunity to incorporate climate into financial risk management and business plans will reap the benefits of an enhanced understanding of risks and an ability to show stakeholders and investors that these risks are taken seriously.

This article was originally published in April 2022 and updated in February 2023.