What is TCFD?
As the world grapples with the climate emergency, there are risks and opportunities for businesses. With this in mind, the international Financial Stability Board created the TCFD in 2015. Its remit was to build a framework for the global financial sector to consider the effect of climate change on how businesses operate into the future.
Launched in 2017, the framework is made up of four areas – governance, strategy, risk management, metric and targets – and helps organisations see the potential impact on business concerns such as revenue, cost and expenditure, assets and liabilities.
Supporters of the TCFD include hundreds of financial firms responsible for trillions of dollars in assets.
Is there a legal requirement to report?
Originally, TCFD was voluntary. But the Financial Conduct Authority (FCA) revealed in December 2020 that all UK premium-listed commercial companies would need to report on a comply or explain basis, using the TCFD framework. This applies to accounting periods starting on or after 1 January 2021, and companies must put a statement in their annual financial report.
Disclosure is going further, too. In March 2021, the FCA announced a consultation on extending these requirements to all large companies – effectively those with over 500 employees – and so we know TCFD will eventually become mandatory.
It’s important to understand that these climate-related risks are no longer just on the horizon – they are already here. And preparing for what you see right now is going to be insufficient – it‘s about preparing for those greater extremes.
What are the benefits of TCFD-aligned disclosure?
We believe that TCFD is more than just another compliance activity sitting on top of mandatory carbon reporting. There are real benefits for businesses.
In 2019, we surveyed some of the UK’s top companies to find out what they thought the benefits were:
- 72% reported increased brand value
- 37% cited reduced shareholder pressure and activism
- 29% reported an increased diversity of investors
- 21% reported a higher company valuation
- 31% reported positive financial impact
We see TCFD as a strategic piece that allows you to understand how resilient your business is to climate-related impacts, identify the opportunities to adapt your business model to become part of the solution, not the problem, and thereby capitalise on the transition to a low carbon economy.
Disclosure can offer a competitive edge when it comes to investors, by showing that climate is top of the agenda, and how your business is better prepared compared to others.
TCFD is also an opportunity for businesses that are truly leading the transition to a net zero economy to tell their story in an engaging, positive and transparent way.
How long does it take to achieve?
This is a marathon, not a sprint. In our experience, you can get going in a couple of months, but getting to that longer term financial value at stake can take over a year.
Any tips for best practice?
- The key thing is to make sure you know what your stakeholders and key partners want and align your disclosures with them.
- It’s useful to see what your peers are doing, but there are advantages to being the first mover. You can set the pace and structure, encouraging others to follow. Being a late adopter can be costly and runs a reputational risk. TCFD is an amazing opportunity to get on the front foot.
- We see that organisations are good at identifying climate-related risks, but it’s not necessarily baked into the core risk management process of the business. Climate needs to become part of the core planning.
- We believe businesses should test the resilience of their strategy in different scenarios. For example, what would they do in the event of climate breakdown? Or if the Paris Agreement goal is achieved?
- Another tip is to make sure you're using the relevant robust climate change data when assessing the risk.
- When it comes to the opportunities associated with the transition to a net zero economy, businesses need to recognise that the solutions to the challenges thrown up by climate change will be co-created. And so they need to identify which partners are best able to work with them.
- Knowing the risks exist is one thing. But knowing you're ready for both the scale and speed they are developing at is where the value really lies.
How can the Carbon Trust support businesses?
We've been providing bespoke advice about TCFD to corporate companies for a number of years. Our mission has always been to turn good environmental performance into competitive advantage, and really help businesses protect and grow business value in the face of the climate emergency.
