TCFD guidance not "necessarily clear" as mandatory disclosures loom

The UK’s introduction of a mandate on climate-related financial disclosures could pose an initial challenge to organisations due to unclear guidance, according to Justin Elks, risk consulting partner at Crowe.

“What it means to comply isn’t necessarily clear. There are a lot of recommendations, a lot of choices of metrics. There’s a lot of development needed.”

As of April 6, 2022, more than 1,300 of the UK’s largest businesses will be legally required to disclose climate-related financial information in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.

This will make the UK the first G20 nation to enshrine mandatory TCFD-aligned requirements into law.

But despite the recommendations’ overarching purpose to standardise and simplify the disclosure of climate-related information, an inevitable period of uncertainty will follow the initial rollout, Elks says

“Everybody’s learning. The methodology is evolving. It’s an evolving picture and people are still getting to grips with it and moving it forward. So that creates some difficulty in terms of pitching what you put out there.”

Elks also expresses concern that, because TCFD-aligned disclosures have never been legally mandated before, looking to peers may not be a viable strategy in the early stages.

“While there is TCFD disclosure out there, it’s typically updated on an annual basis, so that can be a bit of a challenge.”

He goes on to argue that this lack of precedent could create a tendency for caution among businesses, which may prove counterproductive.

“I think there’s a danger that companies can be too ambitious and therefore they’re criticised later if they don’t achieve their ambitions. But equally, there are dangers of being unambitious and being seen to be out of line with your peer group.

“The answer to this isn’t just to be really cautious and disclose nothing, because you could find yourself at a competitive disadvantage.”

The TCFD was created in 2015 by the Financial Stability Board with a view to standardising the disclosure of climate-related financial risk. In June 2017, it went on to publish its final recommendations.

At the heart of the guidance is four “core elements” of climate-related financial disclosures: governance, strategy, risk management and metrics and targets.

But according to Andromeda Wood, VP regulatory strategy at Workiva, businesses who struggle to meet the expectations of these pillars will find compliance challenging.

“If businesses are unable to work towards these pillars, then even producing compliant disclosures could be a challenge,” she says.

“They will need to disclose the metrics and targets used for measuring performance and declare how they expect those risks will impact the resiliency of their corporate strategies as well as their organisations’ financial performance.”

A learning curve for businesses

Wood argues that organisations must respond to these challenges by proactively adjusting processes and workstreams.

“Businesses should be assessing their processes to identify the gaps and implement technology where possible so that they can streamline workstreams,” she says.

“This will enable them to disclose their industry-specific metrics, individual targets and KPIs for measuring progress against targets.”

Simon Weaver, partner and co-head of climate risk and strategy at KPMG, thinks the first port of call for businesses ahead of the April deadline is to establish clarity on what needs to be reported this year.

For accounting periods starting in 2021, UK premium-listed companies need to report on the TCFD recommendations and guidance published up until 2020. Accounting periods starting in 2022 will see new rules included in the TCFD guidelines to obtain information on climate transition plans and how companies will reach their net-zero targets.

“The key recommendation would be for companies to get a cross-functional working group together, agree on the impacts, and agree who will lead on bringing this cross-functional thinking together.”

Weaver also argues that the CEO and CFO need to be intimately involved with these processes to “set the tone right from the top”.

This is echoed by Elks, who argues that technology is far less significant than “the organisation itself” when it comes to TCFD-compliance.

“The fundamentals for me of what a company should be doing are around understanding its risks, developing clear strategy, developing an effective transition plan, and moving forward on that basis,” he says.

“Then disclosure comes from the quality of what you’re actually doing, rather than becoming a piece of greenwashing.”

Elks also argues that advisers can be a critical enabler of these developments for organisations.

“Helping companies to work out what their transition plan is, what their targets should be, and what they should do to address climate change is key.

“There’s a lot more to it beneath the surface than just adding another bit of disclosure to the finance team’s workload.