Do you know the financial risks to your business from climate change?
In 2019 the Government promised to ‘green the UK’s financial system’. One of the ways they want to achieve this is through making companies report on their exposure to the financial risks posed by climate change.
The Government is proposing to introduce the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as a mandatory reporting requirement, starting with larger businesses.
What are the TCFD recommendations?
The TCFD recommendations are arguably the most effective framework for companies to analyse, understand and disclose their own climate-related financial information.
They have been referenced by organisations such as the Financial Conduct Authority and former Bank of England Governor Mark Carney as a vital tool for managing risk and shifting investment to low carbon economies.
The recommendations are structured around four core elements of how organisations operate: governance, strategy, risk management, and metrics and targets.
Why is this reporting so important?
This reporting will embed climate change, and specifically the risks posed by it, into the organisational culture of companies.
The transparent sharing of climate-related financial risks will influence the behaviours of companies and their stakeholders.
Investors will be better equipped to incorporate these risks and opportunities into their business and investment decisions.
What is the Government looking to introduce?
- The scope: all UK companies which have more than 500 employees and a turnover of £500 million. This also includes large asset companies that are currently required to produce a non-financial information statement.
- If the Government goes ahead with these plans, the changes could come into law on the 6th April 2022.
A good first step
It is great to see ambition from Government to become the first G20 country to mandate climate-related financial disclosures. However, here is how we think they could go further:
1. Making the disclosures as accessible as possible to all consumers
We believe the government should look to work with businesses to make sure these disclosures are as transparent and accessible as possible.
Not everyone will have the time to go through companies’ reports on an individual basis to assess their climate-related risks. This information needs to be made easily available to people so they can make informed decisions.
It is imperative that this mandatory reporting does not become a tick box exercise that leads to companies greenwashing.
Government could work with industry and support a public facing, centralised platform to improve transparency. This could look something like the Race to Zero campaign, where businesses who have signed up to climate action initiatives are located in a centralised portal.
2. The disclosures need to form part of a wider policy framework
Mandating climate reporting is a good step but it is important to remember that this is also just a first step.
If we are to truly affect behavioural change, we need to see long-term funding and a policy framework introduced that is appropriate to meet the challenges posed by climate change.
We would like to see government support businesses by incentivising the uptake of green technology such as EVs and heat pumps, investing in net zero R&D, with a focus on heat and transport and supporting the energy efficiency sector with a comprehensive fiscal package.
There is an opportunity to raise the ambition further and make fiscal support to businesses, such as the recent Super-deduction tax relief announced in the Budget, dependent on successful compliance with the TCFD recommendations.
3. Expanding the scope to all businesses but in a phased and appropriate manner
Focusing initially on larger companies makes sense, as this will deliver the most meaningful impact. Also, larger companies will typically have the resource and skills to comply with the reporting requirements.
Nevertheless, this should not be a static decision. Businesses, of all sizes, have a vital role to play in efforts to tackle climate change. We would like to see the scope of these proposals expanded in a phased and appropriate manner to include businesses of all sizes.
However, it is imperative that any expansion of the proposals is done in a careful, thought out manner that does not place excessive reporting burdens. We need to ensure businesses, of all sizes, are supported in efforts to tackle climate change.
