Disclosing climate risks by 2022 – steps you can take to prepare

The time to prepare is now

In the July 2019 Green Finance Strategy, the UK Government set out its expectation that by 2022 all listed companies and large asset owners will disclose climate-related risks, targets and governance in their annual reports. Moreover, reporting should follow the TCFD’s recommended approach.

For some companies, meeting this approach will require a step up in how thoroughly climate risk and company strategy is both explored and disclosed. For others, existing good practice may require some re-aligning to meet the TCFD requirements. The good news for anyone already responding to the Carbon Disclosure Project (CDP) is they will see plenty of overlap between this and the recommendations in the TCFD approach.

However, for all listed companies it is important to ensure the information disclosed is robust and the detail provided is proportionate to the climate impacts and risks the company faces – with the TCFD approach putting climate disclosure firmly on the agenda for the audit and risk committee.

Whether TCFD reporting will become mandatory is likely to be clearer in 2020, when a task force examining this publishes an interim report but if voluntary take-up is slow, a mandatory requirement seems likely.

What is the TCFD approach?

During 2015, in response to a call from G20 leaders, the Financial Stability Board (FSB) established the TCFD to provide companies with recommendations on how to measure and respond to future climate change risks. The UK Government formally endorsed the TCFD recommendations in September 2017, with the aim to improve transparency for investors and other stakeholders within the financial market by the creation of a framework for disclosing climate-related financial risks and opportunities.

An audit committee, internal or external to the company, must scrutinise climate-related financial information for the TCFD.

Under the TCFD approach, companies are guided to disclose climate impacts or risks and their business response through using the following reporting structure:

Scenario analysis – easier than it sounds

Something that may be new to organisations is the TCFD’s emphasis on applying scenario analysis to the evaluation of climate change risks and the strategic response – including specifically a 2°C warming compatible scenario. The idea is to avoid the myopia of thinking and planning only for business-as-usual, and instead to consider several distinctly different narratives about how the world may respond to climate changes – and what that means for the picture of risk. Scenario-building can be as complex as you want to make it, but the TCFD’s recommendations are sensible:

• Consider transition scenarios, i.e. changes in markets and regulation associated with the transition to a low-carbon economy, starting with the widely-used IEA Energy Technology Perspectives (ETP) and World Energy Outlook (WEO) as a set of 'ready-made' scenarios
• Consider physical climate change scenarios, i.e. the effect on weather, natural systems and social systems from physical climate changes, starting with the Representative Concentration Pathway (RCP) scenarios in the IPCC’s Fifth Assessment Report.

For companies with more of a UK-specific focus, transition scenarios based on the policy advice of the Committee on Climate Change provide useful climate-optimistic food for thought, and National Grid’s annual Future Energy Scenarios set out a range of energy market possibilities.

The excellent resources of the UKCP18 climate change data developed by the Met Office are the go-to source for physical climate risks within the UK under a range of scenarios this century.

Preparing now

The expectation – and perhaps the obligation – to follow the TCFD climate disclosure standard is clearly going to become stricter in the near future.