Has the UK’s TCFD mandate improved corporate climate reporting?

The Financial Reporting Council (FRC) and Financial Conduct Authority (FCA) have assessed the climate risk reporting approach taken by almost 200 large firms subject to the UK Government’s new disclosure mandate.

Has the UK’s TCFD mandate improved corporate climate reporting?

Published late last week, the FRC and FCA’s findings indicate that, while most businesses are technically complying with the mandate, many still have a long way to go before producing a meaningful and high-quality report that covers all key aspects of the framework laid out by the Taskforce on Climate-Related Disclosures (TCFD).

The UK Government mandated TCFD-aligned annual reporting for around 1,300 large organisations back in April, in a global first.

Of the 170 large businesses whose reports were assessed by the FCA, the vast majority claimed their reporting were consistent with the TCFD’s requirements on risk management (88%) and improving corporate governance (98%). The proportion was lower for those claiming their reporting met all TCFD criteria on developing strategies, metrics and targets for reducing risk and realising opportunities.

The FCA found that not all of these companies were actually meeting the TCFD’s full recommendations in these fields, despite self-reporting as having done so. Some firms may face further action from the Authority for producing disclsosures that “appear to be very limited in content”.

Non-compliance can result of fines of a minimum of £2,500 and a maximum of £50,000.

Across the board, the FCA is warning that there is much to be done to improve reporting quality. It acknowledges a “significant” increase in the number of companies reporting, and in the average length of a disclosure (from five to 15 pages) but a slower increase in quality.

The most common reporting gap was found to be scenario analysis. This is a process whereby companies are asked to forecast the risks and opportunities to their operations and value chains at a range of global temperature increase trajectories. Most companies were also not ready to unveil the metrics they were using to measure risks and, therefore, specific targets to reduce them.

Without scenario analysis, metrics and targets, the FCA and FRC are warning, businesses are not equipped to provide information on how risks and opportunities will differ between different parts of their business and different geographies in the value chain.

These findings chime with the TCFD’s last annual status report from October 2021, which assessed levels of support and reporting gaps globally. The TCFD revealed a 9% increase year-on-year in reporting quality, despite the number of organisations voicing support increasing by a third.

The businesses assessed by the FCA were all UK-based and hailed from a range of sectors. The most represented sector was industrial goods and services. Also highly represented were raw material resources, financial services, insurance and real estate.

FRC study

Separately, the FRC reviewed the 2022 reports of 25 large businesses in sectors deemed to be the most exposed to climate-related risks, including metals and mining, food, tobacco, utilities, fossil fuels, transport and finance.

While 22 of the firms mentioned climate-related risks in their financial statements, some disclosures were found to be limited – especially at firms which had only just started disclosures and therefore had less mature processes for doing so.

As the FCA found, the FRC found slow progress in the adoption of scenario analysis, with most firms yet to disclose granular and context-specific data – or more data relating to the most material risks and opportunities.

It also revealed slower progress quantifying and disclosing new opportunities than reporting risks.

The FRC’s executive director of supervision Sarah Rapson summarised: “It is encouraging that many companies have stepped up their efforts in providing comprehensive and consistent disclosures on climate-related risks and opportunities, as well as the impact of climate on their financial statements, but there is still a lot of room for improvement. Together with the FCA, we will continue monitoring and supporting companies to make those improvements going forward.”

From next year, certain companies subjected to the TCFD mandate will have another mandate to comply with – the production of net-zero transition plans, first confirmed by then-Chancellor Rishi Sunak last year. The FCA’s report found that eight in ten businesses now have net-zero statements, but transition plans will go further. Businesses will be required to back up long-term emissions goals with interim targets and properly financed plans to achieve them.

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