What is it?
The Task Force on Climate-Related Financial Disclosures (TCFD) is a group comprising 31 members from across the G20. It is chaired by Michael Bloomberg. The Task Force was created by the Financial Stability Board (FSB) in 2015 to develop a set of voluntary and consistent disclosure recommendations for more effective climate-related disclosures across all sectors. In a nutshell, to help business provide better information to support informed capital allocation. After extensive public engagement and consultation, the TCFD disclosure recommendations were finalised in its 2017 Final Report. The Final Report and Annex, along with all of the other TCFD publications, are on the TCFD website.
Why is it relevant?
According to the latest TCFD Status Report (October 2020) nearly 60% of the world’s 100 largest public companies support the TCFD, report in line with the TCFD recommendations, or both. In addition, nearly 700 organisations have become TCFD supporters since the Task Force issued its 2019 Status Report, an increase of over 85%. However, the latest report highlights the continuing need for progress in improving levels of TCFD-aligned disclosures given the urgent demand for consistency and comparability in reporting. Also that asset manager and asset owner reporting is likely insufficient.
How do asset managers and owners feature?
As acknowledged in the TCFD Final Report, large asset owners and asset managers sit at the top of the investment chain and therefore have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures. The Task Force recognises that reporting by this sector group can take a different approach from mainstream corporate financial reporting - including contrasting requirements of clients, beneficiaries, regulators and oversight bodies - and that they should consider materiality in the context of their respective mandates and investment performance.
What are the main TCFD recommendations and guidance?
The TCFD framework is structured around four thematic areas of disclosures, with 11 more specific recommendations. It includes guidance to support all organisations in developing consistent disclosures, as well as supplemental guidance for specific sectors.
We have extracted and set out below the TCFD Recommendations and Supporting Recommended Disclosures as well as specific considerations for asset owners and managers when reporting to clients. The guidance sets out information an organisation should disclose and that which it should consider disclosing.
The TCFD sets out seven fundamental principles for effective disclosure, as follows:
- Disclosures should be specific and complete
- Disclosures should be clear, balanced and understandable
- Disclosures should be consistent over time
- Disclosures should be comparable among organisations within a sector, industry or portfolio
- Disclosures should be reliable, verifiable and objective
- Disclosures should be provided on a timely basis
What is the TCFD’s impact in the UK?
In September 2017 the UK became one of the first countries to endorse the TCFD guidance. In November 2020 the joint HM Treasury-led UK government TCFD Taskforce published its TCFD Interim Report and Roadmap setting out its commitment for making TCFD-aligned disclosures mandatory across the entire UK business and financial community by 2025.
Implementation of TCFD-aligned reporting in the UK involves several overlapping proposed climate disclosure requirements. We have set out the principal measures under consideration below. These form part of a broad range of disclosure requirements at UK, European and international levels.
- FCA proposals for asset managers, life insurers and FCA-regulated pension providers. See our June 2021 blog Climate-related disclosures for the UK asset management industry: the FCA consults on TCFD-compliant measures.
- Listing Rule requirements for standard listed companies. The FCA proposals would apply on a 'comply or explain' basis to standard listed companies (equivalent provisions came into force in January 2021 for premium listed companies), although this could change to be mandatory in the future. See our June 2021 blog Proposed climate-related disclosures for standard listed companies
- BEIS proposals for mandatory disclosures to apply to publicly quoted, large private companies and LLPs. See our March 2021 blog Climate-related financial disclosures for large UK corporates: the UK TCFD roadmap in action
How do these specific proposals and policies interact with the EU’s sustainable finance legislative package?
UK asset managers and insurers, along with groups operating cross-border in Europe, may also be within scope of the EU’s Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation. The FCA TCFD-aligned proposals for asset managers (as described above) are based on a similar approach to that of the SFDR: the principal obligations relate to disclosures at manager/entity-level and those that are product specific. However, there is likely to be some additional compliance burden for firms subject to both regimes, particularly in terms of the specific details to be reported on.
The TCFD recently sought public comment on two documents (closing on 18 July 2021): proposed Guidance on Climate-related Metrics, Targets and Transition Plans and a draft technical supplement on Measuring Portfolio Alignment. Assuming that the TCFD updates are broadly consistent with the changes proposed in the UK consultations set out above, the FCA intends to refer to the updated versions of the TCFD materials (once published) in its FCA Handbook materials when its proposed revisions are finalised later in 2021.