How TCFD and TNFD are shaping climate regulation

This article was written by Emily Williams and Laurien Callens for Corporate Citizenship - part of SLR. Corporate Citizenship provides ESG strategy, reporting, social and environmental impact and other sustainability consulting services to multi-national companies.

In 2015, the Task Force on Climate-related Financial Disclosures (TCFD) was developed to improve and increase the reporting of climate-related financial information. It was implemented in 2017, and focuses on comprehensive disclosure against four main pillars: governance, strategy, risk management, and metrics and targets. These categories encourage businesses to consider the long-term impacts the company and its assets might face from different climate change scenarios, and considers the opportunities and risks these climate-related impacts can have. Since April 2022, the disclosure is mandatory for companies that are required to produce a non-financial information statement annually: UK-based AIM companies with more than 500 employees, and LLPs with 500 employees and a turnover of more than £500 million annually. This change aims to push TCFD reporting away from being a tick-box exercise, and into the mainstream considerations of a business strategy.

Formed in response to the success of the TCFD framework, the Taskforce on Nature-related Financial Disclosures (TNFD) was established in 2021. The aim of this framework is to encourage companies to look at their wider environmental risks, particularly biodiversity and nature, and assess risks and opportunities that arise from impacts in these areas. TNFD saw its latest pilot version launched in June 2022, and looks to publish a full release in late 2023.

TCFD’s aim is to increase climate-related engagement between investors and the companies they invest in, through consistent and transparent reporting. Additionally, businesses are more compelled to increase their environmental ambitions and accelerate their actions, when investors demand more transparency on progress. Before TCFD was established, non-unified climate disclosure made it challenging for investors to assess and compare the exposure of climate risks to a business.

However, looking at the way companies use TCFD, it can be argued its aim has not yet been realised. Companies must prepare and set up tools to provide TCFD reports that have comprehensive disclosure of their quantitative climate-scenario analysis and the financial impacts this may have on the business. What is evident is that the complexity and cost of reporting put companies off from undertaking detailed climate risk assessments.

A survey published by the Financial Conduct Authority (FCA), showed that although 90% of companies have made their reporting consistent with TCFD, the disclosures themselves, particularly in the metrics and target section, appeared to be very limited in content. Reporting gaps are highest for scenario analysis, processes for managing risk, metrics to assess climate-related risks and opportunities, and climate-related targets. For that reason, TCFD is still wrongly perceived as a tick-box exercise, rather than an assessment to aid companies in their integration of climate-related goals into their overall business strategy.

The FCA has reported a slow and steady increase in reporting quality, and has recorded that the uptake of good scenario analysis has been slower than the adoption of many other parts of its framework. To ensure that the aim of TCFD will be reached in the near future, it is important that investors push companies to go above and beyond the TCFD mandate. Companies should be benchmarked against peers and industry best practices, encompassing climate risk in investment-making decisions.