Girl is running the way to wind energy

What companies should consider when making climate-related disclosures

Photographic potrait of Maria Kepa
Maria Kępa

EY EMEIA Assurance Director

10 minute read 03 Feb 2021
Related topics
Assurance
Climate change and sustainability services

Climate change remains on top of the public, regulatory and investor agenda, despite — or maybe rather bolstered by — the COVID-19 pandemic.

In brief

  • Mandatory reporting against the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) is here.
  • Our May 2022 publication (PDF) explores compliance with Listing Rule 9.8.6R (8) based on a review of December 2021 annual reports, and discusses upcoming TCFD reporting changes.
  • The May 2021 publication (PDF) provided emerging observations, insights into developing practice and noteworthy reporting responses from December 2020.

The World Economic Forum's Global Risks Report 2021 emphasises how climate, biodiversity and health risks are all increasingly intertwined. Over 3,000 scientists from more than 100 countries have signed up to the ‘Groningen Science Declaration' — calling on world leaders, decision-makers, and investors to change the way we understand, plan and invest for a changing climate to limit future damage. The decleration sets out  that immediate action is needed to mitigate and adapt our world in response to our changing climate,unless we step up and adapt nowthe results will be increasing poverty, water shortages, agricultural losses and soaring levels of migration with an enormous toll on human life.

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Chapter 1

Considerations for the current reporting cycle

A step-change in reporting for UK premium listed companies

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    Some businesses will undoubtedly worry about the additional reporting burden it adds. The FCA confirmed that (PDF), for accounting periods beginning on or after 1 January 2021, commercial companies with a UK premium listing will be required to include a statement in their annual report which sets out whether they have made disclosures consistent with the recommendations of the TCFD and explain if they have not done so. Where a listed company within the scope of the rule has included some or all of its TCFD-aligned disclosures in a document — other than its annual financial report — it must explain why. The approach does not preclude preparers, including more detailed supplemental climate-related information in separate reports, which may be more tailored to the specific stakeholders they aim to reach.

     

    Status of compliance

     

    The EY annual review of reporting indicated that fewer than half of the UK premium listed companies already adopt or partially adopt TCFD. This means a step change is required across the market to meet the new disclosure requirement in just one year’s time. 

     

    Many companies that state they are compliant reference disclosures across several separate reports and will therefore, face the challenge of integrating the relevant, material information into their annual report and accounts (ARA) for next year. 

     

    The 2019 EY Global Climate Risk Disclosure Barometer provides a snapshot of the uptake of the TCFD recommendations. The report examined disclosures from over 950 companies across a range of sectors in 34 markets during the 2018–19 reporting period. It concluded that, whilst most companies now commonly acknowledge climate change as a material issue, most highly exposed companies still lack high-quality climate disclosures.

     

    These observations were consistent with the TCFD 2020 Status Report, which highlighted the continuing need for progress — with energy companies, and materials and building companies leading on disclosure.

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    Chapter 2

    The expectations of FRC and IA applicable to this reporting cycle

    Companies are falling short of reporting requirements around climate change.

    The climate thematic review of the Financial Reporting Council (FRC) issued in November 2020 highlighted that, even without mandating TCFD, companies are falling short of the UK’s existing reporting requirements when disclosing the impact of climate change on the business. This view was directly supported by feedback from investors (PDF) that “current [climate] reporting is often nonspecific, lacks substance, and is considered insufficiently linked to the company’s plans, business model and strategy.”

    On 18 January 2021, the Investment Association (IA) published its updated Shareholder Priorities for 2021 (PDF), which puts climate change and TCFD reporting at the top of the list. The IA reminded organisations that investors are seeking disclosures which are ‘decision-useful’ and therefore, provided in the context of the strategy and capital management of the entire business. It also recommended the use of sector-specific guidance from the Sustainability Accounting Standards Board (SASB) to determine what information is useful for the company’s investors in decision-making.

    The IA’s corporate-governance research body — Institutional Voting Information Service (IVIS) — will go as far as giving an ‘Amber Top’ in its environmental, social and governance (ESG) report to all companies with year-ends on or after 31 December 2020 — in sectors identified by the TCFD as “potentially most affected by climate change” that do not address all four pillars of TCFD. This is a step change from its approach in 2020, when it stated, “We recognise that companies are on a journey to fully comprehend the impact of climate change on their long-term viability and how best to communicate their response to investors … we will not be introducing any colour top for these disclosures in 2020, but will keep this under review for future years.”

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    Chapter 3

    What companies need to do in this reporting cycle

    Companies need to transparently detail progress, and outline the actions needed to close any gaps.

    It is clear from the various research and reports referenced above — and our conversations with investors — that the majority of companies have a long way to go to achieve full compliance with the TCFD’s recommendations. We encourage companies to act now.

    Mandatory disclosures first impacted reporters in December 2021 on a ‘comply or explain’ basis. We recommended that companies start transparently addressing the following in their reporting for the December 2020–March 2021 annual report cycle:

    • Progress on how they are meeting the TCFD’s recommendations.
    • Actions needed to start closing any gaps and the plan for achieving this before mandatory reporting becomes effective.

    This will help evidence commitment to TCFD and signal accountability. Whilst being ambitious is commendable, companies will need to be mindful of what is realistic and achievable over the next 12 months.

    If presented in a tabular format, this disclosure can be used to signpost those areas within the annual report that already address some of the TCFD requirements. By virtue of complying with the FRC’s UK Corporate Governance Code, most premium listed companies should be able to report against a number of these and the suggestions below can help frame an initial response:  

    Companies that already state compliance with TCFD but provide substantial information outside of the ARA can apply the above suggestions to integrate and signpost key messages across their strategic narrative, whilst continuing to provide the more granular details in separate reporting.

    We also encourage preparers to refer to the useful documents produced by the SASB. The Good Practice Handbook (PDF) contains extracts of good practice from annual reports. More comprehensive examples across all the recommended disclosures are included in the TCFD Implementation Guide (PDF) and its annotated mock disclosures.  

    If presented in a tabular format, this disclosure can be used to signpost those areas within the annual report that already address some of the TCFD requirements. By virtue of complying with the FRC’s UK Corporate Governance Code, most premium listed companies should be able to report against a number of these and the suggestions below can help frame an initial response:  

    4

    Chapter 4

    How can EY help?

    We can help you meet the TCFD’s recommendations and create value by decarbonising.

    How EY can Help

    Climate change is a burning platform and TCFD will hold boards to account for the role they play in managing their organisation’s response to the climate crisis.

    The latest reporting cycle is a chance to signal commitment and early preparation. Full TCFD compliance requires significant work, and a fundamental shift in how boards consider the impact on strategy and risk, and how they develop measures to monitor performance.

     

    TCFD:

    • Benchmark TCFD disclosure to peers and the TCFD recommendations
    • Work with stakeholders to identify key climate-related risks and opportunities
    • Conduct scenario analysis to identify how key risks and opportunities may reveal themselves over time
    • Consult with management on climate-resilience measures in place
    • Provide recommendations on TCFD disclosures

    Decarbonisation:

    • Consider the different external and internal drivers that will influence your low carbon strategy, based on your purpose and ambition
    • Develop decarbonisation pathways specific to your business
    • Create value from your long-term low-carbon position
    • Advise on low-carbon transition and business transformation

    Summary

    Implementing TCFD is a hot topic for UK businesses and global investors. It holds boards to account for the role they play in managing their organisation’s response to the climate crisis.

    About this article

    Photographic potrait of Maria Kepa
    Maria Kępa

    EY EMEIA Assurance Director

    Director in EY's UK audit practice and corporate governance team. Experience working with clients in media, mining and other sectors in Europe, America and the Middle East. Mother of two.
    Related topics
    Assurance
    Climate change and sustainability services

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