FRC Lab publishes a report on better practice TCFD reporting

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01 Nov, 2021

The Financial Reporting Lab ("the Lab") has published a report to help companies prepare for mandatory Taskforce on Climate-related Financial Disclosures (TCFD) reporting.

For accounting periods beginning on or after 1 January 2021, UK premium listed companies will be required to report against the TCFD recommendations on a comply or explain basis in their annual reports, with other companies following in the future.  In advance of these requirements, the Lab has carried out a review of current reporting practice to provide practical guidance to companies on how to provide better TCFD disclosures to meet the demands of investors and to highlight areas where improvements are needed.  

The Lab flags some key issues raised by investors and the TCFD pillars that those align to most closely, and expects that high quality reporting under TCFD should address all of these challenges.  The Lab indicates that answering these questions will help companies prepare disclosures that are consistent with the TCFD framework.  When preparing TCFD disclosures, the Lab also highlights that companies should be considering existing related requirements in particular those set out in the Guidance on the Strategic Report, the Corporate Governance Code and the Streamlined Energy and Carbon Reporting Rules.  Companies also need to consider the impact of climate-risk in the financial statements.

The key areas of improvement raised in the report and flagged by investors are: 

  • There is a lack of sufficient detail and specificity on the impact of climate on business model and strategy which would be useful to investors.
  • Disclosures of risks and opportunities arising from climate change impacts on the business model are of mixed quality, with a lack of substance on how strategy will be adapted, or much more emphasis on opportunities than on risks.
  • Reporting on scenarios remains a key area of investor interest, and an area of weaker disclosure. Some companies disclose climate change scenarios that may affect viability, but detail is scarce.
  • Pledges and indicators related to Net Zero are often ill-defined and difficult to understand and compare, and have the potential to be misleading.
  • There is a lack of explanation of performance against set targets and a disproportionate focus on ‘good news stories’ related to a small part of the business. Outcomes for the business as a whole should be reported.
  • Scope and basis of calculation of metrics is often unclear.

The Lab also highlights key questions for companies to consider for each of the four TCFD disclosure pillars.

Alongside the report, the Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK, which highlights the increased uptake in the last year.

Additionally, the Financial Reporting Council (FRC) has published research by the Alliance Manchester Business School which investigates climate-related scenario analysis in more detail. The research highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the common steps taken to conduct the analysis. 

The press release, FRC Lab report, FRC Lab snapshot and FRC research are available on the FRC website. 

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