These insights will be helpful when preparing to implement the International Sustainability Standards Board (ISSB)’s IFRS S1 and IFRS S2 Standards, as TCFD recommendations are incorporated into them.
Climate-related financial disclosures should be viewed as a journey rather than a destination. Due to the dynamic and developing nature of climate change, ongoing evaluations are necessary to account for its changing progression and updated impacts that arise from scientific data and analysis. We believe transparency is key and will assist users in understanding where entities are in their reporting journey.
You can see a good example of this in the 2023 annual report of Smiths Group Plc [pdf, 4.1mb] (page 47):
'In FY2024, we plan to continue our progress in reporting against all four pillars of the recommendations and align with the recommendations of the Transition Plan Taskforce (TPT) which is due to be released later this year. This will include conducting a quantitative scenario analysis. More detailed information on FY2024 priorities in reporting against TCFD is outlined in the TCFD summary in our FY2023 Sustainability at Smiths report.'
The length of the report should be driven by the information that needs to be disclosed. Reports should focus on information that is material (ie informed that is necessary for an understanding of an entity's development, performance, position) to the entity’s climate-related financial information. Key messages should not be obscured by the volume of reporting. Entities can consider the use of links to reference existing information within the annual report rather than duplicating disclosures.
Based on the Financial Conduct Authority (FCA)’s study of 171 premium listed commercial companies in the UK, regulated companies’ disclosures averaged 15 pages, while non-regulated companies’ disclosures averaged only five pages.
Justification for time horizons chosen by the entity should be linked to the overall business strategy and not solely based on addressing climate-related risks and opportunities. The longer-term nature of some climate-related risks and opportunities needs to be considered when setting an entity’s time horizon. It is important to note that these timeframes are likely to be much longer than entities have ever considered in the past, as financial timeframes tend to be much shorter. The following factors are helpful when entities are assessing timeframes:
Entities are required to disclose how their processes for identifying, assessing, and managing climate-related risks are integrated into their overall risk management. When an entity discloses this integration, there should be a connection between the information disclosed for managing climate-related risks and opportunities and the entity’s risk management framework for other principal risk and opportunities disclosed.
You can see a good example of this in the DiscoverIE Group plc. Annual Report [pdf, 6mb], page 45.
Entities should set targets with a clear definition of the baseline time period against which progress will be tracked. However, just setting these targets is not enough. Entities should also ensure that they have access to data to monitor performance and apply a consistent methodology to support how management is monitoring the achievability of these targets.
Disclosures should align with the reporting period of the annual report and should focus on the current state of the entity during the reporting period. However, the climate-related regulatory environment is evolving quickly and therefore it is helpful to disclose information on future changes (planned or executed).
Events that occur after the reporting period could be treated similarly to the way post balance sheet events are presented in the entity’s financial statements. For example, a separate note on events after the reporting period or a summary at the end of the relevant section to which the event relates. This will ensure that there is a distinction between activities which relate to the period being reported on and those activities which relate to future periods.
The existence of the well-established Greenhouse Gas (GHG) Protocol has resulted in widespread familiarity with GHG-related metrics and targets. Virtually every entity discloses GHG emissions as part of their metrics and targets, but it is critical to ensure that there is a clear linkage between the principal climate-related risks and opportunities that have been disclosed, and the corresponding metrics and targets.
This linkage will result in cohesive reporting that demonstrates to users that metrics and targets selected by management are relevant to the identified climate-related risks and opportunities. A table may be a clear way to demonstrate the linkage to users.
You can see a good example of this in the 2023 annual report of Smiths Group Plc [pdf, 4.1mb] (page 57), which shows the relationship between metrics and other TCFD recommendations.
Scope 3 emissions captures all the emissions that an entity is indirectly responsible for through its value chain (up and down). The upstream and downstream emissions have been divided into 15 distinct reporting categories in scope 3. The 15 categories in scope 3 are intended to provide companies with a systematic framework to measure, manage, and reduce emissions across a corporate value chain.
Entities should disclose all categories that are applicable and form the basis of the disclosed information. This is important for comparison to targets set and performance of peers, in addition to transparency of metrics reported. Also, entities should provide details of the categories that have been included within the scope 3 emissions they have disclosed.
Entities should avoid providing general and broad information on climate change. Instead, disclosures should clearly explain the precise effects of climate-related risks and opportunities, taking into account the entity’s business model and processes.
Investors and reporting bodies have observed a lack of transparency and connectivity between narrative reporting and climate-related assumptions and estimates. Users of the annual report are demanding better connectivity and transparency between narrative reporting and climate-related assumptions and estimates in annual reports. The judgements, estimates, and assumptions made when evaluating the impact of climate-related risks and opportunities are crucial for assessing and comparing the entity’s resilience to climate change.
We hope you find the information in this article helpful in understanding the challenges when reporting under the TCFD framework. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.
