TCFD: What will it mean for the operation and governance of UK large private businesses?
With recent storms sweeping across the UK, changes in our climate are being felt very close to home. Across the world in fact there are unprecedented changes and challenges impacting the global landscape. We are seeing a real climate emergency with rising nature loss.
Businesses, governments, investors, stakeholders and employees see the 2020s as the decade for action. We are seeing a shift from a climate debate move rapidly to climate action with major new commitments to achieving Net Zero carbon emissions in both public and private sectors.
The need to act sustainably and responsibly is no longer a choice. Regulators and Governments are swiftly mandating action across sectors and organisations.
A real driver for change has been the Task Force for Climate-related Financial Disclosures (TCFD), which has garned support from G20 Governments.
What is TCFD?
TCFD was established by the Financial Stability Board to develop recommendations for more effective climate-related disclosures that could promote more informed investment decisions. The recommendations under TCFD are built around four key pillars: governance, strategy, risk management and metrics and targets.
What does it mean for UK companies?
TCFD and wider ESG reporting already applies to premium-listed companies for accounting periods beginning on or after 1 January 2021. Though we have already seen many companies voluntarily adopting and disclosing in line with TCFD ahead of this requirement.
The UK government has recently announced plans to take TCFD requirements further and broaden ESG reporting to wider sustainability metrics. For accounting years beginning on or after 6 April 2022, private companies will come into the catchment of TCFD reporting as thresholds will be changed to include those companies with over 500 employees and £500 million in turnover.
The thresholds work on a standalone and consolidated basis (for a UK company with subsidiaries).
The implications for parent and subsidiary Boards and Directors could be significant and a director has to sign off the ESG report each year. Legal and reputational risks associated with the external reporting and underlying assurance required by stakeholders will be critical areas for General Counsel and Company Secretaries to focus on.
This means many large private companies (including subsidiaries of overseas headquartered groups with operations in the UK) will be subject to scrutiny over their corporate governance and ESG reporting. The disclosures required under TCFD are at the centre of a director’s statutory duty under section 172 of the Companies Act 2006.
How can UK large private companies prepare for TCFD and wider ESG reporting?
With a short lead time to the expansion of TCFD reporting to wider ESG metrics, large private companies ought to take action now to assess the impacts to their business and the implications for ESG reporting. The government is expected to publish non-mandatory guidance but in the interim you can:
- Identify if your business will be subject to reporting - we recommend that you consider UK ESG reporting alongside wider ESG reporting changes across Europe. The recent expansion to large private companies may capture your business, putting it under the spotlight
- Interact with key stakeholders to gain views on ESG matters - what do they see as the impact of your business and where would they like the ESG strategy of the business to shift
- Initiate a plan to gather data or information to report in line with TCFD and wider ESG reporting obligations - do you understand the climate impacts of your business already? You may need to seek assurance or advice on technical matters and will want to achieve consistency
- Implement required organisational or corporate governance changes - TCFD and wider ESG reporting go to the heart of a company’s strategy and purpose. Companies will need to report on their corporate governance. Consider if you have the right corporate governance architecture in place along with the right processes and controls to support directors with their oversight and reporting obligations .
If you would like to understand more about ESG matters including TCFD reporting and how your business is impacted please reach out for discussion.
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