Climate-related reporting: how ready is your business? | Sustainable Legacies

The global movement towards mandatory climate-related financial disclosures is picking up pace. Companies across the world will need to be ready. Our research shows that the majority are not prepared. Sustainability experts Eleanor King and Laura Brankin share the headline findings.

As the global movement towards mandatory climate-related financial disclosures gains momentum, companies across the world will need to align reporting with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations. However, research suggests that the majority of the world’s companies are not yet doing this successfully.

Companies that are required to comply will need to address this unreadiness. In this article, we share headline findings from our own research conducted on behalf of the Department for Business, Energy & Industrial Strategy (BEIS) in 2021 that sheds valuable light on trends, barriers, and drivers with TCFD recommendations.

What are TCFD recommendations? Why are they important?

TCFD recommendations are globally recognised by investors, the financial community, and increasingly, the wider public as best practice in climate reporting.

They are designed to allow organizations to report consistent information to stakeholders and investors that is useful for decision-making. This information can include an organization's exposure to transition and physical climate risks as well as their strategy to both mitigate these risks and harness opportunities to decarbonize.

The TCFD recommendations encourage organizations to fully embed climate risk into the way they do business, placing as much importance on effective governance, leadership commitment and financial risk management as other aspects such as collecting data and setting targets on greenhouse gas (GHG) emissions.

Companies report against four main pillars: governance, strategy, risk assessment, and metrics and targets.

Why do companies need to know about TCFD recommendations?

Companies need to know about TCFD recommendations because:

Understanding climate risks and opportunities can add real value to businesses
There is a global movement towards mandatory climate-related financial disclosures

Our research shows that companies are not yet prepared

In March 2021, we conducted an assessment of climate-related reporting by large private UK registered companies on behalf of BEIS. The research revealed that only 27 per cent of the 150 companies assessed had a ‘reasonable’ or ‘strong’ alignment with TCFD recommendations in their disclosures. In contrast, 56 per cent had little or no disclosure on climate-related matters.

These results are mirrored at a global level where research shows that the percentage of companies disclosing TCFD-aligned information continues to grow, but more urgent progress is needed. According to the Financial Stability Board’s annual status report that covers fiscal year 2021 reporting, 80 per cent of global companies disclosed in line with at least one of the 11 recommended disclosures; however, only four per cent disclosed in line with all 11 recommended disclosures and only around 40 per cent disclosed in line with at least five.

Other findings from our own research include:

Larger companies (by turnover) are disclosing information that is better aligned with TCFD recommendations than smaller companies. Our research also suggests that those companies with a dedicated Sustainability or ESG team have a higher quality of disclosure.
In general, stronger disclosure was identified in the TCFD pillars of ‘Governance’ and ‘Metrics and Targets’ rather than for the TCFD pillars of ‘Strategy’ and ‘Risk Assessment’, suggesting that the forward-looking, future perspective of TCFD as well as embedding climate risk into business strategy and financial risk appraisals may be less mature.

Watch the video to see the headline findings from our research.

Drivers and barriers

Following our assessment of the quantity and quality of disclosures amongst the 150 companies included in the survey, we then interviewed 38 companies from a range of sectors for further clarity and granularity on the drivers behind the disclosures, the recognized benefits, and barriers experienced.

Several common barriers to corporate climate reporting were raised regardless of size, sector, or maturity of reporting: lack of time and resources; costs associated with disclosure; data collection issues; and insufficient internal expertise or knowledge. The extent of unreadiness highlighted in our research suggests that many companies will struggle to overcome these barriers without significant organizational change, external support, and learning from others.

Furthermore, ‘requests from stakeholders and investors’ and ‘a regulatory requirement’ were identified as two of the four most common drivers for companies to be reporting. The latter will only increase in importance as governments across the world start to mandate.

An opportunity for businesses

Companies who view the mandatory requirements as simply an annual report-writing exercise will be missing the point. Those who view these requirements as an opportunity to incorporate climate into financial risk management and business plans will reap the benefits of an enhanced understanding of risks and an ability to show stakeholders and investors that these risks are taken seriously.