Background
Over the past decade, there has been growing pressure on management and Boards from stakeholders to pursue a longer-term orientation in decision-making. The COVID-19 pandemic has laid bare the fact that companies ill-prepared to address significant external risks are unlikely to have the resilience and ability to deliver returns to stakeholders over the long-term. That, together with the broad guidance provided by the Paris Agreement has resulted in a heightened focus on whether companies are effectively overseeing, managing and, ultimately, mitigating climate-related risks in their business models. One outcome of these developments has been the rise in references to the Task Force on Climate-related Financial Disclosures (‘TCFD’), a voluntary reporting framework that has acted as a guide in a space where there remains an absence of common international climate-related reporting standards.
Late in 2020, the UK’s Financial Conduct Authority (FCA) announced it would become the first economy in the world to make the TCFD mandatory, following on from New Zealand’s announcement that the TCFD recommendations would apply to the financial services sector. Initially, the rules apply to premium listed companies on the London Stock Exchange—of which there are 465 excluding investment funds—from 1 January 2021, with an outline timeline that most other companies will be reporting against TCFD by 2023. Shortly thereafter, the Financial Reporting Council (FRC), author of the UK Corporate Governance Code (the “UK Code”), published its review of climate disclosure at UK companies, concluding that “corporate reporting needs to improve to meet the expectations of investors and other users on the urgent issue of climate change”. The FCA’s CEO said the introduction of the TCFD recommendations “must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability.” Likewise, the FRC said it supports “the introduction of global standards on non-financial reporting”. However, until that happens, it recommended reporting “against the Task Force on Climate-related Financial Disclosures’ recommended disclosures and the Sustainability Accounting Standards Board (SASB) metrics for their sector.” While the International Financial Reporting Standards (“IFRS”) Foundation’s consultation on sustainable reporting closed at the end of 2020, confirmation and implementation of such standards is unlikely over the short-term.
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