Mastering TCFD: your expert guide to ensure seamless reporting

More about Sarah-Jane Denton

Sarah-Jane has many years of experience advising on a broad range of environmental topics both in support of transactions and in a compliance context. In recent years, she has particularly focused on advising both corporates and financial sector firms including a number of asset manager clients on UK and EU ESG regulation, having particular expertise in climate and sustainability reporting regimes and their impacts on UK and international businesses. Her practice extends to corporate governance, human rights, supply chain risk and related social issues under the ESG umbrella.

Sarah-Jane also has expertise in the more traditional environmental sphere including consenting, contamination, chemicals, health & safety and product regulation. In addition, Sarah-Jane has worked extensively on energy and infrastructure matters, for both renewable and innovative energy solutions providers and traditional, highly regulated utilities.

More about Simon Witney

Simon is a senior consultant and chairs Travers Smith’s ESG and Impact Group. Simon has particular expertise in sustainable finance and corporate governance, especially in the private markets.

Throughout his career Simon has been a prolific writer and regular speaker on company law and corporate governance and over the last 25 years or so he has advised private equity and venture capital, as well as the UK Government, on a wide range of fund and transactional matters. He has a market-leading reputation in the private equity sector with both Real Deals magazine and Private Equity International magazine having named Simon amongst the most influential figures in private equity.

Simon has previously been a member of the BVCA Council, was chair of the BVCA’s Legal and Accounting Committee between 2010 and 2016, and has also chaired Invest Europe’s Tax, Legal and Regulatory Committee. He is now a member of the BVCA's Accounting, Reporting and Governance Committee, the Policy Committee of UKSIF (the UK Sustainable Investment and Finance Association) and the ESG Committee of the City of London Law Society (CLLS).

In addition, Simon is a Senior Fellow and Visiting Professor in Practice in the Law School at the London School of Economics and Political Science, where he also teaches on the LLM programme. Simon's book, Corporate Governance and Responsible Investment in Private Equity, was published by Cambridge University Press in 2021.

Webinar transcript

Anne-Marie Schoonbeek | 00:06
Great, good. Good afternoon, good morning, perhaps good evening for folks dialing in. Welcome to today's webinar. I will give people a minute or so to gather themselves to dial in. I see already several folks are here, so thank you for your enthusiasm and your punctuality. We'll kick off shortly. And with that, I wish we had some nice elevator music, but we have a few frameworks acronyms to look at on the slide.
So that's a good start. And then we'll get going in a few seconds just to make sure we get those right. Those folks in the door that are keen, and I think I've done everything correct in terms of tech, that's always a good starting point. In terms of household items, while I have you here, we will be recording this session. Now, what does it mean? It means that if you are following today's session, feel like, hey, this is content that I would love to further absorb, you can watch a recording on your own time, but you can obviously share this with your wider colleagues and folks that you think this may be of interest.
So do reach out to us if you do not automatically receive the recording. We are very happy to share that with the right audience. With that, welcome everyone again. Good morning, afternoon, evening. My name is Anne-Marie Schoonbeek. I am here with you today to talk about the topic of mastering TCFD. Now, the risk of putting an acronym in the title means that I should start with explaining the acronym.
So we are here today, and I hope you dialed in knowing that we are here today to talk about the Task Force on Climate-Related Financial Disclosures. So one framework in the sustainability space, as you can see on this page, one of several, but today really deep diving on this particular framework and helping those folks on the phone today, whether it is something that you are currently preparing for your first reporting, whether it's something that maybe your business partners or supply chain connections have asked for. We are here today to cover several grounds. Again, both for folks that are relatively new to the topic, so we hope you could leave today with a broader understanding, but for folks that are perhaps are underway with the reporting, we hope we can help you give you that courage, but the further explanation. Now, the good news for you, it will be myself, but very much joined by the experts, as we promised, an expert guide, joined by our partners and friends at Trevor Smith, who Before we head over and let them introduce themselves, let me just first say thank you so much, Simon, Sarah, Jane. This is not the first time you're joining one of KEY ESG's in-person or digital events, and we always appreciate and we know the audience does your voice and expertise.
So thank you for joining us. As a very brief introduction, Intro to KEY ESG and myself. I am the co-founder and CEO at KEY ESG. Who are we? We are a sustainability software platform. We help organizations, private institutions with their projects, ESG and sustainability management that can mean reporting on a framework like TCFD that we're talking about today, but more generally helping them really turn sustainability into a strategic advantage and doing that through a focus on business outcomes.
So we pride ourselves on being accessible for the non-experts And we are intuitive and collaborative in doing that. And what we do is we ensure that in that world of fast changing sustainability standards, we keep you up to date and we guide you along and we make sure that you do not lose the forest for the trees. Now, with that, what I'll do is I will hand over for the content and maybe in terms of setting the stage for today, I'll hand over to my partners at Trevor Smith.
So I'll stop sharing. What we'll do is we'll have a brief intro on their side to tell a bit more about the firm and their respective, of course, expertises. You can use the Q&A window throughout to post questions. We will have time at the end to answer them. But if you already want to post them throughout this call, we may even be able to answer them virtually. With that, thank you so much, Simon. I see you're ready to go.
So thank you again for joining us and take off, I would say.
Simon Whitney | 04:17
Thank you. Thank you, Anne-Marie. Hello, everyone. It's a pleasure to be here. Thank you for joining this short webinar and thank you to KEY ESG for inviting us. I'm Simon Whitney. I'm a senior consultant at Travis Smith. I'm joined by my colleague, Sarah-Jane Denton, who's a director in our environmental and operational risk practice. We are both lawyers at Travis Smith, UK headquartered law firm. We have clients all over the world. We have a busy and thriving sustainability practice. We're We give advice on all aspects of sustainability law and regulation to companies, to asset managers, to pension funds and to many other clients. The purpose of the webinar today is to remind you of the requirements of the TCFD reporting framework and similar reporting requirements in the UK, and mostly to help you to think about some developments to your reporting that you might like to think about in the months ahead.
So first, a quick reminder about the TCFD requirements themselves. The TCFD, which as you I'm sure know, stands for the Task Force on Climate-Related Financial Disclosures. Is a framework for reporting an organisation's climate-related risks and opportunities. Reporting risks and opportunities related to climate is necessary because it's clear that Climate risk is, or at least can be, a financial risk. It certainly has the potential to affect a company's prospects, not only but perhaps especially over the long term. And so even though that risk may not meet the test for recognition in an entity's financial statements, investors will certainly want to know about it. The TCFD recommendations are intended to be adopted across the world, they're jurisdiction neutral, and they have in fact set the standard in climate reporting. Many companies now use them to report, a few countries have required them to be used, but the influence of the TCFD standard is actually much wider. The new international disclosure standards have used them as the basis for their own standards, the ISSB standards, and not just in relation to climate reporting. They use a similar framework, the same for pillars reporting. For other sustainability related disclosures. And even though the EU has gone its own way in sustainability reporting, rather than merely adopting international standards, as it might have done, the TCFD framework has nevertheless been hugely influential in shaping the CSRD reporting standards, the ESRSs. As well.
So as this slide shows, TCFD reporting requires a firm to use four headings or pillars, governance, strategy, risk management and metrics and targets. Under each heading, there are more detailed recommended disclosures, 11 recommended disclosures in total.
And then there is more detailed sectoral guidance that sits alongside. This guidance is often actually imposing additional disclosure requirements. And so, in fact, adds to the compliance burden as well as helping firms to understand what they do need to disclose. Just to talk briefly about each of these pillars, governance focuses on an organisation's governance around climate-related risks and opportunities, includes the role of the board and management role in assessing and managing the issues. Strategy addresses the actual and potential impacts of climate related risks and opportunities on an entity's business, strategy and financial planning. It requires companies to disclose how they integrate climate considerations into their corporate strategy. Risk management involves the processes used by the organisation to identify, assess and manage climate-related risks. It requires companies to explain how these processes are integrated into their overall risk management framework. And finally, metrics and targets requires organizations to disclose the metrics and targets used to assess and manage climate related risks and opportunities. Includes identifying KPIs, key performance indicators for tracking progress towards their goals. It's important to say that TCFD disclosures are deliberately forward-looking and they're both qualitative and quantitative. There's quite a lot of narrative. Reporting embedded in the reporting requirements.
So the TCFD published its final recommendations in 2017. It's very clearly relating to risks to the entity concerned.
So to enable stakeholders to better understand material climate related financial risks. The focus is on the way in which climate change will or could affect business and prospects of the preparing entity. The UK was actually one of the first countries to roll out mandatory TCFD-aligned disclosures across much of the economy. Indeed, as Sarah-Jane is going to discuss shortly, the UK is planning now to go further and to roll out more generalised sustainability disclosures using the International Sustainability Standard Board's framework, the ISSB standards that have now been created. And as I mentioned before, the TCFD framework has been subsumed within those ISSB standards. Now in the UK, the requirement to publish a TCFD aligned report, as we'll explain shortly, applies to many pension schemes, listed companies, large private companies, LLPs and many regulated financial markets participants, including asset managers, certain life assurers, FCA, regulated pension providers and so on. And on this slide, I just mentioned the TNFD, the Taskforce on Nature-Related Financial Disclosures, which is the equivalent of the TCFD for nature biodiversity. At the moment, reporting against that framework is not mandatory in the UK, although it will form part of the ISSB's future work and might be part of a future discussion. Mandatory standard under the UK's adoption of the ISSB standards.
So many companies are already starting to prepare for that and some are already issuing TNFD aligned reports. So, as I mentioned, there are three main routes for companies to be caught by TCFD reporting obligations in the UK. The UK listing rules. The FCA rules for regulated financial firms, and the Companies Act for large UK companies and LLPs, including AIM-listed companies, And UK companies are LLPs with more than 500 employees and more than 500 million pounds of turnover. These latter requirements, the Companies Act ones, which are often referred to as CFD requirements, do not specifically reference the TCFD, but they do align closely with the TCFD requirements. Framework. And as you'll be able to see, some entities will be subject to more than one set of these rules. In fact, some might even be subject to all three. That makes life a bit more tricky because there are differences between the various requirements. And if you want to prepare one report that covers them all, you have to make sure it complies with all three sets of rules. Okay, so I'm going to deal now briefly with the FCA's rules. Which apply to FCA regulated firms. Then I'm going to pass over to Sarah-Jane, who will talk about the application to listed and large private companies and then go on to talk you through some tips for preparing and some things to watch out for.
So the first asset managers and other InScope financial firms published their mandatory TCFD-aligned reports which were those with over 50 billion pounds of assets under management, they published those reports by 30th of June 2023. So already some time ago, but other firms falling into scope broadly, those with more than five billion pounds of assets under management were required to publish their reports by the 30th of June 2024, covering periods beginning after the 1st of January 2023.
So most asset managers in scope will now have had one round of reporting. The rules apply to FCA regulated managers and asset owners, including FCA. For example, portfolio managers, USITs management companies, UK alternative asset managers, so private equity and hedge fund managers, whether or not they're full scope firms, whether or not they're above the threshold required to be regulated by the Alternative Investment Fund Managers Directive, life insurers, FCA regulated pension providers.
So for asset managers, As I mentioned, the cutoff threshold is £5 billion of assets under management. That's calculated using a three-year rolling average. It's expected by the FCA that this scope covers around 98% of assets under management of the UK asset management industry.
So lots of firms below that threshold out of scope, but obviously the firms with the most AUM clearly covered. Relevant to any private equity sponsors listening, the UK FCA authorised private equity firms who are providing investment recommendations to non-UK managers are in scope, despite not themselves being managers, not having ultimate investment discretion over the fund's investment decisions. This is a structure that's quite common today. In the alternative asset manager space, a UK regulated firm providing advice to often a non-UK firm.
Sometimes that's Luxembourg or Ireland, for example. The meaning of portfolio management has been extended to include such firms in the FCA. Rules.
So if they're providing regular advice over assets that exceed the five billion threshold, then they're in scope. But out of scope are non-UK firms.
So even if a firm markets products to UK investors, it's not caught if it's not UK regulated. The FCA rules require reporting at both the entity and the product level. At entity level, the firm has to produce an annual TCFD report talking about how the firm's taking into account climate-related risks and opportunities in managing and administering investments on behalf of its clients. In particular, if a firm has set climate related targets or it has a transition plan, detailed disclosures must be made, including targets, KPIs, how they've measured their progress towards those targets. An explanation as to why you've not set targets is required if you haven't set them. And so that needs to cover all of the firms in scope business. There's a requirement though for an annual report for each in scope product or funds The contents of that report cover climate related disclosures comprising a core set of metrics, including for example, scope one, two and three greenhouse gas emissions, Many private fund managers, it's worth saying, don't have to actually publish this report. They can merely make it available on demand to investors who request it. But public asset managers generally will need to publish that report as well. As I say, there are those mandatory metrics that you have to use. There's additional metrics that should be disclosed on a best efforts basis. In general, the firms reporting under the FCA rules have to consider all relevant TCFD guidance, including the guidance for the financial sector. But the FCA does allow firms to explain non-disclosure of certain information when accurate data is not available and the firm believes that disclosure would be misleading, although explanation is required. Group reports can be relied on, cross-referencing is allowed. But care needs to be taken because the UK specific obligations of course have to be complied with in whatever report you're referring to. And that's particularly important because the member of the senior management will need to sign a statement of compliance with the rules. To confirm that all of the provisions have been taken into account.
So that's all on the FCA's handbook rules. I'm going to now hand over to Sarah-Jane to talk about the application of the rules to listed and large private companies and then to focus on some pain points for firms and tips to improve reporting this year.
Sarah-Jane Denton | 17:57
- Thank you very much, Simon. So turning to listed companies, so UK listed companies were actually the first to be required to use the TCFD reporting framework. They started out with premium listed companies as far back as 2021 and then standard listed companies followed shortly thereafter.
So it's fair to say that by this point, the FCA, which writes the listing rules, has got a fair amount of experience in writing requirements for TCFD disclosures and in reviewing them. The FCA actually monitors listing rules compliance on this matter in conjunction with the FRC. And both regulators have in the past put out some quite helpful commentary and review reports that if you're looking to produce a good TCFD report are well worth a look. The FRC is putting out regularly some thematic type review reports, for example, on specifics of metrics and targets under the TCFD framework.
So the listing rules require that At their heart, they require a covered company to make a statement in their strategic report.
If you think about it, that's quite a specific requirement, which is just to say, have you made a TCFD compliant disclosure or not? Theoretically, therefore, there would be an option for you to say, no, we have not made a TCFD compliant disclosure. But there is a clear expectation that over time the disclosure Fool. Suite of disclosure requirements will be complied with by listed companies. That's backed up by the fact that in addition, the company has to state that where it has made a TCFD disclosure, Are those complete and fully in accordance with the TCFD framework or are there some omissions?
And then in that case, what steps is the company going to take to make those disclosures in full in the future and when? Generally speaking, the TCFD report for a listed company has to be in the annual report.
So it's fully public. It's filed with the regulator. It can be in another document, but then you have to include a full description of what that document is, where it can be found and why you haven't included your TCFD report within your annual report. Now, in common with the FCA rules that Simon was just talking about, a listed company's disclosures have to take into account the TCFD guidance for all sectors. And additionally, where applicable, guidance for the financial sector and for non-financial groups. And as Simon said, it's really important to remember that those are not your traditional type of guidance, which just tells you how to comply or provides clarifications, but they do actually form the basis of some more granular disclosure requirements.
So it is important to take those into account. And for full compliance with TCFD, you would need to essentially check those off as you go through each of the recommended disclosures. In addition to those specific guidance documents which you need to take into account, in determining whether or not your TCFD disclosure is compliant, the FCA states that it will look at other TCFD guidance, for example, specifics around metrics and targets, in order to assess whether or not your report is fully compliant. UK companies are, similarly to the FCA rules, encouraged to take into account the UK's net zero target.
So I'm sure everybody on this call knows this, but the UK has an overall national target to reach net zero by 2050. So if you as an individual organisation or a group are setting a target, then you're encouraged to take into account the UK's national target and consider your part in helping the UK to reach that target when setting them for yourself. That means if you have got some form of transition plan, then you should disclose that as part of your TCFD disclosure as well. If you haven't set any sort of target, then you should be explaining in your TCFD report why not. Now, all that said, and obviously acknowledging that is quite a lot, listed companies can vary enormously in terms of their businesses and their scale. The FCA does say that disclosures are expected to be proportionate to risk. Now, some of the companies that we talk to don't really see this in practice. These disclosure requirements can feel quite onerous if you're a smaller company, despite being listed. But it does mean that you may end up with some quite brief disclosures in accordance with TCFD. You can still be fully in accordance with TCFD if your disclosure is brief. And it means that we see across the board, actually across these three different scopes, a huge amount of variation in terms of the length and the depth of the disclosures that people make in accordance with TCFD. Next slide, please.
So finally, moving on to the third method to be caught by the TCFD disclosure rules in the UK, and that's under the Companies Act. So we call this regime informally CFD or climate related financial disclosures. We've dropped the T from TCFD because these rules do not actually refer explicitly to the TCFD framework. They don't incorporate it in any way, but they're very closely aligned with it, as I explained.
So the report, if you're within scope of this and the scope thresholds were set out on one of Simon's previous slides, is the report has to cover all of the in scope companies or the group. So if you're a parent company, then you will need to report for the entirety of the consolidated group. Consolidation, obviously, being for financial purposes. If you, however, have a subsidiary which is itself large enough to be in scope, then that should at the very least include a link back to the parent's report within their own annual report. Now, if you are a parent company within the investment sector, bearing in mind that this regime can impact holding companies and structures, then this becomes a little bit tricky because there is this expectation that you would report on behalf of subsidiaries. However, obviously, holding companies generally are very light in terms of their operations. And the government guidance that accompanies the CFD regime actually says that the holding company should talk about the impact of climate risk on the valuation of those investments. Now, that's probably quite familiar to you from the financial perspective. But actually how to interpret that into a narrative climate related report can be a little bit more tricky. And certainly there's quite a lot of discussion in the market about the application of these rules to holding structures. The CFD itself forms part of the company's strategic report.
So again, it's very much a public document. You can go onto Companies House and download these and have a look at how other companies are executing them. These rules have been in force since the 6th of April 2022, but we're just sort of seeing there are only a couple of years of experience in the market to refer back to. In terms of what you actually have to report, as I say, the TCFD framework is not referenced, but it's pretty easy to map the headings within the Companies Act provisions into the TCFD framework.
So there is a governance disclosure, although it's a single disclosure and it doesn't distinguish between board oversight and management oversight and their role in managing climate policy. Related risks and opportunities in the same way that the TCFD framework does. Strategy A, B and C, risk management A, B and C are both mapped very directly. And their metrics and targets is a little bit different. It just requires a disclosure of the company's targets and the KPIs that they use to measure progress against those targets. Thank you. One of the obvious omissions here is an emissions disclosure, and that is because emissions disclosures are already required under a different piece of legislation that, again, is made under the Companies Act. We call that regime SECA or the Streamlined Energy and Carbon Reporting Requirements. And chances are that if you're making a disclosure, under the CFD rules, then you're making that second disclosure as well. There is a requirement under CFD to run a scenario analysis. I'll come on to talk about scenario analysis in a little bit more detail in a second. It's broadly aligned with the TCFD's Strategy C requirement on scenario analysis, but it doesn't actually require you to take into account specific scenarios, including a two degree or lower scenario.
So there's a little bit more flexibility in there. This CFD is a complier explain regime in a slightly similar way to the listing rules, but again, with those small nuances that you'd need to take into account if you're trying to do this all by means of one single report. If the company doesn't pursue any policies in relation to specific elements of this disclosure, so whether that's sort of the mitigation of risk or whether or not board doesn't have oversight for climate related issues, for example, then you need to include a clear and reasoned explanation as to why that is the case. There is the possibility of excluding or omitting some or all of these disclosures where management has got a reasonable belief that it's not necessary. The disclosure isn't necessary for an understanding of the company's business. But again, then you would need a clear and reasoned explanation. And I think it's fair to say that you might be, you can probably expect some challenge to that position unless there is a very good reason. For example, as I've said, if a holding company is, preparing the report. In addition to, sorry, just go back a second. Thanks, Simon.
So just to cover off the last point around the link to financial statements. The Companies Act specifies that where appropriate, the company should include references to and additional explanations of amounts that are included in the company's accounts.
So there's beginning to be this connectivity between the climate related financial disclosures and the financial accounts. Though, as we've mentioned already, there isn't necessarily the same treatment of the long term climate related risk, even as it translates into a financial risk, as in financial rules, which concentrate more on short to medium term risks to the company. There is helpfully some... Recognition here that you might already be complying with a regime which is requiring very similar disclosures.
So you can meet the CFD disclosure requirement using an alternative national, EU or international reporting framework. So obviously, if you're covered by one of the other TCFD UK requirements or alternatively via CSRD or even ISSB in a different jurisdiction, then you might well be looking to rely on that.
So that's who is covered by TCFD. Those are broadly what each TCFD regime requires you to report.
So what are the challenges? So within Travis Smith, we've reviewed quite a large number of TCFD reports at this point, particularly for listed companies and for companies asset managers, alternative asset managers under the FCA rules, but increasingly under the CFD regimes. And we can pick out some trends in the reports that we have published. Been assessing over the last few years. The first challenge consistently across the board is to make a good disclosure in relation to the scope three greenhouse gas emissions.
So I'm fairly sure if you're listening to this webinar, you know the difference between a scope one, scope two and scope three greenhouse gas emission, but just very important. At the highest level, a scope three emissions disclosure is one which relates not to your own business directly, but to the elements that you need to make your business function.
So your supply chain and your downstream emissions. So scope three obviously can be very comprehensive in terms of the number of suppliers, for example, or how far you draw that boundary in terms of your own customers. It can be really challenging to collect scope three data in a reliable way. Scope 3 data itself is divided into 15 individual categories, a very large number of which might be relevant to your business. Just to take a few, for example, there is a category for waste. There is one for business travel. There's one for employee commuting. And there's one of the most problematic for asset managers, obviously, in particular, and those covered by the FCA rules are category 15 financed emissions.
So obviously thinking about the very broad scope of some of those types of businesses operations that can be very problematic to collect. There is some leeway, we think, in terms of sort of enforcement positions around scope three emissions. The most important thing that you can do in relation to any element of TCFD reporting is to be transparent.
So if you have limited data around scope three emissions, then explain what those limitations are. How far they extend.
So how far does any scope three emissions disclosure that you're making extend within your business? So percentage of assets covered, for example, and then talk about what your plan is to improve your disclosures in the future. And that's a really key element when we start thinking about enforcement is that the FCA has been and we expect to be still relatively lenient in terms of its enforcement of these disclosure requirements. However, they do want to see a sort of good faith evolution of these reports as we move forward. And so you should be trying to fill gaps where they exist. The second element that is consistently problematic is under the strategy heading.
So strategy A requires that you should describe the impact of climate related risks and opportunities on the organisation's business, strategy and financial planning. And this really gets to the heart of what a TCFD disclosure is trying to do, which is to explain to the reader what risk does change. Climate pose to your business. Flip side opportunity clearly across the long term.
So how viable will your business be if the climate risks accelerate or if they continue as planned or if all of a sudden countries really elevate their attempts to regulate climate change more strictly, what will each of those impacts do to your business? It's undeniably very tricky, this disclosure. It is one which might require across the longer term disclosure of information which you might not necessarily want to put out into the market, bearing in mind that these are, generally speaking, public reports.
Some of the best Disclosures that we see actually do attempt to put some sort of financial or percentage figure on the impacts of climate. They might do that on a per business basis. You can look at, for example, the want to actually perhaps ironically one of the best tcfd disclosures that you can look at are some of the oil and gas companies so they might for example talk about what the impact of climate is on the price of a barrel of oil in the future for example and again of course these are all forward-looking statements Mostly you'll find a very detailed disclaimer at the back. But that is what this disclosure really gets at.
So perhaps gives you a sense of why it's quite problematic. And then finally, and really quite closely tied to that, to the A disclosure that I've just been talking about is the strategy C disclosure and that's to describe the resilience of the organization's strategy taking into account different climate scenarios.
So this is the scenario analysis disclosure. It's one that generally is not well handled in-house in that very few organizations will have the technical capacity and capability and resource to do this in-house generally requires you to work with some form of climate consultancy to produce these quite complex database models to assess whether or not your business would be resilient in a sort of a 1.5 degree scenario where regulation really would have to ramp up in a two degree scenario or in a potentially in a sort of hothouse world where climate changes very much more rapidly and what impact that would have on your business. Again, this is one where For a start, we see the FCA taking a very sort of softly approach to enforcement.
So it's even written in CFCA rules, for example, that they acknowledge this is quite tricky. It is in their commentary that they see this as very difficult for people. And so we do expect this to be an ongoing process. Leniency in terms of the FCA's enforcement of the scenario analysis disclosure. It's one where we see an enormous variety.
So we see reports where people still talk about how they're planning to implement scenario analysis in the future. A sort of halfway house is that maybe you've started to come up with a scenario analysis methodology. You started working with people. You've tried to apply scenario analysis to certain parts of your business, but not others.
And then at the other end of the scale, we have clients who have, really done a very detailed scenario analysis. They've looked at operations, particularly where those are very exposed to climate change in certain parts of the world and what the potential financial impacts of that would be on their business going forward.
So that's really the way that these two disclosure requirements are very closely linked. You can almost answer the first one by looking at the outcomes from the second. There isn't an expectation that your qualitative disclosures in regard to scenario analysis will shift to a quantitative disclosure going forward.
So again, that's about sort of putting a number on that risk that the all scenario analysis brings out. Hi, please. Thank you.
And then just to talk about the future. So we've talked about TCFD. You might have heard that actually TCFD is sort of gently on its way out to be replaced by its successor, which is ISSB.
So the IFRS, which is obviously the financial regulator, standard setting body, a couple of years ago established a sustainability element of itself. And very rapidly, the International Sustainability Standards Board produced two standards. It only took them about two years from foundation to releasing these standards, which are intended to become a global baseline for sustainability reporting. They refer to these as the building blocks for national standards going forward on sustainability and sustainability. The IFRS and the ISSB has actually subsumed the TCFD's work.
So they've sort of taken over the TCFD's work and TCFD has been pretty much disbanded as a result of that development. There are two standards, very briefly on IFRS S1. This is the general sustainability disclosure standard. As Simon said, this standard actually might feel quite familiar when you look at it because it's centred around those same four pillars of governance, strategy, risk management and metrics and targets. But it's designed to be applicable to any sort of sustainability related risk or opportunity that is financially material potentially for the business.
So it doesn't have really detailed disclosure requirements baked into it. The idea is that you would determine for yourself what topics you should be disclosing based on the financial materiality of those documents.
And then you would disclose in accordance with the standard and again, under those four pillars. By contrast, the second standard that the ISSB produced is the IFRS S2 standard, and this is on climate-related disclosures. It is. Very similar to TCFD. It has gone through a bit of an update because, TCFD is actually one of the older sustainability disclosure regimes at this point. It is a little bit more granular in places, and there are a few more disclosures that are required under it.
So it's similar, but it's not exactly the same. You can pull up a sort of a map between the two regimes to see what the differences are. Just to highlight a couple of those differences, scope three emissions disclosure is always required under S2.
So under TCFD, whereas a scope three emissions disclosure is where appropriate under S2, you would always be required to produce that disclosure. And that is after the first reporting cycle.
So there are a few of these sort of phase in provisions baked in to the ISSB standards. Asset managers, commercial banking organisations and insurance undertakings have to disclose their Category 15 financed emissions, which obviously will be quite challenging. Thank you. Very much hot off the presses. Yesterday, actually, the ISSB announced that it was consulting on some changes to the S2 standard already, which is quite remarkable. And it does align obviously with the general mood music around sustainability reporting in general, but it's quite notable really for the fact that these standards haven't really gone into effect in most jurisdictions yet. And the ISSB is already looking to amend them.
So it has said that it's, thought about this and decided that it will do it based on feedback from the market around application difficulties. Some of the things that it's disclosing, and it's not very long document, so you can go and have a look at it, is that particularly the scope three disclosure requirement would be softened somewhat. In relation to the financed emission disclosure, the category 15 disclosure, you can limit that to only disclosures relating to loans and investments made to investees or counterparties, meaning that emissions that relate to, for example, derivatives, facilitated emissions and insurance related emissions can be excluded.
Though for asset managers, you would still need to make a financed emission disclosure. If you do take advantage of that disclosure of that. Right to omit that disclosure, then you would have to give an indication of what proportion of your activities have actually been excluded as a result. A couple of the other amendments are designed to enhance the interoperability between the ISSP standards and various other regimes. And one example is that if you have a legal requirement in another jurisdiction or, for example, as a result of your stock exchange listing that says you have to calculate your emissions in accordance with a particular regime. And that is not the greenhouse gas protocol, which is what's required under ISSB, then you can use that emissions disclosure that you're already creating to comply with a different legal requirement, which obviously is sort of, I think that's good news. Everyone would acknowledge that. It's good news that you haven't got to then restart your emissions disclosure calculations all over again. That consultation is open for comment until the 27th of June. And just to clear up one point on IFRS and ISSB, we're often asked, well, when do we have to comply? And the short answer to that is that you don't have to comply until your jurisdiction, a jurisdiction in which you are regulated, requires you to.
So essentially, until they're adopted into national frameworks, these standards are entirely voluntary. We are seeing quite rapid adoption of these standards around the world.
So between those jurisdictions which have either already adopted them or they are consulting on the adoption, so maybe they've published a roadmap, there's around about 30 jurisdictions that are in that space at the moment of either having done it or they're talking about doing it. Generally speaking, not economy-wide. Maybe it's just a subset of organizations for now, it could be just listed companies, for example. But that does show that actually the ISSB is achieving its purpose of creating this global baseline. In the uk to bring this back to tcfd we are expecting and actually the government is already late according to the its own timetable that it laid down that the uk government will publish national standards based around s1 and s2 that would then be endorsed and adopted as uk national standards once that's done and they become uk standards then The government in terms of the FCA, the FLC, the government departments can consult on bringing in mandatory disclosure requirements that apply these standards.
So similarly to the way that they introduced TCFD, We would expect that once the standards are endorsed, once the consultation is finished, listed companies will be the first to be required to make disclosures under the ISP standards. In common with some jurisdictions, that is likely to be a climate first.
So you'd have to comply with the IFRS S2 standard, but you'd have a few more years to comply with S1. The FCA has been quite enthusiastic about these standards in respect of its regulated financial bodies, financial companies as well.
So that could be a few more years down the line, maybe sort of 27, 28. But we do expect that those entities that are currently subject to TCFD reporting requirements can expect that over the next sort of five years or so they will be required to report under ISSB instead.
So that is a very whistle-stop tour of TCFD. We threw quite a lot of information at you there.
So we would be very happy now to take some questions.
Anne-Marie Schoonbeek | 45:25
Let me start with thanking both of you. That's a lot of things were covered, both TCFD as well as ISSB.
So thank you both for that and keeping it as engaging as you did. I've seen a few Q&A come in before the call, but maybe one that came in live, a question around scoping, particularly for those folks that are dialing in outside of the, perhaps with parent companies or outside the UK. How does it work if you are servicing organizations within the UK, but you perhaps are headquartered outside. Is there anything that could make you fall in scope of TCFD if I read the question here correct?
Sarah-Jane Denton | 46:06
Shall I take that one and then Simon if you want to make any comments around financial institutions. So generally speaking it's These rules generally apply to UK companies.
So for the most part, not. But if you are, I read the question, I think if you're a UK service company, so maybe that is talking about the holding structures and particularly the Companies Act, if you're a holding company that is consolidating goods, a group of companies underneath or a portfolio of companies underneath, then there is potential for that, even though it's sort of more or less a shell company to be impacted by these rules.
So it's definitely worth running a scoping exercise around any of those sort of structures that you might have sort of hidden away slightly.
Anne-Marie Schoonbeek | 46:54
Maybe go into a jurisdiction closer to us, the CSRD, another acronym that is top of mind for many folks. What are the interactions between the CSRD, particularly when it comes to the climate disclosures? Would they then suffice between the two frameworks or how should one think about if they are in scope of both individually?
Sarah-Jane Denton | 47:16
Say that again. Apologies, Simon.
So... As Simon said, CSRD does not directly adopt TCFD in any sense. It doesn't even map as clearly as ISSB to the four pillars of governance, strategy, risk management, metrics and targets. But all of the individual elements are there.
So, yes, CSRD is slightly different, obviously, because for those that are familiar with the regime, we deal there with double materiality. So we're looking not just at the impact of climate related risk and opportunity on the company's finances, but on what are the impacts of the company on climate.
So there is that additional element and impact. It would not be it's unlikely to be sufficient to sort of copy and paste a TCFD report and expect that to meet all of the individual elements that are required under the E1 ESRS. However, it's one of those instances where if you are complying with TCFD, you the lift in terms of sort of making sure that you've then got a CSRD certificate. Compliant report is unlikely to be really significant versus starting from scratch. And if it's going the other way, so if you are preparing for CSRD and you've got an E1 disclosure, then there is a high chance you've got all of the information that you need to prepare a TCFD report, even though you might need to slice it up slightly differently. That said, TCFD is a relatively flexible regime. And as long as you're sort of hitting all the elements, there is actually no need to set it up as organized under the four pillars.
So I think going CSRD down to TCFD is definitely an easier lift than going TCFD up to CSRD.
Anne-Marie Schoonbeek | 49:01
I like that phrasing, but perhaps it should be a pyramid and understand what's the easiest starting point. But I like that gives comfort. And it's definitely something we see in our user base because it is very likely that you have either entities or in general enough exposure and business activities to hit several jurisdictions.
So very much keen on making that reusable and saving time in that sense. Maybe to add on another there, what about if I make the California climate disclosures? Because I noticed some people dialing in from the US. Anything we know that those are coming into play, what's the compatibility there?
Sarah-Jane Denton | 49:45
I'll offer this question to Simon, but if you want me to take it, just let me know.
Simon Whitney | 49:49
Go ahead, Esther.
Sarah-Jane Denton | 49:50
Please. Okay, thank you.
So there's a couple of different elements in California and obviously I'll preface all of this by saying obviously I'm not a California lawyer, I'm not even a US lawyer, so please do take local council advice. But broadly speaking, there is a requirement for companies that are doing business in California and reach a certain turnover threshold to make a TCFD disclosure of their climate-related risks .
That if you are producing a UK TCFD report on a group wide basis and you're caught by the California rules, then there is a reasonable chance that you will be able to repurpose your UK report as long as it does cover your whole group, including California, to meet those California requirements. They don't. They explicitly refer to the TCFD framework, but they do have this slight quirk where they talk about climate related financial risk. They don't include opportunities.
So it is worth looking quite closely at that language and making sure that you are hitting all of the required points. But because TCFD is generally a little bit broader than California, there is a good chance of being able to repurpose that information again, as you said.
Anne-Marie Schoonbeek | 51:09
Great. That is the answer that we were, that folks were probably keen to hear. And I appreciate we're going over time.
So what I'll do is I'll summarize, you know, what I learned from you all today. And thank you again for sharing both that regulatory context, but what do you see in practice? What are you helping your clients on? And I think that's just very helpful to probably a sound of resonance for folks dialing in. And definitely, again, from our perspective, from the software side of the world, we are seeing the Typically, users having to comply with multiple frameworks, perhaps not in the first year, but as they schedule out their compliance timeline, it is likely if you're in the scope for one, it is very likely you'll be in scope for several. And just hearing and knowing that there is that transferability. And what I heard you saying is, look, if you start with CSRD, you're probably very well set up for all of the others, perhaps reversely. CSRD relatively may be a bit more of a step up if you had reportability. On any of the other climate frameworks before them. I think at the core, what I hear is the regulators really making an emphasis on transparency, There's best efforts. We know it's a journey. We will not get to perfect.
So really making sure that in what you do, you're transparent about the choices you have made. And I think hence it's so important to be able to do that as you're collaborating across your organization and keep track of what is the methodologies used, where are we not reporting because of XYZ and when do we plan to do that. Second, I appreciated your deep dive on carbon accounting, scope one, two, and three. Indeed, likely for people on this phone call, something they are familiar with, but within that, thank you for your time. Deep diving on specific scope three categories, because that again is something that is so shared as a challenge across the different frameworks and we've seen a lot of our organizations that we work with. Starting with carbon accounting it's a good starting point, because if you can do that very well that will set you up and build that organizational muscle for many more frameworks to come so. Great takeaways from my side. And as I said in the beginning of this call, this has been recorded.
So if there is an interest in discussing this in your wider organizations, because you are spearheading this for your team, please do. Yeah. And feel free to share it, but invite folks we host on a regular basis. We love bringing our partner experts on board.
So yeah. Do keep your eyes on the KIEC website. I want to say a big thank you for Trevor Smith for making the time today, for keeping that confidence, giving all of us both the guidance, but the positive tone. We can do this and it's a journey and we're all here for it.
So thank you, Sarah Jane. Thank you, Simon. Thanks all for your interest and time today and looking forward to seeing you on the next one.
Sarah-Jane Denton | 54:01
Thank you. Thank you. Bye. Thank you.