As the Taskforce for Climate related Financial Disclosures (TCFD) has gathered huge international momentum since its establishment in 2015 – a catalyst that could encourage a global low-carbon future – more and more businesses are realising that climate change has the immense potential to cause severe financial risk. Qualitative and quantitative risk disclosures are essential for business’ role in mitigating global climate change.
The sooner government policy can delineate the responsibilities that businesses need to enact, the more tangible this low-carbon future will become. The UK is now the first country in the world to announce intentions to make climate risk disclosures mandatory for large companies across in the UK by 2025 as part of the government’s plan to ensure UK is net zero by 2050.
What is the role of the TCFD?
The TCFD has provided recommendations to help businesses identify information that they should disclose to investors, lenders and insurance underwriters. By providing this information, businesses will afford these stakeholders with a better understanding of how the organisation oversees the management of certain climate and material risks and opportunities with the intention to encourage a more sustainable future for the business.
The TCFD recommendations are structured around four thematic areas of organisations that are interlinked and inform one another. These areas include the following:
- Governance: The organisation’s governance and climate-related risks and opportunities.
- Strategy: The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning.
- Risk Management: The processes used by the organisation to identify, assess and manage climate-related risks.
- Metrics and targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Why is this action being taken and what does it mean for UK businesses?
Businesses have always been considered integral players in the government’s plan to ensure the UK is net zero by 2050. Climate change and its impact will continue to directly and indirectly threaten the financial stability of businesses across national and international borders as climate patterns and environmental processes continue to deviate from the norm due to limited sustainable action.
Changes in the economic landscape will also fluctuate as more governments recognise the immediate importance of sustainable action and join other countries in international agreements such as that of the Paris Agreement, as the transition to a low-carbon world takes place.
The UK financial system needs to be resilient to the risks associated to climate change to ensure a sustainable economic future. Businesses not only need to show ‘green’ intentions but need to actively ensure that every facet of the organisation is addressing climate change issues. The mandatory implementation of climate risk disclosures led by the TCFD recommendations will improve business resilience to climate impact, ensure that consistent reporting measures between companies are equal and enhance the national drive for financial investment towards the UK’s transition to a net zero future.
Businesses will be responsible for all forms of climate related disclosures in their financial reporting, creating an opportunity for greater transparency and consistency in the business, affording them the opportunity to identify opportunities and prepare for risks. Investors should be encouraged to partner with businesses that provide detailed reports, outlining their current sustainable impact, responsibilities, and future plans at ensuring a greener organisation.
Currently, the Treasury has outlined that the following organisations will be mandated to uphold the new rules and regulations; UK-registered large private companies, banks, insurance companies, life insurers, pension schemes regulated by the Financial Conduct Authority, occupational pension schemes, listed commercial companies and building societies. This does not mean, however, that smaller businesses do not need to consider the importance of risk reporting, too. As many SMEs contribute to job creation and overall global economic growth, it is important that they, too, put measures in place that can help them adapt to climate change impacts while ensuring continued positive steps towards the mitigation of carbon emissions and the promotion of sustainable development.
What is iiE’s response to this announcement?
These new regulations have been welcomed by iiE, because businesses play a vital role in ensuring a more sustainable future for the UK. All organisations should already be at a point of working towards an understanding of their sustainability impacts while ensuring that they continue to make improvements in line with the national and international sustainable development and net-zero carbon goals.
iiE believes that all businesses, regardless of their size, have a part to play in ensuring that the UK cuts its carbon emissions by 2050. These recommendations mandate businesses to report on their sustainability impacts, helping them become a more resilient, cost-effective and a greener business in the future. These measures will help create more equitable marketplace conditions to drive investment ‘green economy,’ creating positive feedback loops that improve social, environmental, and financial outcomes.
The iiE accreditation scheme has already helped support hundreds of businesses over the last 10 years to reduce their environmental impact and meet green targets. iiE will continue to support its members and strive to provide businesses with all the help that they need to understand their environmental risks and opportunities and normalise engagement with low-carbon business models.
We also see this as part of the growing global and national legislative movement on sustainable development, and expect increased demand in the marketplace for accredited green businesses, of all sizes. Businesses that do not take a proactive approach to adopting resilient, green, and cost-effective ways of operating will miss out on the exciting opportunities presented by sustainable growth.
The iiE team would like to thank Ashleigh Edden for submitting this article.