The first of many transition risks
Climate change poses risks and opportunities to businesses across all sectors. While extreme weather events arising from climate change can lead to physical damage of assets and disruption to supply chains, efforts to curb climate change can lead to transition risks such as technology shifts, changing consumer preferences and stringent regulations. Both physical and transition risks impact P&L and balance sheets and the value at risk for businesses. On the flip side, there are opportunities for businesses that are agile in adapting their strategy towards a climate resilient future.
Robust disclosures of climate-related financial information are important as they help support investor decisions in capital allocation and allow businesses to forecast emerging challenges and to transition their business model and strategy.
The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) has been one of the most effective frameworks for companies to report on climate-related financial information. Their growing adoption by leading corporations, financial institutions and global regulatory bodies is a testament to their success. In the UK, the Financial Conduct Authority (FCA) has already required disclosures against the TCFD framework on a “comply or explain basis” for UK premium and standard listed companies.
While not explicitly referencing the TCFD framework, the UK Government is following this trend by mandating climate-related financial disclosures (UK-CFD) for AIM-listed and certain private companies and LLPs for accounting periods beginning on or after 6 April 2022.
The disclosures are not a “tick box” exercise
The recommended disclosures are intended to provide decision-useful, forward looking information about how an organization is addressing climate-related risks and opportunities. It is expected that considerable effort and time will be required to embed climate into your existing governance, strategy and risk management structures, and be able to tell your climate story effectively and in accordance with the UK-CFD.
Whilst you are likely to have existing data collection processes in place for Streamlined Energy & Carbon Reporting (SECR), you may need to consider other metrics, and the expectations on quality of non-financial data continues to increase. Where you have global operations, early engagement on the data you will require from them will be key to success. Setting up robust processes and controls to collect and manage your non-financial reporting data will enable you to rely on the quality of the data from the outset.
Who is impacted?
UK public interest entities (PIEs) with more than 500 employees that have transferable securities traded on a UK regulated market, or are banking or insurance companies will need to comply with UK-CFD.
Other UK entities that will need comply are those with over 500 employees that are:
- AIM listed;
- private companies or LLPs (not traded or banking) with turnover of more than £500 million;
- traded or banking LLPs.
The thresholds apply to the UK consolidated accounts, or to the aggregated turnover and employee figures of a UK group if no consolidation is prepared in the UK. Whilst UK subsidiaries can take advantage of an exemption if they are included in a UK consolidated report, there are no exemptions available for UK companies with an overseas parent.
What should you do now?
- Get the right people involved. Ensure it is on the Board agenda, and that the relevant functions of the business (e.g. strategy, risk management, finance, investor relations, sustainability, operations) are involved in a reporting working group.
- Consider whether climate reporting training is required to inform discussion and decisions and understand the reporting requirements for your business.
- Perform a business readiness assessment to understand your current status across the governance, strategy and risk management structures in the business in preparation for adopting the UK-CFD recommendations. Perform a disclosure gap analysis to understand your current state and what is feasible for your 2022 reporting ahead of compliance for 2023.
How KPMG UK can support
KPMG is experienced in supporting clients with the transition towards TCFD and UK-CFD aligned disclosures. We work alongside our Climate Risk and Strategy team (Simon Weaver and Bridget Beals) who advise clients on the strategic response to climate risks and opportunities. We understand that there is not a “one-size fits all” approach to climate-related financial disclosures and can support you to move from your current status towards full adoption of the UK-CFD or TCFD recommendations. Talk to our ESG reporting and assurance experts:
ESG reporting – Rebecca Wilson
ESG Assurance – George Richards