Climate change: planning for mandatory TCFD reporting

As retailers and suppliers grapple with the pandemic, inflation, Brexit, and rising fuel and energy costs, they risk missing another flashpoint. Following COP26, the UK government pledged to introduce mandatory climate-related financial reporting. Like all regulations, TCFD reporting and wider sustainability and environmental, social, and governance (ESG) reporting will impact the unprepared.

When will TCFD reporting become mandatory?

For some, it has already started: as of 6 April 2022, any retailer with over 500 employees or £500 million in turnover is obliged to take part. This means big names, such as Tesco, Aldi and (on the supplier side) Coca-Cola, already have auditing processes underway.

Smaller businesses don’t have to report until 2025. But many suppliers will face pressure to provide environmental and emissions data sooner than that – for use in the compliance journey of their large retail customers.

Why should retailers comply?

Regulation or no regulation, there is a strong environmental imperative to combat carbon emissions. Businesses that can align themselves with ESG reporting frameworks sooner rather than later will  find their corporate reporting transition smoother as regulations evolve. It also enables businesses to:

• cut operating costs by switching from energy that is subject to carbon taxation
• improve brand reputation among environmentally conscious consumers (and avoid being named and shamed as non-compliant)
• attract the growing number of investors which operate strict ESG criteria
• gain competitive advantage – retailers will favour suppliers that can make life easier with readily available ESG data
• avoid fines and sanctions, for example, for failing to accurately declare carbon emissions or water pollutants for taxation.

What do retailers have to report on climate-related risks?

Reporting is based on the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This is one of the most effective frameworks for companies to analyse, understand and disclose climate-related financial information.

Its structure is based on four pillars: governance, strategy, risk management, and metrics and targets. It divides carbon emissions into the following categories:

• Scope 1 – direct manufacturing, services and associated emissions, including fuel consumption from vehicle fleets and backup generators, use of chemicals, refrigerant gases and dry ice
• Scope 2 – electrical and thermal energy consumed as part of internal operations, eg, energy to heat and cool buildings
• Scope 3 – indirect emissions from upstream and downstream activities

The scope 3 category of emissions is much broader and provides the opportunity to decarbonise the supply chain. It contains 15 different types of emissions including: purchased goods and services, capital goods, upstream transportation, waste, business travel, commuting, leased assets, downstream distribution, use of sold products, end-of-life treatment, downstream leased assets, franchises and investments.

What can we learn from first movers?

Early work from larger retailers has shown that scope 1 and 2 are the easiest to audit, with scope 2 bearing the lowest hanging fruit for improvement. Scope 3 emissions are more challenging to measure and tackle.

Improving scope 1 (direct emissions)

Organisations are in direct control of scope 1 emissions so these are relatively easy to reduce. Steps can include replacing ageing assets with energy-efficient alternatives, improving recycling of materials as part of manufacturing, reducing power consumption, and optimising heating and lighting.

Example: In 2021, Sainsbury’s purchased 1,200 lithium-ion pallet trucks, a move with the potential to save enough energy to power 700 average-sized UK homes for 12 months.

Improving scope 2 (indirect emissions)

Retailers are tackling scope 2 by developing partnerships with renewable energy partners or purchasing green energy from the grid at a premium.

Example: In its most recent annual report, Marks & Spencer outlined how a focus on renewable energy influenced the inclusion of a roof-mounted solar array at a new clothing and home warehouse.

Improving scope 3 (indirect emissions from supply and value chains)

On average, more than 80% of retail and food sector emissions are scope 3, relating to the supply and value chain.

Example: Scope 3 contributes to approximately 98% of Aldi South's greenhouse gas emissions, according to the group's 2021 progress report on climate protection. Both Tesco and Sainsbury’s said that cracking scope 3 will rely on close collaboration with their suppliers.

What should retailers do now to prepare for TCFD regulations?

We anticipate it will take large companies between three and five years, and smaller companies two years, to accurately implement the new and complicated TCFD reporting requirements. The overarching tasks are to:

• acknowledge the regulation, the timings and the impact it may have on your business
• set up processes to determine scope 1, scope 2 and scope 3 emissions​ and create a baseline figure
• set climate-related targets and develop a roadmap to achieve these targets against the baseline.

This is, of course, an extremely high-level action plan and most retailers will need dedicated resources or third-party guidance to help with TCFD requirements and ESG reporting frameworks.

Perhaps the most important starting point for all retailers, however, is simply to realise that – as with all environmental matters – action is needed sooner rather than later.

For help in meeting TCFD requirements, please get in touch with Raj Kumar or Oliver Bridge.

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