article banner

FRC: Preparing financial services for TCFD

Rashim Arora Rashim Arora

The Financial Reporting Council (FRC) has published guidance to help firms prepare for mandatory climate-related reporting. Rashim Arora dives into the recommendations and explains what the financial services sector needs to do.

The FRC‘s financial reporting lab unveiled three resources on 28 October to help firms prepare for Taskforce on Climate-related Financial Disclosures (TCFD) reporting. It provided a report on managing mandatory TCFD reporting, a look at the status of current reporting against the TCFD framework in the UK, and research on scenario analysis.

The organisation’s report identifies the key issues that firms need to resolve on climate-related reporting. It reviews current practices and analyses how companies can leverage these to enhance their internal frameworks.

The FRC also provided a snapshot of the climate-related reporting framework that shows there's a  growing focus on TCFD in the market, and that 204 UK companies have already made extensive reference to the TCFD framework in their annual reports. However, work remains to be done by firms outside the FTSE 100.

Ahead of new reporting obligations coming into effect from 1 January 2021, the FRC carried out a review of existing industry practices. This aims to provide practical guidance to companies on how to provide better TCFD disclosures.

Scenario analysis is key

The Climate Scenario Analysis document seeks to explain why and how companies get started with climate scenario analysis by highlighting the steps through which companies produce them, and how this influences outcomes. The report focuses on:

  • process: the teams, departments, and functions that are involved in conducting climate scenario analysis, their roles and at what stage(s) they contribute
  • approach: how scenarios are selected, how impacts are modelled, and the availability and usefulness of resources, guidance, and external support
  • governance: the internal committees that are involved in overseeing the process and approving the output, and how these committees influence its efficacy and outcomes
  • outcomes: how climate scenario analysis outcomes influence strategic planning and decision-making and the extent, and quality, of reporting of findings to external stakeholders

From these industry observations, the FRC found four key points.

Creating a climate change working group helps to develop effective climate governance

The research showed that senior and cross-functional ownership of the climate scenario analysis project enabled them to derive most insight and value from the analysis. Creating a working group was how this was achieved.

The outcomes of climate scenario analysis are used to shape future iterations

Firms derived different levels of value from each iteration of their climate scenario analysis. The first attempt laid the foundations and identified priorities. Later versions built on this infrastructure to carry out targeted analyses and to embed outcomes within risk management and strategic planning.

Best practice is increasingly sector-specific

A key challenge is translation macro scenarios from policymakers into business-level impacts. Teams involved need to leverage existing sector-specific scenarios and guidance to manage this. The FRC also noted that the teams spearheading climate-related scenario analysis within firms should be active in industry-led discussions.

Using climate scenario analysis to develop climate transition strategy as well as to manage climate risk

The teams that embedded climate scenario analysis outcomes into strategic planning derived most insight and value from the process. However, climate scenario analysis teams often fell short of strategic integration, instead stopping the embedding process once key climate risks and mitigation measures had been developed.

What can firms do now?

Firms should consider the key elements in this report to ensure they are aligned to TCFD requirements. Companies should also understand existing sustainability-related requirements - set out in the FRC’s guidance on the strategic report, the corporate governance code, and the streamlined energy and carbon reporting (SECR) rules.

Additionally, firms must understand the impact of climate risk on the financial statements. Companies should ensure they familiarise themselves with all the recommendations and guidance published by various regulatory bodies.

We can help companies to develop robust foundations for scenario analysis, supporting through strengthening the governance framework, and help build a cross-functional climate analysis team. Firms that are less mature in the journey of preparing for climate-related reporting should seek guidance in creating scenarios, reviewing internal models, and practical support on disclosures.

To find out how to prepare for, manage and mitigate climate-related risks and disclosures, contact Rashim Arora.

ESG and climate change How can you prepare your business?