The Taskforce on Climate-related Financial Disclosures (TCFD) was established in 2015 in order to provide consistent climate-related financial disclosures globally that would be useful to investors, lenders and insurance underwriters in understanding material risks. Up until now this reporting has been provided mostly on a voluntary basis, but this is set to change.
Following a UK Government announcement in November 2020, there are now plans to introduce fully mandatory TCFD reporting across the economy by 2025, with some of these requirements already in place and some expected to take effect from January 2021.
Why does this matter?
First and foremost, improving the availability, consistency and reliability of climate-related financial disclosures will ultimately play a significant role in tackling climate change. This will help to inform investment and infrastructure decisions, which in turn will help support the transition to net zero.
Who does it apply to?
The regulations are intended to apply to organisations across the UK economy, ranging from financial institutions such as banks, insurance companies, pension schemes, asset managers, all the way to listed commercial companies and UK-registered private businesses.
What does this mean for the real estate industry?
Globally, the built environment is responsible for almost 40 per cent of energy and carbon emissions. This is why it is important to account for, monitor and reduce the environmental impact of our buildings. Improving energy efficiency and reducing emissions across schemes will be vital if we are to achieve the UK’s new target to reduce emissions by 68 per cent by 2030 and its goal of reaching net zero by 2050.
Physical risks from a changing climate continue to grow and have the potential to impact asset values and cause business disruption. This could involve anything from extreme weather events, such as wildfires and flooding, to gradually increasing temperatures and rising sea levels, all of which can lead to higher operational costs and investment needed to adapt buildings to withstand these risks.
There are also transitional risks as a result of changing policy and regulation, for example more stringent reporting requirements and higher thresholds for minimum energy efficiency standards (MEES), as well as shifting market preferences.
How can you prepare?
If you haven’t already, it’s worth looking to align current disclosure with the TCFD recommendations, which are centred around four key themes including governance, strategy, risk management and metrics and targets. Key to ensuring effective implementation is understanding what the recommendations are actually asking for. In other words, undertaking a gap analysis in order to see what your organisation is doing already and what still needs to be done to fully meet the recommended disclosures.
It is also important to assess what data you have available and whether it is reliable and fit for purpose. Finally, an implementation strategy should outline objectives, timescales and responsibilities.
Most importantly don’t wait. It’s essential to start early in order to allow sufficient time and resources for developing reporting systems, as well as putting the appropriate controls in place to ensure quality, comparability and consistency of quantitative disclosures.
Ultimately, TCFD reporting will enable investors to make better informed decisions on capital allocation, promoting climate action and supporting the UK’s move to a lower-carbon and more resilient economy.
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