UK TCFD: Optional Scenario Analysis Won’t Deliver for Investors

Experts call for UK regulations for corporate climate disclosures to focus on TCFD’s 11 guidelines.

The UK government needs to mandate climate scenario analysis by companies required to align with Task Force on Climate-related Financial Disclosures (TCFD) guidelines, according to experts at a Climate Disclosure Standards Board (CDSB) webinar today.

Discussing the consultation paper published by the Department for Business, Energy and Industrial Strategy (BEIS) in March, panellists said the proposed voluntary approach to scenario analysis would undercut the value of climate-related disclosures covering risks, opportunities and impacts for investors.

The BEIS report sets out how it aims to require, through existing regulations, publicly quoted companies, large private companies and limited liability partnerships (LLPs) to disclose in line with TCFD. The proposals aim to significantly increase the number of UK companies voluntarily reporting in line with TCFD, so that investors have more visibility over the climate-related risks within their portfolios.

More than half (53%) of FTSE 100 companies voluntarily reported in line with TCFD recommendations last year.

Dependent on feedback to the consultation, BEIS requirements will be finalised by the end of this year, coming into force from April 6 2022.

“It’s very difficult to appropriately and adequately assess climate-related risks and opportunities without doing some form of scenario analysis,” said Bridget Beals, Partner and Co-Head of Climate Risk and Decarbonisation Strategy at Big Four accountancy firm KPMG.

Ben Fagan-Watson, Senior Policy Officer at BEIS, explained that the department hasn’t proposed compulsory scenario analysis for corporates because, while some corporates “are quickly developing capabilities in this area”, a number are still experiencing a “significant skill and expertise gap”.

“Scenario analysis will still be encouraged by the government, even as we recognise this is one of the most challenging areas of TCFD recommendations,” Fagan-Watson said.

However, Beals argued that the scenario analysis conducted by corporates doesn’t need to be overly complex and therefore shouldn’t be particularly onerous if made mandatory.

“It can be as simple as conducting a qualitative review of varying carbon prices under a range of different scenarios and thinking about how this might impact demand [of the corporate’s products], for example,” she said.

Existing TCFD guidelines for conducting scenario analysis are actually “very accommodating”, recommending a “simple narrative in the beginning” which corporates can then build on, agreed Michael Zimonyi, Policy and External Affairs Director at CDSB.

In a 2017 report, the Financial Stability Board’s (FSB) Task Force noted that UK corporates conducting scenario analysis should further provide information on their “critical input parameters, assumptions and analytical choices for the climate-related scenarios used, particularly as they relate to key areas such as policy assumptions, energy deployment pathways, technology pathways and related timing assumptions”.

Daniel Wiseman, lawyer at ClientEarth, added that BEIS regulatory changes should support all 11 of the TCFD’s recommended disclosures, rather than focusing broadly on its four pillars: governance, strategy, risk management, and metrics and targets.

“It’s a bit disappointing to see that the [BEIS] proposal just covers the four pillars of TCFD. Investors are asking for corporates to disclose against all 11 recommendations, arguing that they’re all material, and that includes comprehensive scenario analysis,” he said.

Industry has until May 5 to respond to the BEIS consultation.

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