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TCFD: what investors want from corporates

We recently held an ESG workshop alongside Helen Wain of IMS Consulting, the specialist sustainability consultants, to discuss how corporates can construct their reporting under the framework laid out by Task Force on Climate-Related Financial Disclosures (TCFD).

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Over the course of the last 18 months we have seen more corporates disclose climate related financial information, with 41% of the FTSE 350 reporting against aspects of TCFD in 2020/21 reporting season. We are going to see mandatory reporting for Standard Listed Companies and businesses with more than 500 employees or £500m in revenue for reporting periods from 6th April 2022, so expect that over the course of the next year best practice will continue to develop as disclosure becomes more widespread.  

So what do investors really want from TCFD reporting?

Investors will look to TCFD reporting as a proxy for how seriously ESG is being considered by a corporate, and whilst it will by no means drive their investment decision, it will play a role in allowing an investor to understand the potential risks and importantly the opportunity of climate change to the business. 

Investors are most focused on the outputs of your TCFD disclosure - the metrics, targets and commercial implications. They want to see how your business is future proofing its operational model, what the R&D requirements are, if there are opportunities for new products / offerings, how you are planning on reducing your emissions and how you are aligning management incentives to the long termlong-term sustainability of the business. 

Of those that are currently reporting in line with TCFD, the majority of corporates doing full scenario analysis through modelling are those FTSE 100 businesses or industry leaders with the resource to do so. For small/ mid cap companies, investors are focused initially on qualitative scenario analysis, under a range of warming scenarios, with the expectation that the analysis and data will be increasingly quantitative over time. Investors understand that management teams need to get up to speed and want corporates to be transparent with what level of climate related data is currently available, however limited. Investors accept that there will be gaps in the data for small/ mid cap companies, particularly around scope 3, until reporting becomes better resourced and understood. Where there are gaps, investors want to see that a corporate at least understands where scope 3 emissions are coming from and see how the corporate is engaging with their customers and supply chains in an effort to reduce these emissions. 

Over the course of the next 12 months we expect to see increased pressure at AGMs from proxy advisors and investors on corporates TCFD disclosure, with investors applying more scrutiny to any corporate that chooses the “explain” route in the current “comply or explain” mandatory disclosure requirement set by the FCA. We have already seen a number of large institutions flex voting muscles against boards whose climate disclosure fall sort of expectations.
For a guide on how to go about putting together your TCFD disclosure and what best in class looks like, please find the recording of the TCFD workshop, run by IMS Here – Access Passcode: m#0k#O@P

by Hannah Boros, Numis

Investment Banking