US proposals for TCFD-aligned disclosure rules mark a big step towards global adoption

Recommendations made five years ago by the Task Force on Climate Related Financial Disclosures (TCFD) have now become the leading climate reporting framework across many jurisdictions. Last month, that growing global support for the framework was underlined by the announcement by the US Securities and Exchange Commission (SEC) of its proposal to introduce TCFD-style enhanced reporting. 

The TCFD was established in 2015 by the Financial Stability Board to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks. 

In 2017, the TCFD published a framework to help businesses disclose climate-related financial information. The 2017 framework was voluntary, however since the report was published multiple jurisdictions have proposed or finalised laws and regulations to require disclosure aligned with the TCFD recommendations. 

How is the framework being used in the UK, US, Europe, Asia as well as other parts of the world?

UK uptake

In November 2020, the UK’s chancellor of the exchequer announced the intention to mandate climate disclosures by large companies and financial institutions by 2025. As such, the UK has already begun the roll out of its programme of mandatory TCFD-aligned reporting.

Companies with a UK premium listing became subject to TCFD-aligned reporting for accounting periods beginning on or after 1 January 2021. This was extended to additional categories of listed companies for accounting periods beginning on or after 1 January 2022.

The London Stock Exchange published guidance for London listed companies on the integration of climate reporting best practice and TCFD implementation in October 2021. 

The UK government published further guidance last month in relation to the roll out of the next phase of mandatory TCFD reporting, which applies to certain public companies, large private companies and certain limited liability partnerships for accounting periods beginning on or after 6 April 2022. 

Within the new guidance the government stated that it recognises the TCFD recommendations as being the most effective framework for companies to analyse, understand and ultimately disclose climate-related financial information. 

US proposals

The US SEC announced on 21 March 2022 the proposal of rules to enhance and standardise climate-related disclosures for investors. SEC commissioners voted 3-1 to release the proposals.

The proposed rule changes would require a registrant to disclose information about:

• The registrant’s governance of climate-related risks and relevant risk management processes. 
• How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term. 
• How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook. 
• The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements. 

The proposed rules would also require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (known as scope 1 emissions) and indirect emissions from purchased electricity or other forms of energy (known as scope 2 emissions). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (known as scope 3 emissions), if material or if the registrant has set a GHG emissions target or goal that includes scope 3 emissions. 

The proposed disclosures are very close to those in the TCFD framework. Assuming the rules are adopted by the end of this year, the SEC said that large companies would need to disclose scope 1 and 2 emissions in 2024 and scope 3 emissions in 2025 at the earliest. 

European support 

The European Commission supports TCFD-aligned reporting. In April 2021, the Commission issued a proposed Corporate Sustainability Reporting Directive that would amend existing reporting requirements to include a broader range of companies and require sustainability reporting according to standards to be developed by the European Financial Reporting Advisory Group. The Commission noted that the reporting standards should take into account existing standards and frameworks, including the TCFD framework. 

In addition to support from the EU, across the European continent there is widespread support for TCFD-aligned disclosure. For example: 

• The Swiss Financial Market Supervisory Authority amended its circulars in July 2021 to include the disclosure of climate-related financial risks based on the TCFD recommendations. 
• In August 2021, the Swiss Federal Council instructed the Federal Department of Finance to prepare a consultation draft for mandatory climate reporting based on the TCFD by summer 2022. 
• Denmark declared its support for the TCFD in October 2020 and urged companies to commit to TCFD-aligned climate disclosure as a means to building a more resilient financial system. 
• The Norwegian Finance Ministry announced in May 2021 that Norway gave its official support for the TCFD.

Asian growth

Support for TCFD-aligned reporting is growing in the main Asian jurisdictions too:

• Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group published a new strategic plan in December 2020 announcing that TCFD-aligned disclosures “will be mandatory” across relevant financial sectors by 2025. In November 2021, Hong Kong Exchanges and Clearing published new guidance to help issuers prepare for TCFD reporting. 
• The People's Bank of China was reported in June 2021 as having plans to implement mandatory disclosures of climate-related information in line with the TCFD framework to spur similar disclosures by China's main domestic commercial banks and domestic listed companies,
• Japan's Tokyo Stock Exchange (TSE) published a revised corporate governance code in June 2021 which introduced climate disclosures. The Japan Exchange Group, which is the parent company of the TSE, published a survey of TCFD disclosure in Japan in November 2021. In April 2022, the TSE plans to divide its stock market into three new segments: prime, standard and growth. It has been reported that companies listed on the prime market will be required to comply with disclosure requirements aligned with the TCFD recommendations starting in April 2022.
• In December 2021, the Singapore Exchange unveiled its roadmap for issuers to provide climate-related disclosures based on recommendations of TCFD. All issuers must provide climate reporting on a "comply or explain" basis in their sustainability reports from the financial year commencing 2022. Climate reporting will subsequently be mandatory for issuers in the financial, energy and agriculture, food and forest product industries from 2023. The materials and buildings, and transportation industries will have to do the same from 2024.
• There has also been support for TCFD-aligned disclosures from Malaysia’s Joint Committee on Climate Change and South Korea’s Financial Services Commission. 

Other jurisdictions 

The New Zealand government announced its intention to implement mandatory reporting on climate risks in September 2020 and passed legislation in October 2021 to give its External Reporting Board a mandate to issue climate standards as part of a climate-related disclosures framework. Mandatory disclosures are expected here from 2023 at the earliest. 

The Australian Prudential Regulation Authority, the country's banking regulator, released final TCFD-aligned guidance in November 2021 on how to manage risk associated with climate change.

The Canadian government has mandated TCFD-aligned disclosure for Crown corporations with the rollout beginning in 2022 for Crown corporations holding more than $1 billion in assets and others following in 2024 at the latest.

And the Central Bank of Brazil (BCB) issued a public consultation in April 2021 on rules for the disclosure of social, environmental, and climate-related risk management by institutions of the national financial system. The BCB indicated the proposed rules were “inspired” by the TCFD recommendations and would be implemented in two phases.

Osborne Clarke comment

Not only does the framework have widespread support in different jurisdictions, it also has the support of international groups such as the G7 (finance ministers and central bank governors) and G20 (finance ministers and central bank governors). As these requirements start to be adopted by countries and organisations around the world, the pressure on businesses to disclose this type of information will grow. 

For larger companies, the global movement to make climate-related disclosures is a key trend in this post-pandemic period. The acceleration of environmental, social and governance ratings among the investment community, full-scope corporate net-zero targets and shareholder activism on climate change in the last two years have meant many large companies are gathering this data despite regulation. Leadership from big corporates will help signpost and influence SMEs to also manage this transition to building climate risk and opportunity into business as usual strategy.

This insight was co-authored by Abigail Pinkerton a Trainee Solicitor at Osborne Clarke.