Task Force on Climate-related Financial Disclosure (TCFD) -aligned disclosure application guidance - Phase 1 and Phase 2

Question 1

1. Introduction

Accepted Answer

Climate change is a significant crisis facing the global community, and one the UK will need to continue to confront head-on amid warmer winters and hotter summers, plus more variable rainfall and more severe storms. Sea levels are rising by approximately 4 millimetres per year^[1] around the UK coastline, increasing the risk to buildings and infrastructure close to the shoreline. Extreme weather – flooding, storms, heatwaves – already cause significant disruption in the UK every year, so we should not underestimate the challenges that a more extreme climate will have on our lives, the economy and our environment.

This section provides an overview of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and explains how public sector bodies should use this guidance, as well as why TCFD-aligned disclosure is being pursued in UK public sector annual reports and accounts (herein referred to collectively as ‘annual reports’).

1.1 Overview

The government recognised the recommendations of the Financial Stability Board’s (FSB’s) TCFD as one of the most effective frameworks for organisations to analyse, understand, and ultimately disclose climate-related financial information against.

The TCFD’s recommendations set out how organisations across sectors and geographies can assess and disclose their Governance, Strategy, Risk Management and Metrics and Targets related to climate change.

TCFD’s aim is for these disclosures to promote the management of climate-related financial risk and opportunities across the economy and financial system.

While the TCFD recommendations were designed for the private sector, with the aim of providing markets with clear, comprehensive, high-quality climate-related information for financial decision-making, the public sector similarly requires climate-related information for decision-making and accountability to annual report users. The TCFD principles are being adopted more broadly across different sectors and by international standard setters.

Background

In 2015, the FSB established the TCFD to develop recommendations for more effective climate-related disclosures to promote more informed decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets and exposures to climate-related risks.

The Task Force published their recommendations in 2017, which proposed:

four widely adoptable recommendations across four thematic areas (Governance, Strategy, Risk Management, and Metrics and Targets);
eleven recommended disclosures structured around the thematic areas, representing the core elements of the organisation’s operations. The disclosures are intended to interlink and inform each other;
general and sector-specific guidance for applying the framework
seven key principles for effective disclosure:
1. relevant
2. specific and complete
3. clear, balanced, and understandable
4. consistent over time
5. comparable across the sector, industry, or portfolio
6. reliable, verifiable, and objective
7. timely

Because climate-related risks and opportunities (collectively referred to as ‘climate-related issues’) are relevant for organisations across all sectors, the Task Force encourages all organisations to implement the recommendations.

The UK government formally endorsed the TCFD framework^[2] and has mandated TCFD-aligned disclosure for large entities in the private sector.

Overview of TCFD Framework

Thematic areas (core elements, pillars)	Governance	Strategy	Risk Management	Metrics and Targets
Recommendations	Disclose the organisation’s governance around climate related risks and opportunities.	Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.	Disclose how the organisation identifies, assesses, and manages climate-related risks	Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Recommended disclosures
(a)	Describe the board’s oversight of climate-related risks and opportunities	Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term	Describe the organisation’s processes for identifying and assessing climate-related risks	Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
(b)	Describe management’s role in assessing and managing climate-related risks and opportunities	Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning	Describe the organisation’s processes for managing climate-related risks	Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks
(c)		Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario	Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management	Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

Rationale for public sector adoption

Since their inception, the TCFD recommendations have been adopted by a broad range of organisations across countries, industries and sectors. The guidance in this document has been introduced to improve the quality and breadth of climate-related information in public sector annual reports and align climate-related reporting with the private sector.

In addition, the TCFD recommendations are being adopted as the foundation for new international sustainability standards (e.g., upcoming/proposed sustainability standards from International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board ^[3] (ISSB) and the International Public Sector Accounting Standards Board ^[4] (IPSASB). Implementing TCFD’s recommendations aligns the UK public sector with global best practice.

1.2 Application

This guidance should be read in conjunction with the TCFD’s Guidance: Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’s guidance’). Reporting entities should familiarise themselves with the TCFD recommendations and the relevant supporting guidance.

There are, however, necessary interpretations and adaptations for applying the TCFD framework in a public sector context, which have been addressed here. These have been summarised, alongside further guidance, in Annex A.

Implementation approach

Reporting entities will likely benefit from adopting TCFD-aligned disclosure in a phased approach. This application guidance is also being released in phases. Disclosure requirements for future phases will be released in an updated version of this guidance, with phasing as follows:

Phase 1 (issued July 2023) addressed:

general principles (including scoping);
the Governance recommendation and recommended disclosures (a) and (b);
the Metrics and Targets recommended disclosure (b) – where data is available; and,
the TCFD Compliance Statement requirements.

Phase 2 (issued March 2024) addresses:

the Metrics and Targets recommendation and recommended disclosures (a) to (c); and,
the Risk Management recommendation and recommended disclosure (a) to (c).

Phase 3 is anticipated to address:

the Strategy recommendation and recommended disclosures (a) to (c).

Allowing sufficient time to implement the TCFD recommendations is essential. However, organisations should engage with the framework early, scaling up based on priorities, materiality, and available resources.

The implementation timetable for in-scope reporting entities in central government, including years of applicability, has been outlined in Annex B.

1.3 Scope

Central government

HM Treasury sets the requirements for central government annual reports and accounts in consultation with the Financial Reporting Advisory Board (FRAB). FRAB advise on annual reporting requirements for all relevant authorities across the public sector. This guidance has been reviewed and approved by FRAB.

All central government departments (ministerial and non-ministerial) must apply this guidance.

Arm’s-length bodies (ALBs) are required to follow this guidance where they have:

more than 500 Full Time Equivalent (FTE) staff averaged across the reporting period; or,
total operating income and funding received (including grant-in-aid) exceeding £500m; or,
been instructed by their sponsoring department to follow this guidance.

This guidance is not mandatory for:

ALBs not explicitly brought into scope
Other central government bodies where existing TCFD-related regulatory or legislative requirements override this guidance
Wider public sector bodies (unless specifically directed by their respective relevant authority or relevant regulation/legislation

Wider public sector

This guidance does not automatically apply to local government, NHS bodies (Trusts, Foundations, Integrated Care Boards), public corporations, and entities in the devolved administrations.

Relevant authorities may direct entities to follow this guidance or choose to adapt this guidance to meet their needs. Entities in the wider public sector may wish to consult with their relevant authority on TCFD-aligned disclosure.

Significantly impacted sectors and industrial groups

Certain sectors and industries are likely to be more impacted by climate-related issues. TCFD identified certain industries and groups, considered to potentially be most affected by climate change and the transition to a lower carbon economy. Accordingly, the Task Force published supplementary guidance for these industries and groups for recommended disclosures related to Strategy, Risk Management and Metrics and Targets.

Climate-related issues may similarly impact public sector bodies operating in these industries and groups. Where they are not already brought into scope, or directly impacted by regulation/legislation, they should strongly consider making TCFD-aligned disclosure.

Where these activities are not the primary or sole function of the body but might still apply to certain operations, the organisation should assess the overall materiality of the related information and should strongly consider making TCFD-aligned disclosure if this information is material to the organisation as a whole. This assessment should consider:

The relative importance of the associated climate-related risks (and impacts) from these operations, compared to other risks faced by the organisation.
The relative size and magnitude of these activities to the entity overall.
The responsibility and influence of the entity (e.g., policy setting or regulatory role)

Furthermore, such entities should strongly consider applying the TCFD Supplementary Guidance. The following table identifies the specific industries and groups TCFD has provided supplementary guidance to.

	Strat	Strat	Strat	RM	RM	M&T	M&T
	a)	b)	c)	a)	b)	a)	b)
Financial
Banks	■			■		■	■
Insurance Companies		■	■	■	■	■	■
Asset Owners		■	■	■	■	■	■
Asset Managers		■		■	■	■	■
Non-Financial
Energy		■	■			■
Transportation		■	■			■
Materials and Buildings		■	■			■
Ag. Food and Forest Products		■	■			■

^{Strat - Strategy; RM - Risk Management; M&T - Metrics and Targets}

^{There is no sector or industry specific guidance for Governance recommended disclosures (a) and (b), Risk Management recommended disclosure (c); and Metrics and Targets recommended disclosure (c)}

Where an entity is subject to existing legislation or regulation relating to TCFD-aligned disclosure or similar, they must follow the related requirements in full. This can be summarised as follows:

Publicly quoted companies, large private companies, and LLPs should check the BEIS Mandatory climate-related financial disclosure.
Premium-listed and standard-listed companies should check the Financial Conduct Authority (FCA) Listing Rules.
FCA-regulated companies should check the FCA Climate-related Disclosure Rules. Relevant types of entities include:
- asset managers
- life insurers (including pure insurers)
- non-insurer FCA-regulated pension providers, including platform firms and Self-invested Personal Pension (SIPP) operators
- FCA-regulated pension providers

Voluntary adoption

Applying the TCFD recommendations provides various benefits to both reporting entities and report users. As a result, public sector bodies may choose to voluntarily apply this guidance - in full or in part.

Where a reporting entity is significantly impacted by climate-related issues, they should consider the need for TCFD disclosure – even where they do not meet the specific criteria for mandatory disclosure laid out in this section. In addition to increased transparency for key stakeholders across the four pillars, the related disclosure provides management with decision-useful information.

Reporting entities that are significantly impacted by climate change should also consider whether other financial reporting disclosures are necessary under IFRS Accounting Standards^[5].

Where an entity’s policy or regulatory remit is heavily influenced by or has a significant influence on climate change, they should also consider whether disclosure is appropriate based on the informational needs of their annual report users.

In-scope reporting entities

a decision tree for organisations to determine whether they are in scope, and whether they can apply this guidance

1.4 Concepts and Principles

Comply or explain

The TCFD framework is principles-based. In-scope reporting entities must apply a ‘comply or explain’ basis for disclosure; complying with each of the required TCFD’s recommended disclosures; or explaining non-compliance against each of the requirements.

Where an entity chooses to report voluntarily against this guidance, they are not required to explain non-compliance against disclosure requirements.

Public sector bodies may face challenges to implementation and disclosure (e.g., resourcing constraints, availability of expertise, capacity limitations, data availability, etc.). These need to be balanced with the principles in Managing Public Money (MPM) ^[6] concerning the use of public funds.

In rare circumstances, if cost is the reason given for not providing disclosure, the explanation should include enough detail to allow a user to understand why compliance, in that instance, would not deliver value for money.

Moreover, it may not be possible for certain public sector bodies to provide sufficient information to meet the requirements of each of the recommended disclosures (e.g., because of legislative or regulatory constraints, commercial or political sensitivity, significant uncertainty, etc.).

In each case, the reporting entity must explain in enough detail for the user to understand the non-compliance.

Interaction with the phased implementation timetable

In-scope reporting entities must apply the requirements set out in this guidance on a ‘comply or explain’ basis at each phase of implementation. Compliance is only required for requirements set out in that phase of the application guidance. Non-compliance must be explained until such time as compliance is reached. Please refer to the Example Compliance Statement.

Compliance Statement

Reporting entities^[7] must also prepare an overall statement of the extent of consistency with the TCFD’s recommended disclosures (referred to in this document as a ‘compliance statement’).

The compliance statement must be presented at the start of the TCFD-related disclosures in the annual report and must detail:

which recommendations and recommended disclosures have been complied with and which have not;
for those which have not, a short summary of the reason for non-compliance, and any plans for future disclosure.

Where a reporting entity is implementing in line with an authorised phased implementation timetable, the compliance statement must differentiate between compliance with the timetable and the overall framework, from disclosure requirements for future years which are not yet expected.

For example, for Phase 2, a central government department must state which of the recommended disclosures for Governance, Risk Management and for Metrics and Targets have been complied with, and/or explain any non-compliance against each of these recommended disclosures, as well as state progress against the implementation. Refer to Annex B for further information about the phased implementation timetable for central government.

Example TCFD Compliance Statement

[Entity] has reported on climate-related financial disclosures consistent with HM Treasury’s TCFD-aligned disclosure application guidance, which interprets and adapts the framework for the UK public sector. [Entity] considers climate to be a principal risk, and has therefor complied with the TCFD recommendations and recommendations disclosures around [sic]:

Governance - recommended disclosures (a) and (b)
Risk Management - recommended disclosures (a) to (c)
Metrics and Targets - recommended disclosures (a) to (c)

This is in line with the central government’s TCFD-aligned disclosure implementation timetable for Phase 2. [Entity] plans to provide recommended disclosures for Strategy in future reporting periods in line with the central government implementation timetable.

In addition, organisations may use the Compliance Statement to provide a broader context on their climate-related financial disclosures, for example, uncertainty in their assumptions, connectivity with other sections of their annual report, differentiating between qualitative and quantitative responses, etc.

Primary users and materiality

Reporting entities must consider whether climate-related issues are material - to the users of the accounts. In making this assessment, the focus should be on the primary users. Nevertheless, certain TCFD disclosures are required independent of a materiality assessment as they are fundamental to understanding an organisation’s ability to manage climate-related risks.

Primary users

Relevant authorities across the public sector require material information in annual reports; however, the decision on who constitutes a primary user may vary. Consequently, relevant authorities may set different requirements concerning where to report information and at what level of detail.

For central government annual reports and accounts, Parliament is the primary user. HM Treasury requires central government bodies to disclose material climate-related information in their annual reports and accounts.

Materiality

Information is material if its omission or misrepresentation could reasonably be expected to influence the decisions primary users take based on the annual report as a whole. As a general principle, entities should disclose material financial and non-financial information in the annual report that is necessary for the understanding of the performance and accountability of the entity.

Materiality assessments of climate-related information should be consistent with the materiality assessment of other information included in their annual report (and accounts).

Across the UK public sector, different reporting channels are used for different reporting purposes. This may also impact judgements on what information is included in the annual report.

Materiality assessments

Parliamentary focus on climate change has increased with various committees, Commons debates and parliamentary questions on the topic. Similarly, there has been an increased interest from the public and other stakeholders.

While annual report preparers need to exercise judgement when considering materiality, the Task Force necessitates disclosures related to the Governance and Risk Management pillars, as well as Metrics and Targets recommended disclosure (b) (on Scope 1^[8] and Scope 2 GHG emissions only) to be included in annual reports, without being subject to a further materiality assessment. This information is fundamental to understanding an organisation’s ability to manage climate-related risks. This guidance aligns with TCFD’s view on materiality.

		Not subject to materiality assessment	Subject to materiality assessment
Governance	a)	■
	b)	■
Strategy	a)		■
	b)		■
	c)		■
Risk Management	a)	■
	b)	■
	c)	■
Metrics and Targets	a)		■
	b)	■¹
	c)		■

^{1 Scope 1 and 2 GHG emissions only}

There may be capacity, data availability or other challenges, which hinder an in-scope reporting entity from disclosing this information in the reporting period. Any such non-compliance should be explained in the TCFD Compliance Statement.

Other recommended disclosures - Strategy (a) to (c) and Metrics and Targets (a) and (c) – are subject to a materiality assessment. Where the reporting entity does not consider climate as a principal risk, these other recommended disclosures are not considered material. In such instances, reporting entities must provide appropriate explanations in their TCFD Compliance Statement to ensure this is clear to annual report users – in line with this application guidance.

Reporting entities should avoid applying a checklist approach to materiality and should consider the needs of users when judging what is material ^[9]. Irrelevant or superfluous information which is either common knowledge or fails to add value to the primary user’s understanding of the organisation reduces the annual report’s effectiveness.

Minimum reporting requirements for in-scope entities

a decision tree for in-scope reporting entities to determine the minimum requirements

Broader considerations

The government and wider public sector bodies act in the public interest. Public sector bodies have wide-reaching responsibilities with respect to the UK population, the environment, and the economy. These duties may be implicit or laid out in policy, regulation, or statute.

Organisations should consider the wider impact of climate-related risks on their broader responsibilities, as well as their direct objectives and priority outcomes.

Sphere of influence

Public sector bodies may have fiscal, legislative, or regulatory powers to influence the wider ecosystem in which they operate. Primary users of public sector annual reports are likely to be interested in the broader risk environment, which may extend to the impact on the UK economy, the public and the environment relevant to the entity. Consequently, while the TCFD recommendations are entity-level disclosures, organisations should consider external impacts to their wider organisational strategy.

When considering how to implement TCFD recommendations, reporting entities must apply judgement in setting relevant boundaries. Their breadth will depend on the specific circumstances (e.g., their activities, relationships, stakeholders, etc.). The disclosure is likely to develop over successive iterations, as the organisation’s understanding on this topic deepens.

For performance reporting, the Chartered Institute of Public Finance and Accountancy (CIPFA)^[10] set out an example approach for considering the components of ‘materiality’ for public sector organisations, which may be useful:

Impact - information on the positive and negative impacts of the organisation on the global achievement of the UN Sustainable Development Goals (SDG).
State of the environment/outcomes of policies - information on the state of the economy, society and the environment under the organisation’s jurisdiction and other information on policy outcomes.
Outcomes/effectiveness - of programmes and policies.
Value creation - information concerning the creation of long-term value for the organisation, economy, society and the environment.
Financial accountability/value for money - information concerning spend on social, economic and environmental activities.

Information location

Publication

The TCFD recommends that material climate-related information is included in an organisation’s main financial fillings to improve the linkage and consistency between the information included in the narrative/performance reports and the financial statements. For example, where there are material financial impacts driven by climate change or the transition to net zero, these may link to narrative information on management’s management of related risks in the future. Integrated annual reports, which include both performance and financial information, encourage better financial management^[9].

The Task Force recommends using separate TCFD reports for certain industries where disclosed information is not yet deemed material. While this application guidance is for annual reports, with a focus on information material to primary users, reporting entities may choose to report information which is not yet deemed material in a separate report - signposting where appropriate.

Position

Reporting entities in central government must include the TCFD section in the performance report within their annual reports and accounts - either within the performance overview/analysis section, incorporated into the sustainability reporting section, or as a new section. Please refer to the performance reporting section of the Government Financial Reporting Manual (FReM) for further details.

Interactions with other reporting frameworks

A variety of different reporting frameworks exist in government and across the wider public sector. This guidance has been designed to complement and enable alignment with existing climate - and sustainability-related reporting frameworks. Applying this guidance does not override existing reporting requirements imposed by statute, regulation or other authority.

There may be separate annual reporting requirements, which mandate entity-level sustainability-related information - either as part of an integrated report (e.g., within the performance report) or a separately published report.

Where an entity utilises existing information to fulfil TCFD-aligned disclosure requirements - care should be taken over the scope, boundaries and time period of the information used – ensuring the disclosures are useful and any differences (e.g., on frequency, boundaries) are appropriately explained. Reporting entities are encouraged to align with existing frameworks for comparability and consistency everywhere that is possible, relevant and useful to users.

Cross-referencing within integrated entity-level reports

Where existing disclosure requirements (in annual reports) align closely with the TCFD’s recommended disclosures, reporting entities should apply judgement in deciding whether the TCFD requirements have already been met – including cross-references where applicable.

Where existing elements of the annual report contribute to the content of the TCFD disclosures, such as content in the Governance Statement contributing to the disclosures under the governance pillar. preparers should cross reference to content elsewhere in the report rather than duplicate content for the basis of the TCFD recommended disclosures. Concise annual reports, which focus on the needs of the primary user and avoid unnecessary or duplicative information, improve overall effectiveness.

Where cross-referencing is used, the entity may wish to explain the nature of the relationship or interdependency, rather than just highlighting the existence of the relationship or interdependency (e.g., GGCs, NHS Greener plans).

Signposting to external reports and publications

Where separate reporting channels for sustainability-related information and data exist, these are often used by the organisation to assess and manage climate-related issues. This information should be included in the annual report where it is deemed material to the primary user – unless a respective relevant authority has directed otherwise (e.g., by DHSC in the Group Accounting Manual (GAM)).

The performance report should be considered the top layer of information for primary users. Some users may, however, want a greater level of detail.

Where external reports contain relevant information for the recommended disclosures, entities are not required to duplicate this information in this part of the annual report. Entities can signpost to the content of external reports for the basis of compiling these TCFD disclosures.

Signposting to external reports enables users to ‘drill down’ to detailed complementary information that is related to a matter in a particular component, but that is not necessary to effectively communicate the material or mandated information. Signposting to such information should make clear that it does not form part of the component from which it is signposted. Note, however, that excessive signposting can reduce the clarity of the report.

Reporting boundaries

Risk reporting and more qualitative requirements

While TCFD is an entity-level framework, users of annual reports need to understand the wider context for climate-related risks and opportunities. Consequently, reporting entities should consider the risks and opportunities which it can be significantly impacted by or have a significant impact on. Nonetheless, reporting boundaries for performance reporting are often less well defined, compared to IFRS Financial Reporting Standards.

Climate-related information should provide a holistic view across a group, considering the principal climate-related risks from the point of view of the reporting entity. For example, central government departments should apply their own risk appetite and risk management procedures to determine the relative significance of climate-related risks to the group.

Where in-scope reporting entities are unable to report for their group, they should provide an explanation.

Metrics, targets, financial information and other quantitative requirements

Where disclosure requirements are quantitative in nature (e.g., metrics and targets, impacts of climate on financial planning, performance and position, etc.), the reporting boundary should be set at the reporting entity level. However, quantitative information on the wider group the reporting entity is a part of may be appropriate (where possible), where there is a significant impact on the reporting entity (e.g., for future funding).

For Metrics and Targets recommended disclosures, the reporting boundary should be set at the reporting entity level (e.g., for central government in line with the Greening Government Commitments (GGCs)). However, where existing reporting framework consolidate information, this may not be possible. For example, NHS England provide emissions estimates for the NHS in England - consequently signposting to the external report is more appropriate. A clear explanation of the reporting boundary should be provided for quantitative information, where this is not at an individual entity level.

Assurance

As the TCFD-aligned disclosures are within the annual report, it is within the scope of the auditor’s opinion on ‘other information’. Under auditing standards^[11] the auditor reads other financial and non-financial information and considers whether it is materially inconsistent with the financial statements, the knowledge they acquired through the audit, or otherwise appears to be materially misstated.

However, the TCFD-aligned disclosures, in their own right, are not subject to an assurance opinion from the auditor. The auditor will not perform audit procedures on the underlying TCFD information.

Across the public sector, the accountable officer (e.g., Accounting Officer or Chief Financial Officer) takes ultimate responsibility for what is included in annual reports. Appropriate internal review processes and assurance should be in place to ensure the accuracy of the information included – including for TCFD-related disclosures.

Question 2

2. Governance

Accepted Answer

Good governance is fundamental to any effective and well-managed organisation – be it private or public sector – and is the hallmark of any entity that is run accountably and with long-term interests clearly in mind.

Recommendation for Governance

Disclose the organisation’s governance around climate-related issues.

2.1 Overview

This section addresses the disclosure of an organisation’s governance arrangements for climate-related issues. These principally qualitative disclosures are designed to assist report users in assessing the adequacy and effectiveness of an organisation’s board to oversee, evaluate and manage climate-related issues.

Materiality

In-scope bodies should provide the recommended disclosures for Governance. The level of detail provided remains at the discretion of preparers but should meet the needs of the primary users of annual reports.

Applicability

The management structures for making decisions and holding responsibility in the public sector are not always aligned with the private sector.

While the Code of Good Practice^[12] has embedded the ‘department board model’ into central government departments; other public sector bodies may have governance structures which vary significantly from private corporations. In such instances, the principles for the recommended disclosures should be applied – even if the terminology, composition and structures themselves are different.

2.2 Recommended disclosures

A reporting body should disclose information which allows a user of its annual reports to understand how risks and opportunities relating to climate change are identified, considered, and managed within its governance structure.

This section outlines the TCFD recommended disclosures (in boxes) for Governance, with the ‘Supporting guidance from TCFD’. The supporting TCFD guidance includes minor public sector interpretations and adaptations whcih are explained in Annex A.

Public sector considerations and further guidance on each recommended disclosure, has been included to support preparers with disclosure (e.g., public sector-specific considerations). This also draws from common findings and identified good practice from the TCFD review on private companies conducted by the FCA^[13] and Financial Reporting Council (FRC^[14]).

Recommended disclosure for Governance (a) - Board’s oversight Describe the board’s oversight of climate-related issues.

Supporting guidance from TCFD

In describing the board’s oversight of climate-related issues, organisations should consider including a discussion of the following:

processes and frequency by which the board and/or board committees (e.g., audit, risk, or other committees) are informed about climate-related issues;
whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk management policies, annual budgets, and organisation plans as well as setting the organisation’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures investment or grant decisions, and restructures (e.g., Machinery of Government changes); and
how the board monitors and oversees progress against goals and targets for addressing climate-related issues.

Public sector considerations and further guidance

Disclosure may include information on whether the organisation’s climate policies and strategies are addressed by the same governance processes, disclosure controls and procedures used for financial management or alongside other risk management processes (e.g., strategic, stakeholder management, safety, etc.).

Where an authority outside of the organisation has set certain climate policies and specific strategies, the disclosure should include a brief description and may signpost to external information.

The Orange Book sets out principles for effective risk management and applies to all central government departments and their ALBs. The guidance is likely to be helpful to other public sector bodies, as the same principles generally apply, with adjustments for context. Section A: Governance and Leadership in the ‘Orange Book: Management of Risk – Principles and Concepts’ is pertinent to this section.

Recommended disclosure for Governance (b) - Management’s role Describe management’s role in assessing and managing climate-related issues.

Supporting guidance from TCFD

In describing management’s role related to the assessment and management of climate-related issues, organisations should consider including the following information:

whether the organisation has assigned climate-related responsibilities to management-level positions or committees; and, if so, whether such management positions or committees report to the board or a committee of the board and whether those responsibilities include assessing and/or managing climate-related issues;
a description of the associated organisational structure(s);
processes by which management is informed about climate-related issues; and
how management (through specific positions and/or management committees) monitors climate-related issues.

Public sector considerations and further guidance

In this guidance, management refers to those positions an organisation views as executive or senior management positions and that are generally separate from the board. For central government, this would include the structures described in the Corporate Governance Report – please refer to the FReM.

In some cases, a reporting entity’s overall climate-related policies and strategies may be determined by another public sector entity, such as departments using their policy setting or regulatory powers. In some cases, organisations may have a governing body within their own structure, or it may be shared with or may be a matrix structure with other public sector bodies. The entity should provide disclosure for a user to understand the structure and level of oversight the governing body provides for the entity specifically and may signpost to external sources.

Reporting entities should disclose the key reporting channels and processes for climate-related issues, and how these are integrated into the organisation’s overall governance. The information disclosed may include the responsibilities of relevant committees or individual management positions (e.g., job titles, individuals accountable), as well as identify specific reviews being undertaken.

For example, reporting entities may want to disclose if a member of their Executive Committee is responsible for internal climate change policy, or how climate change issues are considered in investment committees and decisions.

If no directors have oversight of climate-related risks and opportunities and/or no individual within the organisation has responsibility for assessing or managing climate-related issues, then this should be stated.

The disclosures interact with other requirements in annual reports, and reporting entities should appropriately cross-reference to enable users to understand the governance of climate change and the actions by the board in an overall context (e.g., to the Governance Statement).

The level of detail and/or cross-referencing to elsewhere in the accounts may depend on the extent to which climate policies and their risks and opportunities are addressed by the same governance processes, controls and procedures detailed elsewhere in the accounts as well as the extent to which specific climate policies and strategies have been established.

Where climate change has been identified as a principal risk, entities should indicate how climate change has been addressed as a principal matter for the organisation – refer to Section 4.

Question 3

3. Strategy

Accepted Answer

HM Treasury intends to publish TCFD Application Guidance for Strategy in an updated version of this document, in line with the announced timetable – refer to Annex B.

The Task Force has published their recommendations and guidance for Strategy on their website. Public sector bodies can choose to implement the TCFD recommendations independently and are encouraged to do so if these recommendations are deemed material to the users of annual reports.

Question 4

4. Risk Management

Accepted Answer

Risk is the possibility of an event occurring that will have an impact on the achievement of objectives. Effective risk management encompasses a series of coordinated activities strategically designed to oversee and address these risks while upholding internal control within an organisation.

The UK’s public sector exhibits a considerable level of diversity, necessitating a wide spectrum of risk management practices. Overarching principles and concepts as set out in The Orange Book. Organisations must proactively cultivate tailored and efficient risk management, which will naturally vary based on the unique characteristics of the organisation and the dynamics of its operational environment.

Climate-related risk is the potential negative impact of climate change on an organisation. Climate-related risk management processes should be tailored based on their associated severity, likelihood, and timing. These processes are not static and will need to evolve and mature over time, in tandem with shifts in the risk landscape and as management’s comprehension of these risks deepens.

Recommendation for Risk Management

Disclose how the organisation identifies, assesses, and manages climate-related risks.

4.1 Overview

This section mainly addresses qualitative disclosures surrounding an organisation’s processes for identifying, assessing, and managing climate-related risks, and their integration within the organisation’s overall risk management.

For central government, existing FReM requirements for the performance analysis and the governance statement expect a significant level of detail to be provided regarding the processes and structures used to identify, evaluate and manage both principal and emerging risks, as well as how the risks and changes in their likelihood and impact may affect performance and delivery in both current and future years.

Materiality

In-scope reporting entities must include Risk Management recommended disclosures (a) to (c) in annual reports – on a comply or explain basis - without further application of a materiality filter.

This provides annual report users with the information they need to understand the organisation’s overall climate-related risk management process; alongside the board and management’s judgement of whether climate is a principal, new or emerging risk - or neither.

Applicability

Risk management terminology and risk classifications will vary across the UK public sector. Annex 4 of The Orange Book provides examples of risk categories which preparers may wish to consider. The Task Force identified and categorised certain climate-related risks as set out in Annex A. Examples of public sector specific climate-related risks are also included in the annex.

Public sector considerations and further guidance

Principal, new and emerging risks

Description of climate as principal risk Where climate is a principal risk, the reporting entity must describe the risk in line with existing performance reporting requirements (e.g., impact on objectives and outcomes, resulting uncertainties, impact on service delivery, etc.)

Under existing performance/narrative reporting requirements, UK public sector bodies are required to report on an organisation’s principal risks ^[15], often with additional disclosure requirements on new and emerging risks in the performance report.

A principal risk is a risk or combination of risks that can seriously affect the performance, future prospects or reputation of the entity. Emerging risks are those with uncertain outcomes which may become certain in the longer term, and which could have a material effect on the organisational strategy if they were to occur^[16].

Reporting entities must describe the principal risks and uncertainties facing the organisation which relate to climate change, and any significant impacts on service delivery. Disclosures should provide users with information which is specific to the organisation’s circumstances.

Where a climate-related risk could significantly impact the delivery of an organisation’s objectives and outcomes, disclosure should provide a clear explanation of the risk and potential impact.

Climate risks often develop and evolve over longer time horizons. Similarly, the government and public sector usually operate over long-time horizons, working to deliver longer term outcomes. Reporting entities should consider how these risks are likely to change over time when providing disclosure.

Central government bodies, specifically, are required to disclose how principal risks have changed over the reporting period, their impact on priority outcomes and delivery, and any mitigation strategies applied, as well as disclosure of any emerging risks and their likely impact on performance – refer to the FReM.

Risk prioritisation

Articulate rationale Where climate is not designated a principal risk (or part of a principal risk) reporting entities must articulate their rationale.

Reporting entities should clearly set out the relative importance of climate-related risks compared with other risks. They should also set out their assumptions for assessing and prioritising the risks, including judgements on what is material. This will support the requirement for Risk Management (a).

Where climate is not deemed to be a principal risk, the organisation may utilise their usual risk management procedures – without bespoke climate-related procedures. In this instance, and where the risk management process is described in sufficient detail elsewhere in the annual report (e.g., the Governance Statement), the Risk Management recommended disclosures (a) to (c) should utilise this information to avoid duplication, cross-referencing accordingly.

Assessing climate-related opportunities enables the development of proactive strategies that enhance the resilience of the organisation. While this section focuses on climate-related risks - rather than opportunities – there is overlap in their assessment and monitoring.

Reporting entities may wish to provide information on climate-related opportunities and how they are managed, ensuring information is fair, balanced, and understandable. Balanced disclosure should focus on climate-related opportunities that are significant. Further guidance on disclosing climate-related opportunities will be included for the Strategy pillar in Section 3.

4.2 Recommended disclosures

This section sets out the TCFD’s recommended disclosures for Risk Management with ‘Supporting guidance from TCFD’.

No interpretations or adaptations have been made to the ‘Supporting guidance from TCFD’ for Risk Management recommended disclosures (a) to (c). Updated references have been made to recommended disclosure (b). The ‘Public sector considerations and further guidance’ section provides additional information to annual report preparers - based on common findings and good practice.

Recommended disclosure for Risk Management (a) - Risk identification and assessment Describe the organisation’s processes for identifying and assessing climate-related risks.

Supporting guidance from TCFD

Organisations should describe their risk management processes for identifying and assessing climate-related risks. An important aspect of this description is how organisations determine the relative significance of climate-related risks in relation to other risks.

Organisations should describe whether they consider existing and emerging regulatory requirements related to climate change (e.g., limits on emissions) as well as other relevant factors considered.

Organisations should also consider disclosing the following:

processes for assessing the potential size and scope of identified climate-related risks and
definitions of risk terminology used or references to existing risk classification frameworks used.

Recommended disclosure for Risk Management (b) - Risk management Describe the organisation’s processes for managing climate-related risks.

Supporting guidance from TCFD

Organisations should describe their processes for managing climate-related risks, including how they make decisions to mitigate, transfer, accept, or control those risks. In addition, organisations should describe their processes for prioritising climate-related risks, including how materiality determinations are made within their organisations.

In describing their processes for managing climate-related risks, organisations should address the risks included in Tables A1.1 and A1.2 in Annex A, as appropriate.

The ‘Examples of Climate-Related Risks/Opportunities and Potential Financial Impacts’ (Table A1.1 and A1.2) may be less relevant for certain public sector bodies and do not need to be considered if not relevant.

Public sector considerations and further guidance

As well as considering internal risk management processes, reporting entities should also consider whether information from external risk frameworks is relevant for their disclosures. The government and the wider UK public sector report against various risk frameworks. These often include climate change as a risk. Identifying, assessing, and leveraging existing risk frameworks will likely aid and improve disclosure. Further guidance is included in Annex A.

Recommended disclosure for Risk Management (c) - Overall integration Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.

Supporting guidance from TCFD

Organisations should describe how their processes for identifying, assessing, and managing climate-related risks are integrated into their overall risk management.

Public sector considerations and further guidance

The organisation must explain how its risk disclosures and management of climate-related risks are integrated into the overall risk management process.

Where climate is identified as a principal risk, then bespoke climate-related risk management is more likely, which will interact with the organisation’s overall risk management. Where climate is not identified a principal risk, the organisation is likely to manage climate-related risks in the same way as other risks as part of their overall risk management, and may benefit from cross-referencing to the Government Statement.

Interaction with strategic and other principal risks

Climate risk is often an exacerbation of existing strategic risks (e.g., extreme weather, water shortages, etc.). Climate change may make these risks more likely or the related impacts more serious. Hence, climate change risks should not be considered in isolation and should be clearly integrated into the strategy of an organisation.

Reporting entities must apply judgement in deciding which risks should be addressed in the TCFD-aligned disclosures and which are considered as other strategic or principal risks. Linkages between related risk disclosures should be explained - making use of cross-referencing where appropriate.

While this application guidance sets minimum disclosure requirements, the level of detail should be commensurate with the significance of climate-related risks to the organisation. Care should be taken to ensure the TCFD-aligned disclosures are proportional – considering other risks disclosed in the annual report.

Question 5

5. Metrics and Targets

Accepted Answer

Stakeholders require a clear understanding of an organisation’s methods for assessing and tracking climate-related risks and opportunities. Access to the metrics and targets employed by the organisation enables stakeholders to make informed evaluations of its performance, level of vulnerability to climate-related issues, and the progress made in effectively managing or adapting to those issues.

Metrics and targets are essential for monitoring performance and tracking progress. The Climate Change Act 2008^[17] commits the UK government by law to reduce GHG emissions – similar legislation has been set by devolved administrations. Central government and wider public sector bodies may have set their own net zero commitments.

Parliament, the public and other stakeholders need to understand how an organisation measures and monitors its climate-related risks and opportunities. This transparency enables them to track an individual entity’s performance.

Recommendation for Metrics and Targets

Disclose the metrics and targets used to assess and manage relevant climate-related issues where such information is material.

5.1 Overview

This section comprises primarily quantitative disclosures related to metrics and targets, as well as qualitative information on how the metrics and targets are used by the organisation.

Materiality

The Task Force requires organisations to provide Scope 1 ^[8] and Scope 2 GHG emissions independent of a materiality assessment and, if appropriate, Scope 3 GHG emissions and the related risks. The disclosure of Scope 3 GHG emissions is subject to a materiality assessment. Further reporting on Scope 3 emissions, beyond the existing categories set out by relevant authorities, is considered voluntary at this time. GHG emission scopes are defined in the GHG Protocol – please refer Annex A for further information.

Other climate-related metric categories remain subject to materiality – except where they are specifically mandated by other reporting requirements (e.g., in legislation, from relevant authorities).

Applicability

Existing performance reporting across the UK public sector requires disclosure in respect of non-financial and sustainability information. The interlinkage and overlap of climate-related and sustainability-related topics is addressed in Section 1.

Public sector considerations and further guidance

Commentary

Where climate-related targets have been set by an organisation (or on them by an external authority), performance against them should be reported. If performance information has already been published elsewhere, signposting to external sources is acceptable. The related commentary must be clear as to whether performance is improving or worsening and not assume this is clear to the user.

Methodologies and reporting boundaries

Organisations should ensure they include definitions and methodologies to explain their metrics and targets, particularly where they are organisation-specific.

Where there are differences in the reporting boundaries for metrics and targets disclosures, these should be explained clearly.

Prior period reporting

Organisations must provide prior year data to track historical performance. Reporting entities should also provide historical data for past years when doing so enhances the user’s understanding of performance.

Baselining

A base year serves as a reference point for comparing present and past emissions. To keep data consistent, base year figures may be recalculated following significant structural changes.

When reporting against metrics and targets, it must be clear as to which years have been set as the baseline. Where external cross-sector frameworks (e.g., GGCs for central government) are being used, the same baseline year should be applied for comparability.

However, there may be instances where a reporting entity sets a new baseline year – either in the absence of one set externally or where significant structural changes (or other changes) have meant a baseline set internally is needed for monitoring purposes. In such instances, reporting entities should explain their choice.

Where a base year is used for performance monitoring, the base year data must be updated and reported in line with changes in accounting policies and boundaries. When material changes occur, the prior-year figure reported for comparative purposes must also be updated with an accompanying explanation.

Prior period comparative information should not go beyond the baseline year.

Broader considerations

Examples of certain different sustainability measurement types which public sector bodies may choose to use, include^[4]:

Operational impacts
Policy effectiveness
The state of economic, environmental, and social conditions in areas under their jurisdiction.
Strategies to create value (for the organisation, its stakeholders, lenders, public-private partnerships, and society more broadly)
Financial accountability/value for money

When determining what information to include in annual reports, preparers must consider both financial materiality with respect to their accounts and the significance of broader impacts on the organisation’s current and future performance with respect to their objectives and strategy.

The public sector is a sector in its own right - with policy effectiveness, stewardship and value creation forming part of the organisation’s strategy, alongside operational impacts. Related disclosures for broader impacts and outcomes should provide a balanced view – noting these are often more challenging to measure and assess.

The responsibility for setting policy, delivering outcomes, and providing services is often shared by multiple organisations and the boundaries of responsibility may be less clearly defined compared to the private sector – where formal agreements and ownership structures are more common.

Where information on broader policy and outcomes is relevant, its significance and ability to meet the primary user’s needs, must be considered. Summarising this information and signposting to external reports may be more useful.

Disclosures related to broader considerations should be clearly separated from disclosures on entity-level operational impacts.

Organisations are encouraged to consider climate adaptation and resilience, as well as climate change avoidance, when considering Metrics and Targets. This will form a significant component of government’s response to climate change.

5.2 Recommended disclosures

This section sets out the TCFD’s recommended disclosures for Metrics and Targets (in boxes), with ‘Supporting guidance from TCFD’. Interpretations or adaptations have been made to the supporting TCFD guidance for Metrics and Targets recommended disclosures (a) to (c) – explained later in this section (and in Annex A). The ‘Public sector considerations and further guidance’ section provides additional clarity to annual report preparers, alongside public sector-specific considerations.

Recommended disclosures for Metrics and Targets (a) – Metrics Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.

Supporting guidance from TCFD

Organisations should provide the key metrics used to measure and manage climate-related risks and opportunities, as described in Tables A1.1 and A1.2 in Annex A, as well as metrics consistent with the cross-industry [or cross-sector], climate-related metric categories described in Table A2.1 in Annex A. Organisations should consider including metrics on climate-related risks associated with water, energy, land use, and waste management where relevant and applicable.

Where climate-related issues are material, organisations should consider describing whether and how related performance metrics are incorporated into remuneration policies.

Where relevant, organisations should provide their internal carbon prices as well as climate-related opportunity metrics.

Metrics should be provided for historical periods to allow for trend analysis. Where appropriate, organisations should consider providing forward-looking metrics for the cross-industry [and cross-sector], climate-related metric categories described in Table A2.1 in Annex A, consistent with their business operational or strategic planning time horizons. In addition, where not apparent, organisations should provide a description of the methodologies used to calculate or estimate climate-related metrics.

The ‘Supporting guidance from TCFD’ has been adapted to remove reference to ‘revenue goals from for products and services designed for a low carbon economy’ which is irrelevant for the vast majority of public sector bodies. TCFD’s ‘Examples of Climate-Related Risks/Opportunities and Potential Financial Impacts’ (in Table A1.1 and A1.2) may be less relevant for certain public sector bodies - refer to Annex A for further guidance.

Public sector considerations and further guidance

Industry and cross-sector comparatives

The TCFD framework emphasises the importance of cross-industry-based metrics and targets for comparability. Where a public sector body operates in a specialised industry, they should consider reporting cross industry-based metrics.

In addition to the cross-industry metrics, existing sustainability reporting frameworks across the UK public sector, which already require reporting on water, energy, land use, and waste management, may be used to draw cross-sector comparatives (e.g., GGCs for central government, NHS Greener metrics, climate and sustainability-related reporting in the devolved administrations which are often collected outside annual reports).

While the TCFD guidance makes specific reference to incorporating performance measures into remuneration policies, UK public sector bodies may have less flexibility in setting remuneration policies and may be subject to additional controls and limitations.

Furthermore, public sector bodies may have a broader set of levers to drive organisational change. Consequently, guidance on climate-related performance-based remuneration policy may be less relevant in a public sector context.

Internal carbon pricing

Internal carbon price refers to a monetary value on GHG emissions an organisation uses internally to guide its decision-making process in relation to climate change impacts, risks, and opportunities. This represents the external costs of GHG emissions.

The government already uses internal carbon prices (‘carbon/emissions values’) to evaluate the impact of GHG emissions on policy and programme appraisals. This represents a monetary value that society places on one tonne of carbon dioxide equivalent (£/tCO2e).

These differ from external carbon prices, which represent the observed price of carbon in a relevant market (such as the UK Emissions Trading Scheme).

Reporting entities that use internal carbon pricing should provide relevant disclosure in their annual reports - signposting to external frameworks and sources where appropriate. This may include information on how carbon values (or internal carbon prices) are used to appraise and evaluate policies, programmes or projects, as well as the absolute value.

Recommended disclosure for Metrics and Targets (b) – Emissions Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks.

Supporting guidance from TCFD

Organisations should provide their Scope 1 and Scope 2 GHG emissions independent of a materiality assessment, and, if appropriate, Scope 3 GHG emissions and the related risks. All organisations should consider disclosing Scope 3 GHG emissions.

GHG emissions should be calculated in line with the GHG Protocol methodology to allow for aggregation and comparability across organisations and jurisdictions. As appropriate, organisations should consider providing related, generally accepted industry-specific GHG efficiency ratios.

GHG emissions and associated metrics should be provided for historical periods to allow for trend analysis. In addition, where not apparent, organisations should provide a description of the methodologies used to calculate or estimate the metrics.

Public sector considerations and further guidance

Currently, the GGCs require certain central government bodies to report on emissions, including Scope 1, Scope 2, and Scope 3 – business travel only. Central government bodies in scope of the GGCs should align their reporting with the Sustainability Reporting Guidance (SRG), ensuring the same underlying methodology is applied.

At present, further categories of Scope 3 GHG emissions (in addition to business travel) are not required for GGC or SRG purposes. However, central government bodies may choose to report on other GHG emissions sources - which are out-of-scope of the current GGC framework. Some of these emission sources are considered in the SRG.

Where applicable, central government reporting boundaries should mirror the GGC boundaries.

Where central government bodies report on emissions, in line with the SRG, they may choose to include this information in the same location as the TCFD Compliance Statement and recommended disclosures or continue to report in the sustainability report. However, appropriate cross-referencing should be added.

Other public sector bodies

Emissions reporting requirements may necessitate new reporting procedures, adapting/extending existing voluntary reporting, or assessing alignment of their existing frameworks with the TCFD guidance. Reporting entities will benefit from considering this early, and relevant authorities should be consulted where appropriate.

Methodologies and reporting boundaries

The GHG Protocol is the most widely used methodology and underpins most emissions reporting frameworks – including the TCFD’s framework.

Reporting entities should provide an explanation of the methodology used to calculate emissions metrics, including whether it is in accordance with the GHG Protocol methodology, the reporting boundaries and highlighting any changes in the basis of reporting. Where organisations align their methodology or reporting boundary with an existing reporting framework (e.g., GGCs for central government) then simply stating this alignment is sufficient.

As there is significant scope for judgement in determining boundaries and which emissions are included, organisations should explain these decisions clearly. This information is expected to be more material where these metrics underpin a major policy or strategy.

Intensity metrics

Reporting entities should consider reporting intensity metrics (emissions per chosen unit) and provide clear explanations of the choice of metric.

Scope 3

Organisations may choose to undertake an assessment of Scope 3 emissions. If a reporting entity decides to report further emissions, they must clearly identify which emissions categories are included and ensure this is understandable with historical data. Further information on emissions scopes is included in Annex A.

Where Scope 3 emissions are deemed to be material to primary users, but not disclosed in the annual report - the reporting entity should update their TCFD Compliance Statement, detailing the reason for the omission and setting out the expected timeframe for their inclusion, where appropriate.

Recommended disclosure for Metrics and Targets (c) – Targets Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

Supporting guidance from TCFD

Organisations should describe their key climate-related targets such as those related to GHG emissions, water usage, energy usage, etc., in line with the cross-industry [and cross-sector] climate-related metric categories in Table A2.1 in Annex A, where relevant, and in line with anticipated regulatory requirements or market constraints or other goals. Other goals may include efficiency or financial goals, [and] financial loss tolerances, avoided GHG emissions through the entire service delivery and product life cycle.

In describing their targets, organisations should consider including the following:

whether the target is absolute or intensity-based;
time frames over which the target applies;
base year from which progress is measured; and
key performance indicators used to assess progress against targets.

Organisations disclosing medium-term or long-term targets should also disclose associated interim targets in aggregate or by business line, where available.

Where not apparent, organisations should provide a description of the methodologies used to calculate targets and measures.

The ‘Supporting guidance from TCFD’ has been adapted to introduce reference to ‘service delivery’ in lifecycle emissions considerations relevant for public sector bodies, and remove reference to ‘revenue goals from for products and services designed for a low carbon economy’ which is irrelevant for the vast majority of public sector bodies.

Public sector considerations and further guidance

Organisations should provide fair, balanced, and understandable commentary on climate and sustainability-related performance, detailing organisational activities and other factors that have led to significant movements.

Annual reports should clearly distinguish between ‘targets’, ‘commitments’, ‘pledges, ‘goals’, ‘aims’, and ‘ambitions’, explaining which of these policies they have actively pursued and included in organisational plans and budgets.

Organisations should clearly highlight which Key Performance Indicators (KPIs) are used to monitor progress against targets and provide sufficient information to assess performance.

Reporting entities should explain which Scope 1, 2 or 3 emissions are included in their targets and ensure that their relationship with GHG reporting metrics is clearly explained.

Reporting entities should provide comparative information for all metrics alongside current reporting to enable performance against the target to be assessed. Any updates to targets, such as restatements or updates to baselines, should be disclosed and explained.

Organisations should identify any areas where performance was not in accordance with the target and any actions taken to address this.

Question 6

6. Annexes

Accepted Answer

6.1 Annex A

Further guidance

There is an array of existing material and guidance published by TCFD, as well as other external bodies, which may be useful to expand knowledge, build capacity and enhance reporting.

Recommendations - Four widely adoptable recommendations tied to Governance, Strategy, Risk Management, and Metrics and Targets
Recommended Disclosures - Specific recommended disclosures organisations should include in their financial filings to provide decision-useful information
Guidance for All Sectors - Guidance providing context and suggestions for implementing the recommended disclosures for all organisations
Supplemental Guidance for Certain Sectors - Guidance highlighting important considerations for certain sectors in providing sector- or industry-specific climate-related financial information Supplemental guidance is provided for the financial sector and for non-financial sectors potentially most affected by climate change
Additional Supporting Materials - Additional information and guidance to help preparers implement key components of the TCFD recommendations

TCFD’s guidance on climate-related risks and opportunities

Climate change can have far-reaching impacts, encompassing not only physical effects on people and the environment but also the consequences of transitioning to a changing climate, along with the necessary tasks of adaptation and mitigation. The Task Force categorise climate-related risks as follows:

Physical risks – adverse impacts (e.g., disruption to operations, destruction of property) either event-driven (acute) such as increased severity of extreme weather events (e.g., cyclones, droughts, floods, and fires) or longer-term shifts (chronic) in precipitation and temperature and increased variability in weather patterns (e.g., sea level rise); or,
Transition risks - associated with the move to a lower-carbon global economy, the most common of which relate to policy and legal actions, technology changes, market responses, and reputational considerations.

The TCFD identified certain climate-related risks, opportunities, and financial impacts which may be relevant for disclosure. The Task Force also set out examples of climate-related risks and opportunities, as well as the potential financial impacts – included in Table A1.1 and A1.2. Further details are included in the TCFD guidance.

Climate-related risks, opportunities and financial impact identified by the Task Force. Source: www.fsb-tcfd.org/publications/

Not all TCFD’s guidance or examples are relevant to, or can be applied by, public sector bodies. Discretion must be used to determine which are relevant in their own context.

Table A1.1 Examples of climate-related risks and potential financial impacts

Transition risks

Climate-related risks	Potential financial impacts
Policy and Legal
Increased pricing of GHG emissions	Increased operating costs (e.g., higher compliance costs, increased insurance premiums)
Enhanced emissions-reporting obligations	Write-offs, asset impairment, and early retirement of existing assets due to policy changes
Mandates on and regulation of existing products and services	Increased costs and/or reduced demand for products and services resulting from fines and judgments
Exposure to litigation
Technology
Substitution of existing products and services with lower emissions options	Write-offs and early retirement of existing assets
Unsuccessful investment in new technologies	Reduced demand for products and services
Costs to transition to lower emissions technology	Research and development (R&D) expenditures in new and alternative technologies and processes
	Capital investments in technology development Costs to adopt/deploy new practice
Market
Changing customer behaviour	Reduced demand for goods and services due to shift in consumer preferences
Uncertainty in market signals	Increased production costs due to changing input prices (e.g., energy, water) and output requirements (e.g., waste treatment)Abrupt and unexpected shifts in energy costs
Increased cost of raw materials	Change in revenue mix and sources, resulting in decreased revenues
	Re-pricing of assets (e.g., fossil fuel reserves, land valuations, securities valuations)
Reputation
Shifts in consumer preferences	Reduced revenue from decreased demand for goods/services
Stigmatisation of sector	Reduced revenue from decreased production capacity (e.g., delayed planning approvals, supply chain interruptions)
Increased stakeholder concern or negative stakeholder feedback	Reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention)
	Reduction in capital availability

Physical risks

Climate-related risks	Potential financial impacts
Acute
Increased severity of extreme weather events such as cyclones and floods	Reduced revenue from decreased production capacity (e.g., transport difficulties, supply chain interruptions)
	Reduced revenue and higher costs from negative impacts on workforce (e.g., health, safety, absenteeism)
	Write-offs and early retirement of existing assets (e.g., damage to property and assets in “high-risk” locations)
Chronic
Changes in precipitation patterns and extreme variability in weather patterns	Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants)
Rising mean temperatures
Rising sea levels

Table A1.2 Examples of climate-related opportunities and potential financial impacts

Opportunities

Climate-related opportunity	Potential financial impacts
Resource Efficiency
Use of more efficient modes of transport	Reduced operating costs (e.g., through efficiency gains and cost reductions)
Use of more efficient production and distribution processes	Increased production capacity, resulting in increased revenues
Use of recycling	Increased value of fixed assets (e.g., highly rated energy- efficient buildings)
Move to more efficient buildings	Benefits to workforce management and planning (e.g., improved health and safety, employee satisfaction) resulting in lower costs
Reduced water usage and consumption
Energy Sources
Use of lower-emission sources of energy	Reduced operational costs (e.g., through use of lowest cost abatement)
Use of supportive policy incentives	Reduced exposure to future fossil fuel price increases
Use of new technologies	Reduced exposure to GHG emissions and therefore less sensitivity to changes in cost of carbon Returns on investment in low-emission technology
Participation in carbon market	Increased capital availability (e.g., as more investors favour lower-emissions producers)
Shift toward decentralised energy generation	Reputational benefits resulting in increased demand for goods/services
Products and Services
Development and/or expansion of low emission goods and services	Increased revenue through demand for lower emissions products and services
Development of climate adaptation and insurance risk solutions	Increased revenue through new solutions to adaptation needs (e.g., insurance risk transfer products and services)
Development of new products or services through R&D and innovation	Better competitive position to reflect shifting consumer preferences, resulting in increased revenues
Ability to diversify business activities
Shift in consumer preferences
Markets
Access to new markets	Increased revenues through access to new and emerging markets (e.g., partnerships with governments, development banks)
Use of public-sector incentives	Increased diversification of financial assets (e.g., green bonds and infrastructure)
Access to new assets and locations needing insurance coverage
Resilience
Participation in renewable energy programs and adoption of energy- efficiency measures	Increased market valuation through resilience planning (e.g., infrastructure, land, buildings)
Resource substitutes/diversification	Increased reliability of supply chain and ability to operate under various conditions
	Increased revenue through new products and services related to ensuring resiliency

Public sector bodies face additional climate-related related risks in connection with value for money, accountability, policy leadership, and coordination and delivery. The NAO published Climate change risk: A good practice guide for ARACs which offers further reading in this area. Example of climate-related risk categories that organisations may wish to consider are included below, with those specific to the public sector summarised as follows:

Policy leadership risk refers to the danger of government failing to effectively address climate change due to the lack of a clear, coherent, and flexible strategy across departments. This risk encompasses uncertainties in technological development, changes in behaviour, and the need for transparent, realistic plans to meet long-term objectives like net zero by 2050.
Value for money risk in the context of transitioning to net zero refers to the financial dangers associated with either delayed action or hasty decisions without adequate risk assessment, potentially leading to increased long-term costs or expensive future corrections. This risk highlights the importance of integrating climate change risks in decision-making to balance cost-effectiveness with swift progress towards net zero goals.
Accountability risk is the ambiguity and potential ineffectiveness in achieving net zero goals driven by unclear roles and responsibilities of public bodies outside central government departments.
Coordination and delivery risk refers to the potential failure in effectively addressing climate change due to inadequate collaboration, communication, and sharing of knowledge among different organisations. This risk arises from unclear roles, fragmented funding, and diffuse accountabilities, particularly between central and local governments and other bodies, leading to social and economic costs and failure to meet targets.

UK public sector climate-related risks identified by the Task Force in the framework with additional public sector specific risks identified by the National Audit Office (NAO) in their Good Practice Guide

Other public sector climate risk frameworks

The government identifies climate change as a risk in the National Risk Register^[18]. The Climate Change Committee (CCC) was established under the Climate Change Act 2008 and produces a periodic UK Climate Change Risk Assessment (UKCCRA). The UKCCRA identifies priority risk areas for the UK government to address (including on freshwater, soil health, carbon stores, supply chains, etc).

The Department for Environment, Food & Rural Affairs (Defra) publish the National Adaptation Programme (NAP) to respond to UKCCRA’s risks facing the natural environment, infrastructure, people and the built environment, business and industry, local government, and adaptation reporting.

Each of the devolved administrations have their own legislation with respect to climate change and are required to develop adaptation plans to respond to the risks (and opportunities) posed by climate change - as identified in the most recent UKCCRA.

Annually, the CCC independently assess progress toward reducing emissions. The CCC periodically assess progress on climate change adaptation plans.

Metrics and targets

Emission scopes

The GHG Protocol set out the emission scope levels. This can be summarised as follows:

Scope 1 - refers to all direct GHG emissions.
Scope 2 - refers to indirect GHG emissions from consumption of purchased electricity, heat, or steam.
Scope 3 - refers to other indirect emissions not covered in Scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions. Scope 3 emissions could include the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g., transmission and distribution losses), outsourced activities, and waste disposal.

Overview of GHG Protocol scopes and emissions across the value chain. Source: https://ghgprotocol.org/

TCFD’s guidance on metric categories

The Task Force published Guidance on Metrics and Targets which includes seven metric categories (Table A2.1). The Task Force believes these are generally applicable to all organisations. The table also includes certain public sector interpretations which are in line with the proceeding sections.

Table A2.1 Cross-industry, climate-related metric categories

Metric Category	Example Unit of Measure	Rationale for Inclusion
GHG Emissions Absolute Scope 1, Scope 2, and Scope 3; emissions intensity	MT of CO2e	Disclosure of GHG emissions is crucial for users to understand an organisation’s exposure to climate-related risks and opportunities. Disclosure of both absolute emissions across an organisation’s value chain and relevant emissions intensity provides insight into how a given organisation may be affected by policy, regulatory, market, and technology responses to limit climate change.
Transition Risks Amount and extent of assets or organisational activities vulnerable to transition risks¹	Amount or percentage	Disclosure of the amount and extent of an organisation’s assets or business activities vulnerable to climate-related transition risks allows users to better understand potential financial exposure regarding such issues as possible impairment or stranding of assets, effects on the value of assets and liabilities, and changes in demand for products or services.
Physical Risks Amount and extent of assets or organisational activities vulnerable to physical risks	Amount or percentage	Disclosure of the amount or extent of an organisation’s assets or business activities vulnerable to material climate-related physical risks allows users to better understand potential financial exposure regarding such issues as impairment or stranding of assets, effects on the value of assets and liabilities, and cost of business interruptions.
Climate-Related Opportunities Proportion of revenue, assets, or other business activities aligned with climate-related opportunities	Amount or percentage	Disclosure of the proportion of revenue, assets, or business activities aligned with climate-related opportunities provides insight into the position of organisations relative to their peers and allows users to understand likely transition pathways and potential changes in revenue and profitability over time.
Capital Deployment Amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities	Reporting currency	Capital investment disclosure by non-financial organisations and financing by financial organisations gives an indication of the extent to which long-term enterprise value might be affected.
Internal Carbon Prices Price on each ton of GHG emissions used internally by an organisation	Price in reporting currency, per MT of CO2e	Internal carbon prices provide users with an understanding of the reasonableness of an organisation’s risk and opportunity assessment and strategy resilience. The disclosure of internal carbon prices can help users identify which organisations have operational models that are vulnerable to future policy responses to climate change and which are adapting their operational models to ensure resilience to transition risks.
Remuneration Proportion of executive management remuneration linked to climate considerations²	Percentage, weighting, description, or amount in reporting currency	Remuneration policies are important incentives for achieving an organisation’s goals and objectives and may provide insight on an organisation’s governance, oversight, and accountability for managing climate-related issues.

Source: www.fsb-tcfd.org/publications/

^{1 Transition and Physical Risks: Due to challenges related to portfolio aggregation and sourcing data from companies or third-party fund managers, financial organisations may find it more difficult to quantify exposure to climate-related risks. The Task Force suggests that financial organisations provide qualitative and quantitative information, when available.}

^{2 Remuneration: While the Task Force encourages quantitative disclosure, organisations may include descriptive language on remuneration policies and practices, such as how climate change issues are included in balanced scorecards for executive remuneration.}

Public sector interpretations and adaptations

The Task Force developed their recommendations for the private sector. Consequently, certain key principles, concepts and terms used in the TCFD guidance have to be interpreted and adapted for a public sector context. These interpretations and adaptations are limited specifically to this guidance (and the UK public sector) and should not be applied more widely.

Private sector	Public sector	Explanation
Business or company	Organisation	Encompasses a wider array of bodies, including those in the public sector.
Business plan	Operational plan	A plan sets out what an organisation does, and what it is trying to achieve. For the private sector, this is focused on making profit; whereas for the public sector, this is focused on delivery. For example, this could be the sustainability enabler with a central government department’s Outcome Delivery Plan (ODP).
Business model	Operational model	Transforming inputs through its activities into outputs and outcomes that aims to fulfil the entity’s objectives, by providing goods and/or services
Acquisition and divestures	Investment and grant decisions, or restructures (e.g., Machinery of Government changes)	While public sector bodies can acquire and divest other investments; these decisions tend to encompass a broader array of actions, including different types of restructures (e.g., Machinery of Government changes), grants, and investments.
Products and services	Public goods and services	The public sector delivers public goods and services, not products and services.
Supply chain and/or value chain	Supply chain	The public sector is focused on the delivery of public goods and services - not profit. This is not limited to monetisable value.
Investment in research and development	Funding research and development	Equity investment in the private sector is common. Other forms of funding (e.g., grant funding) are also used in the public sector. Consequently, funding has been used to encompass the broader funding streams.
Access to capital	Access to parliamentary supply, other funding, and resources	For the private sector, access to capital predominantly refers to cash raised from debt and equity. For the public sector, funds are predominantly raised via taxes (as well as fees and levies), borrowing and other sources (e.g., donations or selling public assets).

6.2 Annex B

The TCFD recommendations are intended to fundamentally change how organisations address climate change and its impacts, culminating in insightful disclosures. A phased approach (both in scope and timing) provides reporting entities with solid building blocks to allow for the most effective implementation of the TCFD recommendations.

In the private sector, generally, organisations have chosen to provide the Governance disclosures first as these engage senior leadership and are higher level/ more qualitative. Organisations often then provide disclosures for Risk Management and Metrics and Targets, before attempting the more complex and qualitative disclosures for Strategy. This has informed our implementation timetable for central government.

While in-scope central government bodies should follow the implementation timetable set out below, the ‘comply or explain’ principle applies to the overall implementation approach just as it does to individual disclosures. Therefore, entities may choose to diverge from the implementation timetable, on the condition that they provide an explanation in the TCFD Compliance Statement.

Public sector bodies should assess progress and evaluate performance throughout implementation, with an appropriate level of review and oversight by those charged with governance in their review and approval of each year’s annual report.

Setting out a clear and realistic implementation timetable for TCFD recommendations is likely to improve the quality and effectiveness of disclosure. The phased approach for central government may be used as a template, recognising the differences in users’ informational needs, risks and capacity. Relevant authorities may choose to set their own implementation timetables which entities should remain alert to.

A reporting entity may choose to follow a slower implementation timetable. In-scope reporting entities would need to provide an explanation for non-compliance with the timetable. Where such information gaps are considered material, the reporting entity should set out its future plans to address the gaps. The information needs of users should be the driving factor in determining what to disclose. Applying appropriate judgement to the level and breadth of disclosure is key to producing effective and useful public sector annual reports.

	Phase 1 - Governance focus	Phase 2 - Risk Management and Metrics and Targets	Phase 3 - Strategy
Target period	2023-24 (for annual reports ending 31 March 2024)	2024-25 (for annual reports ending 31 March 2025)	2025-26 (for annual reports ending 31 March 2026)
Focus	High-level overview	Qualitative disclosures with existing quantitative disclosures	Quantitative disclosures with technical requirements. TCFD-aligned disclosure is fully implemented.
Requirements	Reporting entities shall provide a TCFD Compliance Statement and the recommended disclosures for: Governance; Metrics and Targets (b), only where available from existing reporting processes	Reporting entities shall provide a TCFD Compliance Statement and the recommended disclosures for: Governance; Risk Management; Metrics and Targets	Reporting entities shall provide a TCFD Compliance Statement and the recommended disclosures for: Governance; Risk Management; Metrics and Targets, considering wider reporting; Strategy
Disclosure basis	Comply or explain	Comply or explain	Comply or explain
Interaction with GGC framework	Continue to apply GGC21-25 emissions methodology for Metrics and Targets, in line with SRG	Continue to apply GGC21-25 emissions methodology for Metrics and Targets in line with SRG	Apply new GGC25-30 emissions methodology for Metrics and Targets (GGC21-25 runs until 31 March 2025 with next commitment period for GGC25-30 starting on 1 April 2025). Consider further additional support on emissions methodology (e.g. on scope 3).

Footnotes

[1] State of the UK Climate 2021 - Kendon - 2022 - International Journal of Climatology - Wiley Online Library

[2] UK government to enshrine mandatory climate disclosures for largest companies in law with BEIS Climate-related financial disclosures for companies and limited liability partnerships

[3] ISSB published IFRS-S1 General Sustainability-related Disclosures and IFRS-S2 Climate-related Disclosures

[4] IPSASB’s consultation on Advancing Public Sector Sustainability Reporting

[5] IFRS published educational material on effects of climate-related matters on financial statements in July 2023

[6] Managing Public Money (MPM) sets out the main principles for dealing with resources in public sector organisations in the UK.

[7] Reporting entities adhering to the DHSC Group Accounting Manual (GAM) are not required to include a TCFD Compliance Statement. Refer to DHSC GAM for further details.

[8] The GHG Protocol defines emission scopes. An Overview of GHG Protocol scopes and emissions across the value chain has been included in Annex A.

[9] HM Treasury published the Government Financial Reporting Review in April 2019

[10] CIPFA’s [Public Sector Reporting: time to step up] (www.cipfa.org/protecting-place-and-planet/sustainability-reporting)

[11] Under ISA 720, the auditor provides a negative opinion on the other information.

[12] UK Government’s Code of Good Practice

[13] FCA’s Review of TCFD-aligned disclosures by premium listed commercial companies

[14] FRC’s CRR Thematic review of TCFD disclosures and climate in the financial statements

[15]UK public sector reporting requirements have been driven by Section 414CB of the Companies Act 2006 which requires a description of the principal risks relating to environmental matters, including how an entity manages the principal risks.

[16]Definitions align with the FRC’s Strategic Report Guidance which has been used to develop public sector performance and narrative reporting, as well as the TCFD’s guidance.

[17] Climate Change Act 2008: www.legislation.gov.uk/ukpga/2008/27/contents

[18] The National Risk Register 2023

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1. Introduction

1.1 Overview

Background

Overview of TCFD Framework

Rationale for public sector adoption

1.2 Application

Implementation approach

1.3 Scope

Central government

Wider public sector

Significantly impacted sectors and industrial groups

Entities subject to TCFD-related (or similar) legislation or regulation

Voluntary adoption

In-scope reporting entities

1.4 Concepts and Principles

Comply or explain

Interaction with the phased implementation timetable

Compliance Statement

Primary users and materiality

Primary users

Materiality

Materiality assessments

Minimum reporting requirements for in-scope entities

Broader considerations

Sphere of influence

Information location

Publication

Position

Interactions with other reporting frameworks

Cross-referencing within integrated entity-level reports

Signposting to external reports and publications

Reporting boundaries

Risk reporting and more qualitative requirements

Metrics, targets, financial information and other quantitative requirements

Assurance

2. Governance

Recommendation for Governance

2.1 Overview

Materiality

Applicability

2.2 Recommended disclosures

Supporting guidance from TCFD

Public sector considerations and further guidance

Supporting guidance from TCFD

Public sector considerations and further guidance

3. Strategy

4. Risk Management

Recommendation for Risk Management

4.1 Overview

Materiality

Applicability

Public sector considerations and further guidance

Principal, new and emerging risks

Risk prioritisation

Climate-related opportunities

4.2 Recommended disclosures

Supporting guidance from TCFD

Supporting guidance from TCFD

Public sector considerations and further guidance

Supporting guidance from TCFD

Public sector considerations and further guidance

Interaction with strategic and other principal risks

5. Metrics and Targets

Recommendation for Metrics and Targets

5.1 Overview

Materiality

Applicability

Public sector considerations and further guidance

Commentary

Methodologies and reporting boundaries

Prior period reporting

Baselining

Broader considerations

5.2 Recommended disclosures

Supporting guidance from TCFD

Public sector considerations and further guidance

Industry and cross-sector comparatives

Climate-related performance-based remuneration policy

Internal carbon pricing