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TCFD reporting for Private Equity
TCFD stands for the Task Force on Climate-Related Financial Disclosures. TCFD disclosure recommendations, first published in 2017, pertain to the risks that climate presents to financial and non-financial companies. There are 11 across four key areas:
· Governance
· Strategy
· Risk management
· Metrics and targets
Since its inception, the UK and countries in the EEA have used the TCFD framework to enforce the mandatory disclosure of climate-related information.
TCFD continues to have a significant impact on the world of ESG today. This can be seen through its incorporation into both the new, globally recognised ISSB standards and the Sustainability Disclosure Requirements (SDR). The SDR is the UK's counterpart to the EU's SFDR for financially material ESG reporting.
What are the TCFD regulatory requirements?
Private companies with over 500 employees and a £500 million annual turnover must report on data gathered from April 2022.
The TCFD has been enforced for the largest asset managers (>£50 billion assets under management) since January 2022, with reporting required by June 2023. Smaller asset managers (£50billion > £5 billion assets under management) will be reporting the following year.
This is accelerating a shift towards climate reporting amongst fund managers, as investors are increasingly expecting TCFD-level disclosures as standard.
BVCA Publication (2022) TCFD Implementation: Considerations for Private Equity
When TCFD was first published, there were a lot of unanswered questions within the PE industry regarding both the disclosures themselves and the level of detail required from portfolio companies.
Fund-level disclosures mark a significant transition in TCFD reporting. Up until this point, reporting entities would likely have the resources for either in-house teams or external support from consultancies. For fund managers working with portfolio companies that are much smaller, this presents a unique challenge from a reporting perspective. These companies need to provide detailed disclosures regarding their emissions and their efforts to combat climate change.
The British Private Equity & Venture Capital Association (BVCA), in conjunction with KMPG and Initiative Climate International (iCI),published a paper addressing this confusion, entitled “TCFD Implementation: Considerations for Private Equity”. It was written in response to calls from the private market sector. Investors in particular required guidance and help on how to disclose comparable metrics across different funds.
Findings from TCFD Implementation
Although TCFD has published its own guidance for asset managers, it does not account for issues specific to PE. Issues arise with regards to smaller portfolio companies, changes in fund composition, and the different disclosures required (i.e., firm, fund, and portfolio company).
For further information on guidance and best practices, we recommend reading the full paper. The document helpfully splits disclosure requirements between firm level and fund level. It breaks down requirements in terms of the aforementioned four key areas: governance, strategy, risk management, and metrics and targets.
Current best practices are included in each of these sections, providing an overview of how the sector is responding. Here are a couple of the most interesting observations emerging from this publication:
TCFD-aligned reporting is becoming the norm
The publication notes the widespread adoption of TCFD-aligned reporting in the private equity industry, even though regulations have not yet been enforced. This is due to a variety of non-regulatory factors, including:
· Investor expectations.
· The use of TCFD for the integration of climate risks into due diligence and exit assessments.
· The use of TCFD for climate risk assessment during the holding period for potential buyers.
There are many approaches available
Metrics and targets are considered the most challenging of the four TCFD reporting areas. For example, firms can choose from different portfolio alignment metrics. They could track the percentage of their portfolio companies that have a Science-Based Targets Initiative (SBTI) plan in place, for instance. SBTI targets provide standardised plans for companies looking to reduce their emissions and eventually reach net zero. Firms could also measure the Implied Temperature Rise (ITR) of their portfolio. However, there is no consensus on the methodology of this metric.
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