TCFD-aligned reporting and the role of investor engagement

The threat of climate change has catapulted sustainability to the top of corporate agendas. Meeting ambitious decarbonisation goals to achieve net zero by 2050 relies heavily on finance flows funding green transition. In this environment, the framework of the Task Force on Climate-Related Financial Disclosures (TCFD), now integrated into the International Sustainability Standards Board (ISSB), has rapidly gained global prominence since its 2015 inception.

The TCFD framework equips investors and companies with a standardised set of recommendations to effectively assess and report on climate risks and opportunities. As trillions shift towards sustainable assets, investor engagement and voting have become powerful mechanisms to accelerate portfolio alignment and drive change.

This article spotlights regulations in the UK investment landscape driven by TCFD and highlights the critical role engagement plays from an investor's perspective in realising the potential for ushering in a greener, more sustainable economy.

Understanding TCFD disclosure regulations in the UK

Born out of the Financial Stability Board (FSB), TCFD is one of a range of international frameworks offering organisations a structured approach for disclosing climate-related financial data to stakeholders. Mandating TCFD disclosures assists markets in efficiently allocating capital towards sustainable business practices that are designed to mitigate climate change impacts.

The framework includes 11 recommendations across four core pillars requiring disclosure:

• Governance: Organisations should describe board and management oversight of climate-related risks and opportunities. Reporting should cover processes for identifying, assessing, and managing climate issues, whether this responsibility sits with specific positions or committees, and how the board is informed.
• Risk management: Companies must detail their processes for identifying and assessing climate risks, and how these are integrated into overall risk detection protocols and subsequent risk management activities. Reporting should reflect physical risks from extreme weather along with transitional risks like policy shifts, tech disruptions or market changes.
• Strategy: Firms need to disclose actual and potential impacts of climate-related risks and opportunities on their business models, strategy, and financial planning across short, medium and long-term horizons. Reporting should reflect potential influences on revenue, expenditures, acquisitions and divestments, access to capital and overall resilience.
• Metrics and targets: Organisations are expected to disclose greenhouse gas emission reduction targets, performance against these targets, and related key performance indicators assessing progress. Reporting should encompass historical trends and forward-looking projections related to climate-related risks and progress monitoring.

The adoption of these standards has gained momentum globally. In the UK, the financial regulator now mandates TCFD alignment across investment firms under its supervision.

Which firms are covered by the regulation?

All UK premium listed companies face TCFD consistent requirements in annual reports. Other affected groups include:

• Standard listed companies
• Asset managers
• Life insurers
• FCA-regulated pension providers

UK firms with over 500 employees or £500M+ turnover also fall under TCFD-aligned regulations.

The Financial Conduct Authority (FCA) rules mandate strict disclosure requirements for regulated UK investment firms in line with the TCFD framework.

What disclosures do firms need to make?

Regulations mandate both entity and product-level reporting:

• Entity reports: Companies must publish a yearly sustainability report on their website explaining how they consider climate-related risks in their investment activities and business operations.
• Product reporting: Firms also need to report specific climate-related metrics for financial products and portfolios. These metrics should be accessible on companies' websites and provided to institutional investor clients upon request.

Additionally, premium-listed companies on the London Stock Exchange have to make an annual statement on whether their disclosures align with TCFD recommendations. If they do not align, detailed plans are required on how consistency will be achieved.

Why this matters for investors

The mandated disclosure rules give investors reliable sustainability data and facts they need to make choices that support a shift to a greener, more resilient economy.

Furthermore, maintaining market integrity depends on comprehensive climate-risk reporting as investors increasingly prioritise targets like net zero. Hence, transparent disclosures reduce information asymmetry optimising flows towards sustainable finance opportunities.

The investor perspective on TCFD

Investors face large financial risks as climate change causes more extreme weather and a shift to low-emissions economies. As a result, investors widely welcome the TCFD framework, as its reporting rules let investors see clear, unified data about climate risks and opportunities across their holdings.

Robust TCFD implementation can help towards gathering more consistent, reliable financial data that allows the following:

• Assess climate preparedness and potential impacts: Evaluate how ready companies are for climate change effects and model possible losses across holdings to improve resilience.
• Integrate climate risks into evaluations: Factor risks like extreme weather and emissions regulations into overall assessments using frameworks to limit investor exposure.
• Identify sustainable investment opportunities: Pinpoint emerging eco-friendly areas, like renewable energy or green transport, as markets shift to tap into growth potential.
• Track and report emissions progress: Measure portfolio companies' emissions cuts against science-based targets and transparently communicate this decarbonization performance to stakeholders.

The investor role, however, also extends into corporate engagement guided by TCFD’s pillars.

The role of investor engagement in driving change

Climate-oriented investors face the complex challenge of aligning financial returns with the decarbonisation of their portfolios and real-world emissions reduction to combat climate change.

Investor engagement is key to holding companies accountable for their environmental impact and empowering shareholders to influence corporate climate strategies and net-zero commitments. Robust emissions data can help monitor companies’ climate progress and identify candidates for engagement, allowing investors to tackle these challenges head-on.

Engagement options range from dialogues with investor relations teams to winning board seats in proxy contests:

• Conversations sharing expectations around disclosure, targets, and transition strategies send signals that sustainability is an investor priority. Ongoing dialogue allows the surfacing of concerns early before they escalate.
• More intensive interactions directly with boards, or even considerations of escalation, can ratchet up pressure when engagement responsiveness stalls.
• Shareholders can also leverage voting rights to oppose management resolutions or present their proposals, compelling climate action through governance mechanisms.
• In severe cases, running alternate board member slates via proxy contests seeks to overhaul a recalcitrant company's oversight from the top down.

Relying on more robust disclosures, investors can deploy the right engagement tactics to hold companies accountable for sustainability issues.

Real-world possibilities of investor engagement

In practical terms, investor engagement can lead to actual change at investee companies, as highlighted in the following examples:

‍

Impactive offers a powerful solution for reporting and engagement tracking

Financial leaders have not only a duty to adhere to TCFD disclosure but also to fully embrace shareholder stewardship obligations. Platforms like Impactive can help systematically track engagement progress at scale. But responsibility ultimately lies with investors to put in the work directing companies toward emission mitigation efforts compatible with global climate targets.

As investors face growing demands to demonstrate responsible investment practices, fragmentation between teams and outdated tools can hinder progress. With Impactive, investors finally have an engaging system tailored to ESG integration, transparent tracking, and showcasing authentic responsibility.

Schedule a demo today or explore starter plans fit for any investment team.