New regulations on climate governance – and their implications for supply chains and SMEs

Overview

Reporting on Taskforce on Climate-related Financial Disclosures (TCFD) will becomes law in the UK from 6th April 2022.


TCFD reporting will be mandatory for more than 1,300 of the largest UK-registered companies and financial institutions. These include many of the UK’s largest listed companies, banks and insurers, as well as large private companies with more than 500 employees and £500m in turnover. It is above and beyond existing regulation for listed and large businesses to disclose direct emissions (Scope 1 and 2). To date, Scope 3 measurement has been voluntary.


It represents a recognition that voluntary uptake of climate disclosure to an appropriate level is slow and piecemeal, and needs to be strengthened to enable alignment of investor and business strategies to the UK’s net-zero emissions.


So what?

Increasing scrutiny and action towards supply chain decarbonisation will be seen – increasing the need for measurement and action from suppliers and SMEs who are upstream of these large corporates.


Read on for more…


What is TCFD?

TCFD – short for the Task Force on Climate-Related Financial Disclosures – are a set of recommendations regarding the information that companies should publicly disclose on climate change.



Developed by the international Financial Stability Board, the aim is to improving how large companies communicate on climate change to their investors and other stakeholders.


There are 11 disclosures categorised into four areas – governance, strategy, risk management and metrics/targets.


Until now, TCFD – much like Net Zero commitments - has been voluntary. However, as of April 2022 in the UK, TCFD-aligned disclosures are now mandatory for many large corporates and financial organisations. And new proposals in the USA in March 2022 look to bring TCFD-aligned regulation for all listed US companies as well.


What does TCFD mean for large companies?

Large organisations impacted by TCFD need to conduct a comprehensive climate change risk and opportunity assessment. This means that large companies need to:

  1. Collect carbon data to assess their risk exposure. This is operational (scope 1 and 2) emissions at the very least, but for most also includes their scope 3 emissions.

  2. Identify al climate change risks and opportunities – across policy, legal, technology, market, reputational and physical risks. Scenarios are central to TCFD – with a “transition” scenario (best practice being a 1.5 or 2degC scenario) and a “physical risk” scenario (e.g. a 3degC or 4degC scenario).

  3. Evaluate the impact of these scenarios on the business, strategy and financial planning. Decide on mitigations and strategies moving forward.


Source: TCFD, FSB publications

What does TCFD mean for supply chains and SMEs?

This drive for increased transparency and disclosure is all well and good, but what does it mean for supply chains?


Until now, scope 3 emissions reporting has been voluntary for large companies. TCFD-aligned disclosures mean that for all large corporates with significant scope 3 emissions (which is most), scope 3 now becomes a critical element to assess and manage.


But what does “significant” mean regarding scope 3? While TCFD says to measure scope 3 “if appropriate”, Science Based Targets sets this threshold as 40% or more of the company’s overall emissions being in scope 3 – and as many corporates see 70-95% of their emissions in their scope 3, this will be commonplace.


This means more and more interest and transparency in scope 3 emissions and active programmes to reduce scope 3. Moving from voluntary Net Zero targets to more formal and exacting regulation will tighten the belt of supply chain interactions on carbon.


Just looking at the UK, 50% of UK business sector emissions are from SMEs. Supply chain exposure to climate risk will become more and more important.


This adds to the voluntary (but very public) Net Zero ambitions of many corporates already, but gives regulatory scrutiny and more systematic rigour to approaches.


In summary

Supply chains should expect more demands from corporates on their decarbonisation. More questions, more requirements in tender processes, and more barriers to contracts for those not able to articulate their decarbonisation roadmap and how they align to Net Zero.


After all, supply chains are where many corporates’ substantial emissions are.


Are you ready? Contact us today.


Whether you’re a corporate wanting to understand and engender decarbonisation in your supply chain, or you’re an SME wanting to win more contracts, demonstrate or start your decarbonisation journey, contact gurus@zerobees.com

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