TCFD rules: Threat or opportunity?

Climate change is a financial threat to big business. Supply chain disruption caused by extreme weather is expected to cost many billions of pounds. 

Governments and global economic institutions are so concerned by this threat they have implemented legislation forcing large-scale companies to report on what protections they have put in place to safeguard supply lines (see “What are the TCFD regulations?” below).

See also: How climate change may increase pest and disease threats

While farm businesses are not the initial target, they are expected to be drawn in as big companies look to ensure their whole supply chain is on board. 

In the coming years farms could face extra administration and additional investment to make changes and prove a level of climate resilience that will satisfy their customers. 

But, although it sounds like an extra burden, industry experts suggest the farms that prepare now could strengthen links with customers and ultimately have a competitive advantage. 

We asked Kite Consulting’s Hayley Campbell Gibbons, Agricarbon’s Tom Sadan and Joe Spencer and Mark Lumsdon-Taylor of accountancy firm MHA to explain the new rules and assess the threats and opportunities. 

What are the TCFD regulations? 

The regulations stem from recommendations made by the United Nations Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD).

Although the taskforce has been disbanded its recommendations have been widely accepted by governments, companies and financial bodies so the process is still commonly referred to as TCFD.

The recommendations set out a framework for companies to disclose information on climate-related risks to their operations to provide potential investors with greater transparency. 

In 2021, the UK government amended the Companies Act to introduce mandatory disclosures.

Since January 2022 they have applied to businesses with more than 500 employees.

By 2025 the rules are expected to be extended to include an assessment of a company’s contribution to climate-related risks – the so-called Sustainable Disclosures Requirement (SDR).

TCFD recommendations overlap with environmental, social and governance (ESG) reporting rules. It can be said that TCFD focuses in more detail on the E and G. 

How TCFD affects farmers and growers

TCFD focuses on:

• Governance – who is responsible for the company’s response to climate risk
• Strategy – how the business responds to climate-related risks and opportunities
• Risk management – how the company identifies, assesses, manages and reports on climate-related risks and opportunities
• Metrics and targets – which indicators the company has selected to measure its environmental performance and targets

“If you think that this doesn’t apply to you because the legislation targets large companies, think again,” says Joe Spencer.

Some of the big businesses required to report under the legislation have strong links with farming.

For example, the large dairy and meat processors, most supermarkets and UK banks all work directly with farmers.

“In the near future we also anticipate TCFD requirements will be extended to include medium-sized companies,” adds Mark Lumsdon-Taylor.

That means an increasing number of agriculture-facing businesses will be applying pressure to their farmer-suppliers to report on climate-related risks, their emissions and make revisions to the way they farm.

Farms are already beginning to feel the effects of the legislation, and it will likely gather momentum in the next two to three years as companies get to grips with the requirements, forecasts Agricarbon’s Tom Sadan.

For farmers, the administration could become fairly taxing – a lot of form filling and extra audits, Tom says.

The practical changes could also be onerous, like controls on antibiotics use, moving away from unsustainable sources of soya, and switching to reduced tillage.

Every single company that you supply could come up with something entirely different, adding further time and complexities, he adds.

At worst, if a farmer-supplier can’t comply with a company’s TCFD strategy, that company might have to mitigate the risk by offering a contract to a farm business that can.

Farm-level risks

Farming businesses will eventually be expected to set out risks and the contingency plans they have in place.

These include risks to inputs and production from increased extreme weather events such as storms, drought and flash floods.

The potential effect of longer-term climate changes such as sea level rises and a farm’s location will also come under scrutiny.

Kite Consulting’s Hayley Campbell-Gibbons says: “For example, a processor may identify that its sites or farmer-suppliers are situated in a location becoming more prone to droughts or flooding.

“The disclosures report must state which areas of their milk field may be at greatest risk, and what impact any loss of production would have on the business.”

A contingency plan would show the adaptations that could be made at farm or factory level to reduce the risks, or whether the business can source from alternative farmer-suppliers or re-site operations to areas with less risk.

Beyond the physical factors there are transitional risks to businesses from policy changes, shifts in markets and new legislation – the impact of these must all be accounted for.

How climate-change risks are affecting farms

In a recent survey conducted by Kite Consulting, dairy and livestock farmers reported already facing challenges from a wide range of climate issues.

More than 95% of farmers expect there to be a financial cost from climate change and almost three-quarters (74%) consider related risks to their farm strategies.

But less than half of those (48.7%) have so far made plans.

Financial costs

The survey revealed that a third of farmers considered slurry storage and spreading legislation a big challenge in the face of more extreme weather.

Kite Consulting looked into those two key issues and analysed how much it would cost to improve climate resilience for the sector.

The consultancy considered capital investments based on increasing slurry storage to eight months and raising silage capacity to provide 18 months’ storage to protect against shortages.

“We estimated the total cost to the UK dairy industry from these two issues alone would be £2.4bn,” says Hayley.

Aside from these two issues there has been no accurate assessment of the financial and physical impact posed by climate change to business.

The potential financial risk across livestock, dairy and arable could amount to many billions of pounds, she says.

And it is that vulnerability that has caused alarm among shareholders and financial institutions.

TCFD opportunities

Because the legislation has forced companies to change their position, they are now looking deeper into their farmer-suppliers’ situations and having to understand their difficulties, says Hayley.

TCFD could shift the conversation from farming’s emissions and carbon footprint to understanding the risks climate change poses to food production, she says.   

Tom points out that the language being used by the companies is supportive and could mark a change in the farmer-buyer relationship with potential financial backing to help farms adapt.

Companies such as Nestle, Arla and Barclays are working with suppliers to help them change.

Kite is working with supermarket Asda to help form its TCFD strategy while Agricarbon is baselining farms for Nestle, First Milk and Diageo.

So for those willing to transition, this change could be a positive, working more closely with customers, suggests Tom.

Actions on TCFD for farmers and growers

It is important to seize the chance now, says Joe.

Farms that get ahead of the curve can build links with buyers and market their position.

Reporting companies will need information, and to assess what work is being done they will need a start point.

Baseline your farms now and record and track every area of the business, says Mark.

Those farms that can show they have reviewed risks, can provide data and suggest mitigating actions will have the competitive advantage, he says.

Work to tackle the changing climate’s impact on productivity should not be put off, says Tom.

Demonstrating responsibility and preparedness when faced with climate challenges will be vital to long-term business sustainability, he adds.

The first step is to review the farm’s exposure to climate risk, says Hayley.

There is a case for applying the principles of climate-related financial disclosure at farm level. The simplest way to do that is to carry out a review of the business, she says.

The process should identify risks and quantify the impact on operating profit, value of outputs and yields.

The review would then highlight options for increasing resiliency through mitigations and adaptations.

Kite advises farmers to apply a stress test typically asking:

• What risks does climate change pose to my business now, and over the next five years?
• What would be the impact of that risk to my farm, crops or stock and business?
• What adaptations and solutions might mitigate the impacts or reduce the risk?

Once risks and impacts have been identified and ranked in terms of likelihood and severity, any mitigations should be costed and written up.

A climate risk assessment with a resilience score, mitigation guidance and an action plan can then be produced for the farm business.