TCFD and the risk of stranded assets for UK commercial properties

August 28, 2023

The United Kingdom took an ambitious leap forward in the fight against climate change when they became the first G20 nation to introduce TCFD-aligned disclosures as a mandatory requirement for its largest companies. In this article, we will explore what this means for the UK's commercial property sector and the potential risks of assets becoming stranded.

What is TCFD?

The Taskforce on Climate-Related Financial Disclosures (TCFD) is an industry-led initiative that seeks to improve transparency around businesses' environmental risks and opportunities. Launched at the Paris COP21 in 2015, TCFD has developed a series of recommendations for businesses to disclose climate-related financial information in a consistent manner. The primary goal is to ensure investors, lenders, and other stakeholders are well-informed about how companies are preparing for the challenges and opportunities presented by climate change.

UK versus the world
Last year, the UK, aiming to fortify its position as a leader in green finance, legislated mandatory TCFD-aligned disclosures. From April 2022, over 1,300 of the largest UK-registered companies and financial institutions have been compelled to disclose climate-related financial information. This landmark decision predates both the G20 and COP26 summits.

Internationally, while the adoption of TCFD recommendations has gained traction, the UK stands out by transforming these recommendations into law for its largest businesses, placing it ahead of its G20 counterparts. While many jurisdictions follow the TCFD recommendations on a voluntary basis, including the European Union, Singapore, Canada, Japan and South Africa, the United Kingdom and New Zealand are the first to mandate climate-risk disclosure in line with the TCFD

How is this impacting the property industry?

For the UK's commercial property industry, the implications are significant. Companies within the sector that meet the threshold of over 500 employees and £500 million in turnover are required to undertake qualitative reports detailing their climate risks and opportunities annually.

Beyond just meeting regulatory standards, the disclosure laws also emphasise the need for real estate entities to be proactive. Given the data from the Representative Concentration Pathways (RCP) that anticipates over half a million residential and commercial properties in the UK to be at high climate-related physical risk by 2050, commercial property owners must take action. The UK Green Building Council's (UKGBC) framework aids property owners in navigating these disclosures and effectively reporting on the financial risks climate change poses to their assets. They have launched a Framework to provide organisations with a consistent methodology for measuring climate-related physical risks to built assets.

The risk of stranded assets

Stranded assets refer to those that lose value or turn into liabilities before the end of their anticipated economic life. For the commercial property sector, the introduction of mandatory TCFD-aligned disclosures means assets that don't comply or adapt to the climate-related expectations may become stranded.

The risk emerges in two main areas:

  • Physical Risk: Properties that are exposed to increasing climate hazards such as floods, heatwaves, or sea-level rise might face devaluation if they're perceived as high-risk.
  • Transition Risk: As the UK advances towards its Net Zero target, properties that aren't energy efficient or don't meet emerging green standards could lose value.

Owners of commercial properties, especially those with substantial portfolios, will need to reassess their assets in light of these risks. By identifying potential vulnerabilities and implementing mitigation measures, property owners can safeguard their investments and ensure long-term profitability.

To conclude, the UK's commitment to mandatory TCFD-aligned disclosures represents a paradigm shift in how businesses approach climate-related financial risks and opportunities. For the commercial property sector, this presents both challenges and opportunities. By proactively addressing these concerns, businesses can not only ensure compliance but also position themselves advantageously in an increasingly green economy.

Here at CIM, we're actively helping the world's built environment to achieve net zero emissions and accelerate progress toward ambitious targets. Learn more by requesting a callback with one of our team members.

Paul Walsh
August 28, 2023