The costs and benefits of TCFD disclosure

In recent years, we have demanded more and more transparency from companies about their climate impact. But it is becoming increasingly clear that while this greater transparency is good for investors, it can also become very expensive, especially for smaller companies. The case of voluntary disclosure of the TCFD in Great Britain demonstrates this.

In Britain, companies were asked to disclose their climate-related risks, targets and emissions under guidelines from the Task Force for Climate-Related Disclosure (TCFD). From 2017 to 2021, this disclosure was voluntary, and since then it has been made mandatory first for larger companies and increasingly for smaller companies.

Researchers from the University of Glasgow looked at the companies in the FTSE 350 and their voluntary disclosure practices between 2017 and 2020. They wanted to know what types of companies were making these voluntary disclosures and whether there was a link with profitability and valuations.

It won’t surprise anyone, I think, to read that the companies that provided voluntary disclosure tended to be more exposed to climate-related risks (e.g., they were large emitters), or had more resources in the form of more employees and a larger board or even a dedicated sustainability committee. The companies that are more aware or more affected were early adopters.

Interestingly, voluntary TCFD disclosure is also correlated with higher profitability and higher valuations. This is of course not a causal relationship. It simply reflects the tendency of highly profitable companies to spend more money on voluntary projects that can enhance reputation and improve decision-making.

What is interesting, however, is the chart below, which breaks down TCFD voluntary disclosure across the larger and smaller companies in the sample. Although there is a positive correlation between profitability and voluntary disclosure for large companies, the correlation is negative for smaller companies. This indicates that smaller companies face significantly higher costs as a result of TCFD disclosure, and that these additional costs increasingly reduce profitability as a company becomes smaller.

The effect is not strong enough to turn a profitable small business into an unprofitable one, but it does show that ESG compliance is a significant cost driver for smaller companies. No wonder regulators across Europe are relaxing reporting requirements and trying to ease the burden on smaller companies.

Correlation between voluntary disclosure of the TCFD and business statistics

Source: Hsu et al. (2025)