Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The UK plans to compel its largest companies to keep track of
how climate change is creating costs and opportunities, jumping
ahead of a group of countries rushing to expand financial reporting
rules.
It will require companies to disclose how climate change could
hurt their profits through revisions to two acts, according to a 24
March consultation. The plans are
based on recommendations published in 2017 by a private sector-led
body affiliated with the G20, the Task Force on Climate-related
Financial Disclosures (TCFD).
It will see the disclosures in the annual financial reports of
banks, UK-registered companies, listed companies, asset managers,
life insurers, general insurers, and two different kinds of pension
plan provider.
It will first capture the high-earners. The UK has already put
into place a separate rule, adding TCFD to "premium listed"
companies' reporting requirements in a 1 January update to stock market listing
guidance.
Many of the targeted organizations already publish
climate-related data in financial reports to shareholders, but more
and more are set to submit a larger chunk of data as the UK scales
up its scheme from its launch on 6 April 2022 through to 2025.
Risks can come from climate change itself or policy responses to
it, according to a paper on a prior consultation by the UK's
financial regulator, the Financial Conduct Authority (FCA).
Companies must report on not only the possible costs of climate
change, but also the possible impacts of their activities on it.
The consultation suggested the "like-for-like" climate impact and
risk data would spur green investment and "support a competitive
and resilient UK economy" while also raising protection for
consumers, for example pension holders.
London's finance sector could gain an edge as global finance
turns green, the government said. "Clear disclosure expectations on
climate change can also help further underpin the reputation of the
London market as a leading venue for high-quality listings, thus
ensuring that the UK remains an attractive domicile for
internationally active financial intuitions and that London retains
its position as a leading international financial center," the
government promised in the consultation.
The government also said it is supporting creation of a new
global Sustainability Standards Board by the UK-headquartered
International Financial Reporting Standards (IFRS) Foundation by
the end of September, and the mooted launch of a global
sustainability standards board at the UN Climate Summit (COP26) in
Glasgow, Scotland in November.
TCFD spreads around the world
In proposing TCFD-aligned disclosures, the UK follows in the
footsteps of New Zealand, which announced a partly mandatory
climate risk reporting regime in September 2020 that is set to be
rolled out in 2023. Australia, Canada, France, Japan, and the EU
are each working towards climate risk reporting rules for
companies.
Like New Zealand's regime, the UK is allowing an opt-out for
companies that have an excuse for not sharing data. But unlike New
Zealand, the UK will require reporting outside the financial sector
by non-financial listed companies of a certain size, according to
IHS Markit Senior Research Analyst Sara Giordano.
Several countries have some rules already in play. Five years
ago, France passed Article 173 of the Energy Transition Law to
introduce mandatory climate reporting for institutional investors.
This followed its introduction of mandatory climate and social
reporting for companies in 2002, which was preceded by the 1995
Green Accounts rule requiring reporting for certain companies in
Denmark. "For quite some time, however, France has been reckoned as
the country with the most advanced regulatory framework in terms of
mandatory climate reporting," Giordano said.
Despite departing the EU at the start of the year, the UK shares
the bloc's ambitions on green disclosures. The EU in its 2018
non-financial reporting directive (NFRD) required larger companies,
banks and insurers to disclose environmental and social data,
suggesting in the guidelines that use they TCFD,
but use of the guidelines was not made mandatory.
The European Commission plans to adopt an act forcing companies
and financiers to classify how green their activities are according
to a system still under wraps, a so-called Green Taxonomy, by 1
June, but the UK plans to formulate its own version. The UK is making related changes at its
central bank, the Bank of England, following calls for EU banks to urgently
address their climate change risk by the Bank of France.
Voluntary reports remain weak
Beyond legislation, many companies with direct exposure to
fossil fuel supply chains or causing high emissions (like banking,
insurance, financial markets, energy, transport, buildings, food,
agriculture, and forestry) voluntarily report to shareholders using
TCFD guidelines.
European companies from Spain, France, Italy, and the UK report
the most, spurred by the EU's NFRD. Companies in the energy sector,
like majors and electric utilities, file some of the most complete
TCFD-aligned reports, according to Ernst & Young's 2019 survey of TCFD reporting. This
is because of pressure from investors, direct shareholder action,
and changing public opinion.
But despite some TCFD adoption, and more recently, the net-zero
movement by governments and companies, "limited progress has been
made in addressing climate-related financial disclosures" since
2017, said Ernst & Young in the survey. Companies usually don't
make climate-related forecasts or include them in enterprise risk
management plans, it said.
The UK is no exception when it comes to a lack of strong TCFD
reporting. "Last autumn, Ernst & Young found that fewer than
half of UK premium listed companies fully or partially adopted TCFD
requirements in their corporate reporting, which highlighted the
scale of work still to be done even before the expansion of
requirements to other listed and non-listed companies," Ernst &
Young's Global Climate Change and Sustainability Services Leader
Mathew Nelson wrote in a blog on the UK proposal last month.
TCFD acknowledged that, despite progress, many reporting
companies had more work to do in its 2020 status report on the regime.
The UK government appears to have latched on to this, saying in
its TCFD roadmap, "given the urgency of the climate threat, a
voluntary approach to climate-related financial disclosure may not
be sufficient." Only a third of the UK's larger listed companies
were reporting in 2019, and those that did report often did not
fully describe the scope and nature of their strategies, observed
the FCA.
Climate risk to go mainstream
Two years ago, the UK introduced mandatory reporting on direct
GHGs as well as energy use with the Streamlined Energy and Carbon
Reporting rule, covering about 12,000 of the UK's largest
companies. The regulations are intended to increase awareness of
their energy costs.
The UK appears to be building on this and other emissions
reporting regimes. "GHG reporting followed a similar path and
international standards now enable consistent calculation and
reporting of GHGs which facilitates like-for-like decision making
when it comes to investment and procurement decisions considering
GHG mitigation," Robbie Epsom, EMEA head of ESG, CBRE Global
Investors told IHS Markit.
But it should take care to avoid duplicating the GHG reporting
companies face. "To minimize the reporting burden and maximize the
benefit, it would be great to see the mandatory TCFD regulation
align with the current streamlined energy and carbon reporting
regulation, perhaps," said Epsom.
The newly required data reports would be more effective, and
have greater impact, if they presented the strategy, targets,
metrics, and analysis beside financial data, he added.
The TCFD regime could spur a sea change as smaller companies
become active on climate risk, Epsom predicted. "It will catalyze a
shift in the market to mainstream the consideration of climate
risk, both physical and transitional, as part of business decision
making," he said.
The UK's latest move benefits from the net-zero declaration
trend of the past year, coinciding with a rise in demand for green
investments in Europe. "With access to this information,
decisionmakers and investors will be able to make informed
decisions to support their sustainability strategies and net-zero
targets. Therefore, allowing businesses to take positive and
targeted action on climate risk," said Epsom.
Posted 14 April 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability