Financial services firms in the United Kingdom must soon begin reporting what material financial impact they experience from climate change under a new disclosure mandate that is the first of its kind in the world.
Chancellor of the Exchequer Rishi Sunak (the U.K. equivalent of the U.S. Treasury secretary) announced last week a package of plans to “bolster the dynamism, openness, and competitiveness” of the country’s financial services sector. “Our plans will ensure the UK moves forward as an open, attractive and well-regulated market, and continues to lead the world in pioneering new technologies and shifting finance towards a net zero future,” Chancellor Sunak said.
The plan includes issuing the country’s first sovereign green bond in 2021, subject to market conditions, with the broader intent “to help the U.K. meet its 2050 net-zero target and other environmental objectives,” the government stated. Further, the United Kingdom has its sights set on becoming the first country in the world to make disclosures mandatory in line with the currently voluntary recommendations of the Financial Stability Board’s widely adopted Task Force on Climate-Related Financial Disclosures (TCFD) by 2025.
The U.K. government said it intends to follow up with a series of further issuances “to meet growing investor demand for these instruments,” explaining these bonds “will help finance projects that will tackle climate change, finance much-needed infrastructure investment, and create green jobs across the country.”
On Nov. 9, the U.K.’s TCFD Taskforce published an interim report providing a roadmap for implementing the mandatory disclosures, many of which will come into force by 2023. The upcoming rules and regulations will capture a “significant portion of the economy,” the U.K. government said, including:
- Listed commercial companies;
- U.K.-registered large private companies;
- Building societies;
- Insurance companies;
- U.K.-authorized asset managers;
- Life insurers;
- FCA-regulated pension schemes; and
- Occupational pension schemes.
In the report, the U.K. government suggests financial services firms captured in each of the groups above use the roadmap and “consider taking the necessary steps now to build their capabilities and iteratively refine their climate data and the resulting disclosures.”
From a broader compliance standpoint, all companies in all industries should take note of the requirements. “[T]his announcement emphasizes the government’s focus on ensuring adequate climate reporting and is unlikely to be the final development in this area,” states a client alert from law firm Osborne Clarke.
As for next steps, the TCFD Taskforce said in its interim report that it “expects that it may be necessary, in due course, to consider setting more detailed expectations for disclosures to supplement the TCFD recommendations and enhance comparability across UK organizations. Given the interlinkages between UK organizations and the global economy, it is also important to be able to compare UK organizations with those in other jurisdictions.”
The United Kingdom is part of a growing number of local governments around the world seeking to make TCFD-aligned disclosure recommendations mandatory. New Zealand, for example, proposed similar plans in October that would make such disclosures mandatory by 2023 and capture roughly 200 large financial institutions—banks, credit unions, asset managers, and insurers.
Different than the United Kingdom, however, New Zealand is proposing a more lenient “comply-or-explain” regime, meaning if covered financial institutions don’t make such climate-related disclosures they have the option to explain why. “Given the urgency of the climate threat, a voluntary approach to climate-related financial disclosure may not be sufficient,” the U.K. interim report stated.
Bank of England Governor Andrew Bailey echoed this same sense of urgency in a Nov. 9 speech given at the Corporation of London Green Horizon Summit. “Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage,” he said. “And acting now gives us the best opportunity to manage those risks.
Bailey noted the Bank of England is working with the Treasury and other regulators to consider the U.K.’s approach to climate disclosure. Additionally, plans to launch a climate stress test exercise—first announced in July 2019 but delayed because of the pandemic—now have a new target date of June 2021.
The U.K. government also announced plans to implement a green taxonomy—a common framework for determining which activities can be defined as environmentally sustainable—to improve understanding of what impact firms’ activities and investments have on the environment and support the transition to a sustainable economy. The U.K. taxonomy will take the scientific metrics in the EU taxonomy as its basis, and a Green Technical Advisory Group will be established to review these metrics to ensure they are right for the U.K. market.
The United Kingdom further announced plans to join the International Platform on Sustainable Finance “to support and benefit from the development of common international standards on taxonomies.”
The U.K. Financial Reporting Council also recently expressed its support for the introduction of global standards on non-financial reporting and announced its intent to engage with firms working to achieve that goal. In the meantime, the FRC encourages firms to report against the TCFD recommendations and, with reference to their sector, use the Sustainability Accounting Standards Board metrics.
On Nov. 10, the FRC published a review that “reflects the important role boards, companies, auditors, professional associations, and investors play in considering and responding to climate-related issues,” the organization said. “Each has the capacity to act as a driver of change.”
The FRC found, for example, some companies have set strategic net-zero goals, “but it’s unclear from their reporting how progress towards these goals will be achieved, monitored, or assured.” Additionally, the FRC said consideration and disclosure of climate change matters in financial statements lags behind narrative reporting, and that its review identified “areas of potential non-compliance with the requirements of International Financial Reporting Standards.”
From an audit practice standpoint, the FRC found the “quality of support, training, and review provided to audit practices on climate change varies considerably across firms.” In reviewing audits, the FRC also found “auditors need to improve their consideration of climate-related risks when planning and executing their audits.”
“Users of corporate reports expect more from companies, auditors, regulators and standard-setters in terms of climate change reporting,” said FRC Chief Executive Sir Jonathan Thompson in a news release. “While this review highlights some bright spots of better practice in both corporate reporting and auditing, we also found that more needs to be done. I know that this is a difficult time to ask for more, but now is the time for all of us to raise the bar.”