The UK government’s Department for Business, Energy & Industrial Strategy (BEIS) has opened a consultation into climate-related financial disclosure for listed companies, on its path to become the first G20 country to make Task Force on Climate-related Financial Disclosure (TCFD) recommendations mandatory by 2022.
As set out in the 2019 Green Finance Strategy, it is proposed all publicly quoted companies, large private companies and large asset owners should disclose in line with the TCFD to support the transition to net zero.
The consultation paper said the objectives of the analysis and engagement of the industry will help consider the scope and size of the companies that will be required to disclose, their locations, the mechanisms to report and timing of the regulation – however it is expected the commencement date for mandatory reporting is at 6 April 2022.
“Climate change poses risks to companies, financial institutions and individuals alike,” the document said. “Both physical and transition risks could have material impacts on the value of companies and their assets. Physical risks are those arising from the climatic impact of higher average temperatures (such as the increased frequency and severity of extreme weather events), whilst transition risks are those arising from the changes in technology, markets, policy, regulation, and consumer sentiment which will result from our transition to a low-carbon economy.
“If these risks are not properly managed, the Intergovernmental Panel on Climate Change estimates $69trn in global financial losses by 2100 from a 2-degree warming scenario.”
See also: – Four TCFD considerations for asset managers
It added it is becoming easier to compare companies’ exposure to climate-related risks and opportunities, and when the TCFD becomes mandatory “investors will be better equipped to incorporate these risks into their investment and business decisions, and this also provides greater information to other stakeholders for relevant decisions”.
TCFD is structured around four pillars: Governance, Strategy, Risk Management and Metrics & Targets
Source: Financial Stability Board
It also noted the “quantity and quality” of climate-related financial information disclosed had increased on a voluntary basis, but added now is the time to take regulatory action.
“While companies, financial institutions and governments globally have expressed a great deal of support for the private sector led, voluntary TCFD framework, levels of disclosure overall are low, and many companies are often not disclosing against all four pillars of the TCFD recommendations.
“For example, the percentage of companies disclosing under the ‘Strategy’ pillar is significantly lower than that of any other recommended disclosures. Additionally, information is four times more likely to be disclosed in sustainability reports than in financial filings or annual reports, as is recommended by the TCFD20.
“An increase in the quality and quantity of TCFD disclosures is needed. Financial markets only work if they are consistently supplied with timely, comparable and transparent information and data, something which regulatory action to require relevant disclosures can support.
“High-quality disclosure on how organisations will manage the material financial risks and opportunities arising from climate change will improve transparency and encourage more informed pricing and capital allocation,” it added.
The paper also said the UK Green Taxonomy, flagged by the UK Chancellor Rishi Sunak last November, will provide a common framework for determining which economic activities can be defined as environmentally sustainable, following in the footsteps of the European Union.
“The UK taxonomy will provide a framework to enable financial institutions to assess the impact and performance of companies with respect to environmental objectives,” the paper said.
To review the Technical Screening Criteria of the taxonomy and advise Government on an ongoing basis, the government has also launched a UK Green Technical Advisory Group. It will announce further information on the composition and mandate of the expert group, in due course.
Commenting on the government’s proposal to require large public and private companies to report in line with the TCFD framework Sarah Woodfield, stewardship manager at the Investment Association, said: “This proposal is a crucial and welcome step forward as the UK looks to reach net zero by 2050 and achieve its ambition to be a global leader in sustainability. Investment managers have an important role to play as stewards in supporting companies transition to a more sustainable future.
“Having clear and consistent data on the climate-related risks faced by both private and public companies is vital to achieve this. It will also support investment managers to better communicate climate risk to their pension fund clients, enabling them to meet their disclosure requirements and better understand the impact of their investment portfolios.”