Mandatory Climate Risk Disclosures - what the new rules mean for you
Mandatory climate related risk disclosures
You probably won’t need to do it – but you still need to know about it
As of this month, the UK will become the first G20 country to make it mandatory for Britain’s largest businesses to disclose their climate related risks and opportunities. This reporting will be done using the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations.
who are the tcfd?
The Taskforce on Climate-Related Financial Disclosures (TCFD) was launched by the Financial Stability Board (FSB) in 2015 during COP21 in Paris. It was co-founded by Mark Carney, then the Governor of the Bank of England, now the UN Special Envoy on Climate Action and Finance and UK Finance Adviser for COP26.
Its mission is to bring climate related transparency and accountability to the corporate world – specifically large-scale financial operations to ensure greater resilience to climate impacts, and therefore a more pro-active strategic approach to dealing with these challenges.
The framing is entirely business-oriented, but both Mark Carney and the TCFD’s Chairman Michael Bloomberg have spoken extensively on the moral imperative of taking action to counter climate change and the central role business needs to play in ensuring we leave the planet in a better place than we found it. The TCFD’s board is made up of not only leading financial professionals, but sustainability experts and consultants from around the world.
From April 6th 2022, over 1,300 of the UK’s largest registered companies and financial institutions will be legally obliged to disclose climate related financial information.
Admittedly this new law won’t affect the vast majority of organisations in the UK…yet. But the seeping nature of the regulation and the long-term implications are need-to-know information for anyone in the business world.
so who will need to start reporting as of 6th april 2022
Only the most important financial institutions and very largest companies will be expected to submit official reports. The government is deliberately targeting what they consider to be the most economically and environmentally significant UK companies:
UK listed commercial companies
UK-registered large private companies
Banks and building societies
Insurance companies
UK-authorised asset managers
Life insurers and FCA-regulated pension schemes
Occupational pension schemes
Private companies with over 500 employees and £500 million in turnover
What will they be expected to report on?
The government has adopted the TCFD recommendations to give companies a clear framework on what they need to report, the format it should take and the information required.
In brief, the requirements fall into four buckets:
Governance
Disclosure of the organisation’s governance around climate-related risks and opportunities including how the board will oversee such risks and opportunities, and management’s role in assessing and managing them.Strategy
Disclosure of the actual and potential material impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning. Organisations will need to describe in detail the climate-related risks and opportunities the business has identified over the short, medium, and long term, their impact on the business, and include a commentary on the resilience of the business’s strategy when taking different climate-related scenarios into consideration.Risk management
Disclose how the organisation identifies, assesses and manages climate-related risks – describe the processes used by the business for doing so, and setting out how those processes are integrated into the business’s overall risk management.Metrics and targets
Disclosure of the metrics and targets used by the organisation to assess and manage climate-related risks and opportunities, including a commentary on greenhouse gas emissions and performance against targets.
Why is this all so important?
There are several reasons we should all be paying attention to this legislation.
Firstly, those companies required to report under the TCFD framework will find that climate related considerations now must play a part in every decision they make – whether that is investment opportunities, strategy planning or new market research. It will add a whole layer of data and auditing requirements and remove the possibility for these companies to ignore their environmental impacts. And whilst the government is targeting c.1,300 companies – just 0.03% of the estimated 4.2 million registered companies in the UK- in real terms those companies represent trillions of pounds in assets and an outsized portion of the workforce That 0.03% is an enormously influential set of organisations with business interests in every corner of the UK economy.
Second - this is only the start. The Government plans to expand these rules to include more UK authorised asset managers, life insurers and FCA-regulated pension providers in 2023, with further expansions expected in 2024/25.
At this stage, there is no indication that the Government is considering extending the new disclosure rules beyond the above, but it hasn’t ruled it out. We may all one day find ourselves obliged to disclose the risk climate change poses to our organisations as regularly as our VAT returns – and given this new regulation, should not be surprised at being asked to do so.
Third – and most time sensitive now, for smaller businesses - is that whilst they may not need to report directly to the Government, they may be part of the supply chain of a larger company that does. As these large companies are obliged to expand reporting, so too will they be obliged to expand their understanding of their supply chain and include relevant data from suppliers in their network. We believe this trickledown effect will be substantial and mean that organisations that fall outside the expectations of the Government, will nonetheless become involved in the reporting process simply by being part of a wider business ecosystem.
what next?
With the rules only just coming into effect it is hard to tell what the long-term ramifications might be.
The Government’s hope is that these measures will ultimately support a better allocation of capital to support the UK's net zero target – a big investor with capital in its pocket and an environmental obligation to fulfil will look to invest in renewables (for example) rather than outdated fossil fuel technology. Similarly, a pension fund that needs to guarantee the financial wellbeing of its clients 30 years from now will not be looking to invest in projects that will likely be side-lined as part of our national greenhouse gas emissions reduction plan.
Our hope is that these regulations will oblige companies to make better decisions regarding climate risk and the country’s net zero goals. Strategy will have to be placed within a context of environmental responsibility and a company’s sustainability will be a daily discussion point at board level meetings.
ESGmark® will be watching the adoption of the TCFD reporting with interest and will return to it as the policy develops.
For more on the UK Government’s environmental policy, see our Introduction to the Green Claims Code, and for a global context we have a full round up of last year’s COP26 outcomes and the importance of all this as we work towards the UN’s Sustainable Development Goals.