There were a number of key climate and green finance announcements at the launch of the Green Horizon Summit on 9 November 2020, hosted by the City of London Corporation and Green Finance Institute.
Two of these announcements relate to how companies and other organisations in the UK will be required to report on climate change in the very near future – paving the way to mandatory TCFD-aligned climate reporting for corporates and the financial sector, by 2025.
The Financial Conduct Authority (FCA) has confirmed that, from 1 January 2021, premium listed companies in the UK will be required to make better disclosures about how climate change affects their business, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). This, it says, will cover two-thirds of the market capitalisation of equities on the UK Official List. The FCA’s full Policy Statement and final rules will follow by the end of the year. See FCA announcement.
The new FCA rule will be introduced initially on a “comply or explain” basis. The FCA generally expects companies to be able to comply. However, it understands that some companies may need more time to deal with data, analytical or modelling challenges.
The FCA will also consult in the first half of 2021 on introducing TCFD obligations for asset managers, life insurers and pension providers. The FCA has said it aims to bring in those rules for the largest firms by 2022.
The FCA has also said it will also consider moving from 'comply or explain' to mandatory disclosure. For further information on how the climate disclosure rules are expected to be rolled out to other types of company and other types of organisation in the UK – see below.
The Chancellor, Rishi Sunak, also announced that the UK will become the first country in the world to make TCFD-aligned disclosures fully mandatory across the economy by 2025. See Chancellor’s announcement.
In its Green Finance Strategy in 2019, the government set an expectation that all listed issuers and large asset owners would be disclosing in line with the TCFD recommendations by 2022. A cross-government/regulator taskforce was established in 2019 to explore the most effective approach to climate-related disclosures.
The joint Government Regulator TCFD Taskforce has published an interim report alongside a roadmap for implementing mandatory climate disclosures, many of which will come into force by 2023. The government has said it will provide an update on progress in the 2022 refresh of the Green Finance Strategy.
The indicative timeline in the roadmap shows the roll out of TCFD-aligned climate disclosure rules to different types of organisations in the UK as follows. The details of implementation will be determined by the relevant regulator or government department.
For companies, the roll out of TCFD-aligned disclosure requirements will be done as follows.
Premium listed companies
- Applies from 1 January 2021
- On a “comply or explain” basis
- FCA full Policy Statement and final rules to be published by end of 2020
- FCA is considering providing guidance on the limited circumstances in which the FCA would expect an issuer to provide an explanation, rather than make disclosures
Other listed commercial companies
- FCA to consult in first half of 2021 on extending the scope to other listed commercial companies
- FCA to consider making disclosure requirements mandatory rather than “comply or explain”
- Annex A to interim report defines “listed commercial companies” as all premium listed commercial company issuers of equity and all issuers of standard listed shares (excluding listed funds) on the FCA’s Official List
- Disclosures for listed open/closed ended investment companies will be considered alongside those for asset managers
UK registered companies
- BEIS to require companies registered in the UK including very large private companies (exact scope to be decided – see Annex A to interim report for options being considered) to make TCFD-aligned disclosures in their annual report and accounts
- Obligation to be included in the Companies Act 2006
- BEIS to consult in early 2021
- Regulations expected to be made in mid-2021 and to come into force in 2022
See the Annex to the interim report for further detail of how mandatory climate disclosure is expected to be rolled out to:
- banks and building societies;
- insurance companies;
- asset managers;
- life insurers and FCA-regulated pension schemes; and
- occupational pension schemes.
However, for asset managers and other financial market participants, it is worth bearing in mind that the FCA has confirmed (via trade associations) that it will not be implementing the requirements of the EU Sustainable Finance Disclosure Regulation (SFDR) into UK law, which includes various climate disclosures. The FCA is expected to consult in 2021 on a UK regime. This means that UK firms will not need to comply with the SFDR in the UK. However, they will be directly impacted if they market their funds into Europe and are likely be indirectly impacted if they have affiliates or clients that are subject to the EU rules. For more information on the SFDR, see our client briefing.
The intention behind the government’s plan to make climate disclosure mandatory for various organisations in the UK is to ensure that the right information on climate-related risks and opportunities is available across the investment chain – from companies, to financial services firms, to end-investors.
High-quality disclosures about how organisations and assets will be impacted by – and how they will impact – environmental change is expected to encourage better informed pricing and capital allocation. This in turn would drive investment in more sustainable projects and activities.
As the UK government states in the Private Finance Strategy for COP26 - which was launched on the same day as the FCA and the Chancellor made their announcements - a transition to net zero will affect how risk is measured and managed and how assets are valued. The private finance sector needs to be able to allocate capital to manage climate risks and seize climate opportunities. To identify those opportunities and assess the “transition readiness” of companies, the financial sector needs information on scientifically feasible transition paths. This information will help expose which companies will be able to seize the opportunities in the transition to a net zero world and which will (possibly) cease to exist.
What does this mean in practice?
The UK, along with the EU and many others across the globe, have pledged to reach net zero carbon emissions by 2050. Over the last few months, we have also seen a significant ramping up of net zero pledges from corporates and financial institutions. As hosts of the next global climate summit (COP26) in 2021, the UK government is expected to show international leadership through its own climate agenda.
The transition to a net zero economy – in the UK and elsewhere - will require a vast increase in investment, from the private and public sectors, in greener and more sustainable activities and products. Better data is at the crux of managing climate risk and seizing the opportunities.
Investors say they need more and better climate data that focuses on the financial impact of climate change. Corporates say that it is difficult to know which of the many existing voluntary climate reporting frameworks and metrics to use.
The announcements this week by the FCA and the Chancellor are intended to cut through the confusion and provide climate data that will enable better informed pricing of the risks and opportunities associated with the net zero transition – with the TCFD clearly emerging as the gold standard for climate reporting, not just in the UK but elsewhere across the globe too.
In the meantime, though, until the new mandatory reporting rules kick in, the Financial Reporting Council is encouraging companies in the UK to report voluntarily against the TCFD’s recommended disclosures and the Sustainability Accounting Standards Board’s (SASB) metrics for their sector – see our blog post: FRC review of corporate climate reporting concludes more needs to be done to meet investor expectations.