By Camilla Tagliabue
This blog post was submitted as a contribution to the Tabula project, an international and comparative research collaboration carried out over the summer of 2021.
The establishment of the Task Force on Climate-related Financial Disclosures (TCFD) by the international Financial Stability Board in 2015 could be identified as one of the most relevant recent steps taken globally toward a greener economy.
The TCFD was charged with studying how to help companies disclose key climate-related information to the market. In June 2017, the TCFD issued a Final Report on climate-related financial disclosures. The report provided recommendations in four main areas: government, strategy, risk management, and metrics and targets. Furthermore, it set out the importance of considering the impacts on climate change when making business and investment decisions. In this regard, the TCFD underlined the duty of the companies and actors in the market to demonstrate that they are aware of their responsibilities toward the environment.
Following the issuance of the Final Report by the TCFD, the UK government realized the importance of acting on a national level to accelerate the implementation of measures to protect the environment and to raise awareness of the need to act to support the economy while stopping, or at least slowing, climate change. As a result, in June 2019, the government issued legislation committing the United Kingdom to reduce gas emissions to net zero by 2050. Furthermore, on July 2, 2019, the UK government issued its Green Finance Strategy, and in conjunction with that, a task force was established to determine the most effective and efficient approach to ensuring the implementation, at a national level, of the recommendations proposed by the TCFD.
In November 2020, the task force published “A Roadmap towards Mandatory Climate-related Disclosures,” which underscored that the level of TCFD-aligned voluntary disclosures of climate-related information by entities operating in the UK was still very low. Therefore, the “Roadmap” detailed the importance of imposing mandatory climate-related disclosures on companies and large asset owners, namely listed commercial companies, UK-registered companies, banks and building societies, insurance companies, asset managers, life insurers and FCA-regulated pension schemes, and occupational pension schemes. Moreover, the “Roadmap” set forth steps to be followed in order to have national mandatory climate-related disclosures aligned with the TCFD’s recommendations by 2025.
The pandemic crisis notwithstanding, the UK government and relevant regulatory authorities made it a top priority to ensure the protection of the environment and to take economic recovery from the pandemic as an opportunity to modify the framework for financial disclosure. Therefore, soon after the publication of the “Roadmap,” they implemented several changes and published proposals for public input.
Policy Statement
PS20/17: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations
In December 2020, the UK Financial Conduct Authority (FCA) introduced a new rule, the “comply or explain” disclosure requirement, applicable to the accounting period beginning on or after January 1, 2021. The rule requires commercial companies (either UK or overseas companies) with a UK premium listing to include a specific statement in their annual financial reports either declaring that they have made TCFD-aligned climate-related financial disclosures or explaining why such disclosures were not provided and which steps the companies are taking to be in compliance. The new rule was accompanied both by guidance in determining whether a company’s disclosures follow the TCFD’s recommendations and by clarification on existing obligations of disclosures on Environmental, Social, Governance (ESG) matters, including climate change.
Public Consultation
On requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs)
Between March 24 and May 5, 2021, the UK Department for Business, Energy & Industrial Strategy consulted the public on a proposed regulation that would mandate disclosure of climate-related financial information both by publicly-traded companies (including AIM quoted companies with more than 500 employees) and by UK companies and LLPs with more than 500 employees and a turnover of more than £500 million. Based on the public’s feedback, the UK government planned to introduce the regulation by the end of 2021, with applicability to the financial terms beginning on or after April 6, 2022.
On June 22, 2021, the FCA published two proposals: one on the introduction of guidance and rules regarding climate-related financial disclosures to asset managers, life insurers, and FCA-regulated pension providers (CP21/17); and another on the extension of the mandatory climate-related disclosures to issuers of standard listed equity shares that also sought opinions on ESG topics in UK capital markets (CP21/18). The public was able to comment on both proposals until September 10, 2021. The FCA planned to publish a Policy Statement by the end of 2021, including an explanation of the feedback received and the new regime.
Proposal
CP21/17: Enhancing climate-related disclosures by asset managers, life insurers, and FCA-regulated pension providers
The proposal outlined in CP21/17 would be applicable to asset managers, life insurers (including pure insurers), and non-insurer FCA-regulated pension providers (including platform firms and self-invested personal pension operations). However, asset managers and asset owners with less than £5 billion in assets under management or administration on a three-year rolling average (which should be determinate on an annual basis) would be exempt.
The proposal would impose disclosures on climate-related information on two levels: entity level, and product or portfolio level. On the entity level, the FCA would require a yearly TCFD report, published on the entity’s website, that would detail how the entity has taken into consideration risks and opportunities related to climate while managing or administering investments on behalf of clients and consumers. On the product or portfolio level, where applicable, entities would be required to make annual disclosures regarding a baseline set of core, mandatory carbon emissions and carbon intensity metrics (including additional metrics, whenever possible), and scenario analysis for individual products or portfolio management services. Such disclosures would be posted on the entity’s website and included in appropriate client communications or, in certain circumstances, provided annually to a client upon request.
Proposal
CP21/18: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets.
In the proposal set forth in CP21/18, the mandatory TCFD-aligned disclosure requirement would be extended to standard listed issuers regardless of where they are incorporated. (The FCA is here seeking comments on whether the rules also should be extended to issuers of standard listed GDRs.) The requirement would not be applicable to standard listed investment entities and shell companies, however.
Such a requirement would mirror the “disclose or explain” requirement implemented in the UK in 2021 for premium listed commercial companies. It would require the issuer to provide in its annual financial report a statement that reports, among other elements: whether the entity has made disclosures in compliance with the TCFD’s recommendations in its financial statement; where such climate-related disclosures are set forth in the financial report (or other relevant documentation); reasons for not making such disclosures, if they were not made, and a description of the steps being taken in order to be in compliance; and an explanation of any disclosures that were made against the TCFD’s recommendations.
Alongside this proposal, FCA sought opinions on ESG-related matters in the UK capital markets.
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Gas emission, pollution, and climate change do not solely impact the environment; they also pose risks to companies’ operations, supply chains, and financial commitments, and to the global economy. As such, now more than ever, it is critical to call for action and change. The economic recovery following the pandemic should be taken as an opportunity to “build back better.” One way to do so, and to simultaneously accelerate the transition to a greener and less carbon-incentive economy, is with the introduction of mandatory climate-related disclosures, as established by the UK government.
The goal in introducing mandatory climate-related disclosures in the United Kingdom for several actors in the market is to enable consumers and investors to make informed decisions. Such disclosures improve transparency in the investment chains of both financial and non-financial sectors and provide the instruments to better understand the impact of business and investment decisions on the climate. Moreover, the high quality of the required climate-related disclosures would enhance the integrity of the market as well as competition in the interests of consumers and investors, who are developing a sense of moral duty toward the protection of the environment. The disclosures, then, are intended to help consumers and investors identify unsustainable products and businesses, and to drive their investments and allocation of capital to greener economy and activities.