Government unveils fresh climate risk disclosure rules for large firms
UK set to become first G20 nation to enshrine mandatory TCFD requirements into law from April 2022 in move that is set to impact 1,300 businesses
The UK is set to become the first G20 country to legally force large companies and financial institutions to report and disclose the risks they face from climate change and the net zero transition, in a move the government expects will affect around 1,300 major British corporations.
The new climate risk disclosure rules confirmed today are set to come into force from April 6 next year, and will apply to many of the UK’s largest traded companies, banks, and insurers, as well as private companies with over 500 employees and £500m in turnover, the government said.
The Treasury said the decision to enshrine into law requirements for large firms to report in line with the Taskforce on Climate-related Financial Disclosure’s (TCFD) global framework would help to increase the quantity and quality of climate risk reporting, and encourage the development of more robust emissions reduction plans.
Moreover, it said the new requirements would help investors and businesses better understand the financial impacts arising from their exposure to the physical and transitional impacts associated with climate change, and price those risks more accurately, in turn helping to combat ‘greenwashing’ and unlock much-needed private funding for greener industries.
Energy and Climate Change Minister Greg Hands said the decision – which comes just a week after the publication of the government’s landmark Net Zero Strategy and only days before the UK hosts the COP26 Climate Summit in Glasgow – would help make the UK financial system “the greenest in the world”.
“If the UK is to meet our ambitious net-zero commitments by 2050, we need our thriving financial system, including our largest businesses and investors, to put climate change at the heart of their activities and decision making,” he said.
The TCFD guidelines, developed in the wake of the Paris Agreement in 2015, provide a uniform framework for companies to assess how the changing climate and net zero transition may impact their business model and strategy, thereby helping them better prepare for disruption ahead.
A growing wave of major companies have committed to disclosing such risks in line with the TCFD guidelines in recent years, including top brands such as Tesco, Aviva, and Unilever, but the practice is still far from uniform across the UK or global economy.
The new rules set to come into force from April next year, which are still subject to Parliamentary approval, support the ambition set out by the Chancellor Rishi Sunak a year ago for the UK to become the first G20 country to mandate TCFD rules across the entire economy by the mid-2020s, with such rules already becoming mandatory in certain sectors such as for large pension funds.
Chris Cummings, chief executive of the Investment Association, hailed the new TCFD rules as “an important step to taking an economy wide step to addressing climate change and reaching net zero emissions”.
“TCFD-aligned disclosures are a crucial part of managing the impact of climate change; supporting companies to focus on the effects of climate change on their business and communicating how these are being managed to their investors and other stakeholders,” he said. “IA members are major investors in UK listed and private companies, so enhancing climate-related disclosures will enable investment managers to provide the necessary support and challenge, through their stewardship role, to their investee companies, as they transition to more sustainable business models.”
It came as the Bank of England and its various financial regulatory bodies published a flurry of report on climate adaptation risks yesterday, revealing it is exploring rules that could force banks to hold extra capital to cover them against the economic shocks posed by climate change and the net zero transition.
The central bank’s Prudential Regulation Authority said there was scope to use the existing bank capital regime to address the “financial consequences” of climate change, and that it would potentially be “prepared to impose and additional capital charge or scalar where appropriate” for particularly risk-exposed companies.
It also acknowledged the specific challenges of managing climate-related risks – which are systemic in nature and involve high levels of uncertainty – and indicated it would formally consult next year on whether new approaches would be needed.
David Barmes, senior economist at think tank and campaign group Positive Money, welcomed the PRA’s announcement.
“After months of pushing back on the idea of ensuring capital rules reflect climate risk, believing that banks can be left to themselves to address this systemic issue, it is positive that the Bank of England appears to be recognising the need for stronger regulation,” he said. “The Bank has finally accepted that climate-related risks are different to other financial risks because they involve huge amounts of uncertainty, tipping points, and long time horizons, meaning traditional risk measurement tools and existing capital buffers may be ill equipped to deal with the severe threats they pose.”
