Julia Irvine 2 Jul 2019 03:43pm

Listed companies face mandatory climate risk disclosure

Listed companies and large asset owners will be expected to disclose the impact of climate change risk on their businesses from 2022 under the government’s proposed Green Finance Strategy announced today

In a keynote speech at the third Green Finance Summit in London, City minister John Glen said the Treasury would be setting up a joint taskforce with UK regulators to explore the most effective way of ensuring that such disclosure happened, “including whether mandatory disclosures are necessary”.

“The UK has a long history of leading the way in tackling climate change, but we need to do more to protect our planet for future generations,” he said.

“The City has a vital role to play in securing a greener future for us all. By investing more in sustainable projects it can not only protect our environment, but also help establish London as the pre-eminent international centre for green finance.

“Today’s Green Finance Strategy will support this ambition, with new initiatives to boost funding for green ventures and ensure the environment is at the centre of all financial decision-making.”

Other measures include jointly funding the Green Finance Institute with the City of London with the aim of increasing cooperation between the public and private sectors, generating new opportunities for investors and boosting the UK’s reputation as a global hub for green finance.

There will be a £5m Green Home Finance Fund to enable pilot products such as green mortgages to get off the ground, an initiative to ensure financial services related qualifications cover knowledge of green finance and a requirement for the city’s regulators to take climate change into account when carrying out their responsibilities.

In the strategy paper, the government highlights the work by the four financial regulators – the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Pensions Regulator (TPR) – on disclosure of climate change risk.

It points to the FCA’s 2018 discussion paper on the value of introducing a requirement for financial services firms to report publicly on how they manage climate risks, and to the PRA’s supervisory statement on banks’ and insurers’ approaches to managing financial risks from climate change.

It has also set up an industry group with TPR to develop guidance for pension schemes on the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Nevertheless, it says, more needs to be done and more speedily if the ambition of the green finance strategy is to be achieved. As well as the joint taskforce of regulators to ensure a co-ordinated approach on climate-related financial issues, the government intends to take forward discussions with international standard-setters to promote internationally consistent disclosure.

It will also support the work of the World Benchmarking Alliance to develop “transformative benchmarks” to enable comparison between companies’ performance on key areas of sustainability and impact on the UN Sustainable Development Goals.

The strategy was widely welcomed by the financial services sector and beyond. A joint statement from the four regulators described climate change as a defining issue of the times. “We recognise it presents far-reaching financial risks relevant to our mandates from both physical factors, such as extreme weather events, and transition risks that can arise from the process of adjustment to a carbon neutral economy,” they said.

“Companies should consider the likely consequence of climate change on their business decisions, in addition to meeting their responsibility to consider the company’s impact on the environment. Financial risks will be minimised by achieving an orderly transition and via a collective response.”

“We welcome the action being taken as part of the UK’s green finance strategy to ensure a coordinated approach and look forward to further collaboration to advance progress in the near term on climate-related issues.”

In a separate statement, the FRC set out what it is doing to encourage companies to consider their impact on the environment. “Reporting should set out how the company has taken into account the resilience of the company’s business model and its risks, uncertainties and viability in both the immediate and longer-term in light of climate change,” it said.

“Companies should also reflect the current or future impacts of climate change on their financial position, for example in the valuation of their assets, assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities and financial risk disclosures.”

In carrying out its reporting oversight brief, the FRC will monitor companies’ climate change reporting and consider the adequacy of auditors’ work on principal risk disclosures, including climate risk.

Later this year, the FRC’s Financial Reporting Lab will provide guidance for companies on reporting climate related risk and opportunities, while the FRC intends to publish a climate adaptation report under the Climate Change Act.

ICAEW chief executive Michael Izza also gave his backing to the strategy. “The climate emergency represents the greatest risk of modern times. The Green Finance Strategy has our full support and highlights the fundamental role that finance professionals can play in leading our way out of this crisis and securing a greener future for us all.

“Businesses are already feeling the effects of climate change with extreme weather patterns, for example, having resulted in the downgrading of credit ratings and even bankruptcy for some companies. We can no longer bury our heads in the sand. Businesses must adapt to meet the climate crisis by driving towards net zero carbon and developing new industries and products.”

CBI chief economist Rain Newton-Smith agreed. “Business,” she said, “is right behind the need for the UK to have a net-zero economy by 2050 and build on our global leadership in cutting greenhouse gas emissions.

“Green Finance is an excellent tool to help decarbonise the economy and could be another string to our bow as one of the world’s great financial powerhouses.”

She added that the strategy was a “golden opportunity” for the UK to build on its existing strengths in green finance.