Mandatory Climate-related Financial Disclosures

Government taskforce announces roadmap towards mandatory climate reporting for UK businesses

The Taskforce on Climate-related Financial Disclosures (TCFD) has announced that the Government will be taking legislative steps over the next 5 years to make Climate-related Financial Disclosures (CFDs) mandatory for certain UK businesses. In June 2017 the TCFD published a report setting out overarching recommendations to be implemented by businesses relating to strategy, governance and risk management. The report also provided the relevant metrics and targets which businesses could adopt in order to assess and manage their climate risks and cost saving opportunities. The latest report of the UK's Joint Government-Regulator TCFD Taskforce (published on 9 November 2020) notes that whilst progress was being made, voluntary uptake was well below expectations. This has prompted action to accelerate progress by mandating CFDs across the economy, on the basis that mandatory disclosures would help to:

• build awareness of climate-related risks, opportunities and impacts across the economy;
• integrate assessment and management of these risks, opportunities and impacts;
• inform investment decisions, improving market effectiveness through more efficient pricing and allocation of capital, empowering stewardship and driving economic change to support the transition to a lower carbon economy and resilience to physical climate risks;
• stimulate the development of green financial products; and
• stimulate competition between providers of these products - with follow-on benefits for consumers.

It appears that the mandatory TCFD-aligned disclosure regime will supplement the existing Streamlined Energy and Carbon Reporting (SECR) and Energy Savings Opportunity Scheme (ESOS) (see our factsheet on these schemes for more information) by bringing them within a wider and cohesive climate reporting framework for large businesses and institutions.

Who will be caught?

Seven categories of organisation will be caught by the mandatory CFD process:

• Listed commercial companies;
• UK-registered private companies and LLPs with two of the below:
  • Over 250 employees;
  • Annual turnover exceeding £36 million; and
  • Annual balance sheet exceeding £18 million;
•  Banks and building societies;
•  Insurance companies;
• Asset managers;
• Life insurers and FCA-regulated pension schemes; and
• Occupational pensions schemes.

Steps to be taken by in-scope organisations

The timeline of planned regulatory actions or legislative measures is set out in the following diagram: (Source: Interim Report of the UK's Joint Government-Regulator TCFD Taskforce, November 2020)The intention is that CFDs will be mandatory across the economy by 2025, with most measures expected to come into force by 2023.Although the mandatory regime has yet to take effect, the Government's report suggests that the Climate Financial Risk Forum's (CFRF) June 2020 report would provide a good starting point for in-scope businesses looking to get a head start on preparations for the implementation. The CFRF report provides that organisations should make CFDs in respect of:

• the potential for absolute financial loss by the consumer due to climate-related financial risk through exposure to the company and/or its financial products;
• the potential for relative financial loss by the consumer through exposure to the company and/or its financial products to peers;
• the potential to mitigate these risks through effective strategy; and
• the potential to adapt to future developments in these areas through effective governance and strategy changes.

Over the next year, the CFRF will be refining and building upon the recommendations in its June 2020 report and producing guidance on the metrics, data and methodologies which in-scope businesses should follow to meet the demands of the CFD regime. Further information can be found here.

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Author: Reece Ballett, Trainee Solicitor