UK government pledges economy-wide climate disclosures by 2025

The UK’s government said it aims to become the first in the world to mandate all firms to disclose their financial exposures to climate risk.

The UK’s finance minster Rishi Sunak laid out the plan on November 9. Sunak also revealed plans for the government’s first green bond issuance and a new green taxonomy for financial assets.  

“The UK will become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures fully mandatory across the economy by 2025,” the UK Treasury said in a statement.

The Financial Conduct Authority unveiled plans for the voluntary disclosure of climate-related risks by financial firms, adding that it might seek to make the regime mandatory.

Earlier this year, New Zealand became the first country to pass legislation requiring financial firms to declare their climate risks. The rules, which still need to be passed by Parliament, will only apply to banks, asset managers and insurance firms with more than NZ$1 billion ($683 million) in assets. They are due to come into effect in 2023.

The UK’s approach goes further than New Zealand’s and will cover a “significant portion” of the country’s economy, the Treasury said. Listed companies, banks, large private businesses, insurers, asset managers and regulated pension funds will all have to adhere to the disclosure requirements.

In its Green Finance Strategy, published in 2019, the UK government said it expected all “listed issuers and large asset owners” would disclose their climate-related exposures by 2022. It said it expected the disclosures to be in line with the TCFD’s recommendations.

The UK authorities set up a government-regulator TCFD task force, including the Bank of England and Financial Conduct Authority, to consider how to meet this goal. In its interim report, also published on November 9, the task force outlined a roadmap for implementing the new disclosure regime.  

From 2023, all publicly listed UK companies with a premium listing, banks, building societies, insurance companies and pension schemes worth more than £5 billion ($6.5 billion) will be required to “comply or explain” with the TCFD’s requirements, the report said.

The UK authorities will then tighten and extend rules in 2025, subject to consultation, the report said.

“I hope that UK firms will lead the way by responding with credible and detailed disclosures,” said Andrew Bailey, the Bank of England governor.

All firms overseen by the Prudential Regulation Authority must disclose their climate-related financial risks by the end of 2021, the report said.

This would currently involve 214 banks with total assets of £10.1 trillion and 264 insurers, whose total assets equal £2.6 trillion, the report said. From January 1, 2022, the report said the PRA will review the quality of firms’ disclosures.

“If mandatory requirements [are] found to be necessary, public consultation and implementation will follow,” the report said.

The FCA’s chief executive Nikhil Rathi said it had recently proposed a new listing rule that would require “prominent listed companies” to improve their climate-related disclosures.

“This will cover two-thirds of the market capitalisation of equities on the UK Official List – that’s £1.9 trillion,” he said.  

Rathi said the FCA will carry out a consultation in the first half of 2021 on proposed new rules for a “wider scope” of issuers. “We will also develop proposals for client-focused disclosures by asset managers, life insurers and FCA-regulated pension schemes,” he said.

The task force report sets out a proposal to extend voluntary disclosures of climate-related risks. Under the proposal, FCA-regulated firms with a total market capitalisation of £2.9 trillion would make them by 2022 and 2023.

But the report added that the FCA will also consider consulting on making this more extensive disclosure regime mandatory.  

The UK’s Pensions Regulator, and government departments for Work and Pensions, and Business, Energy and Industrial Strategy are making similar recommendations that firms they regulate should extend their climate-related disclosures.

The Department for Work and Pensions says it will make new regulations to fully map the TCFD recommendations into pensions law by October 2021.

TCFD details

The TCFD is a private sector-led group that was created by the Financial Stability Board in 2015. It aims to “develop voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders and insurance underwriters in understanding material risks”.

The TCFD’s June 2017 report sets out recommendations for the financial sector in four areas: governance; strategy; risk management; and metrics and targets.

In October, the TFCD said 42% of companies with a market capitalisation of more than $10 billion disclosed at least some information in line with its recommendations.

“Implementing the TCFD’s recommendations in the UK is just the first step,” said the FCA’S Rathi. “It must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability.”

Green bond issuance

Sunak said the Treasury would issue its first green bond next year, as part of its own climate commitments. The Treasury intends to follow up with a series of further issuances to meet growing investor demand for these instruments, it said in a statement.

The green bonds will help finance projects that will “tackle climate change, finance much-needed infrastructure investment and create green jobs”, the Treasury said

Nations including Germany and Sweden have already issued sovereign green bonds as part of their efforts to create a green Covid-19 recovery.

The government has also set up UK Green Technical Advisory Group has been set up to create and implement a new “green finance” taxonomy for its bonds. The UK also intends to join the International Platform on Sustainable Finance, the Treasury added.

In June 2019, the UK became the first major economy in the world to commit to a net-zero emissions goal by 2050. The UK is a signatory of the 2016 Paris Climate Agreement, which aims to keep a global temperature rise this century below 2°C.