Companies will need to report the financial impacts of climate change on their businesses within the next five years as investors and governments demand they curb their greenhouse gas emissions.
Rishi Sunak announced[i] that the rule would apply to most of the economy, including listed companies, banks, large private businesses, insurers, asset managers and regulated pension funds.
“We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre,” the Chancellor said. “We’re doing what’s right for the UK and providing firms with certainty and stability.”
By 2025, he said those groups must report in alignment with the Task Force on Climate-related Financial Disclosures, an organization established in 2015 by the international Financial Stability Board to promote more informed decisions by companies.
The TCFD says companies should disclose in their financial reports how climate change could increase or reduce sales, among other issues. More than 1,500 organizations have expressed their support for the TCFD’s recommendations according to the TCFD’s 2020 status report[ii]. The 1,500 TCFD supporters include companies representing a combined market capitalization of $12.6 trillion and financial firms responsible for assets of nearly $150 trillion.
A roadmap for implementing TCFD has been set out by the Government’s TCFD Taskforce[iii].
The Taskforce has set out an indicative path, mostly occurring over the next three years, towards the disclosure of comprehensive information on how climate-related risks and opportunities are being managed across the UK economy. Coverage of disclosures should increase each year as potential new regulatory or legislative measures come into force.
It presents a coordinated strategy for seven categories of organisation: 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.
“Open, honest, consistent and transparent disclosure is a fundamental pre-condition for the realignment of finance and capitalism,” said Jenn-Hui Tan, global head of stewardship and sustainable investment at Fidelity International, a large global asset manager.
Regulators in the U.S. have voiced support for the TCFD, and the superintendent of the New York State Department of Financial Services recommended that banks and insurers report through the TCFD. The DFS regulates around 1,500 banks, 1,800 insurers and other financial groups, with assets exceeding $7 trillion.
The U.S. could move closer to requiring environmental, social and governance disclosures from companies under President Biden.
New commissioners at the Securities and Exchange Commission would likely be supportive of mandating ESG disclosures by companies, and Biden would have an opportunity to replace Securities and Exchange Commission Chairman Jay Clayton, whose term expires in June next year.
Sustainable investing does not look like a fad.