On 9 November the chancellor, Rishi Sunak, outlined the following measures designed to strengthen the UK's credentials as a green finance centre:
- Introducing the UK's first sovereign green bond by 2021 (subject to market conditions).
- Implementing a "green taxonomy": a common framework for assessing the environmental sustainability of different activities to aid investment decisions.
- Mandating climate risk disclosures for a range of UK companies over the next five years.
In this Insight, we will look at the last of the three measures, which marks an important step-change in climate-related compliance requirements in the UK.
What are the new reporting requirements?
Climate-related reporting is not a new concept. The government has for some time been encouraging businesses to comply with the reporting requirements set out by the global Taskforce on Climate-related Financial Disclosures (TCFDs). However, according to a report issued by the government, the Financial Conduct Authority (FCA) and the Pensions Regulator, a shift from a voluntary to a mandatory approach to climate-related financial disclosures is required "given the urgency of the climate threat".
The mandated, TCFD-aligned disclosures require the release of certain information in order to build awareness of climate-related risks, opportunities and impacts across the economy. This information can then be used in order to make investment decisions, and to stimulate an accurately priced and transparent market for green financial products.
Which organisations would the requirements apply to?
The indicative roadmap for these measures (which is set out in the report) details a coordinated strategy across 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.
When will these changes come into effect?
The government has announced its intention to move towards mandatory TCFD-aligned disclosures across non-financial and financial sectors of the UK economy over the next five years, with most action occurring over the first three years.
Different timescales for implementation of the mandatory reporting requirements are suggested for the different types of organisation, with compliance from banks, building societies and the largest businesses required from the end of 2021.
It is expected that the new mandatory reporting requirements will come into force incrementally, and will initially require clients to comply with the TCFD rules or explain why disclosures have not been made. A shift away from a "comply or explain" approach would then follow, making the UK the first major economy in the world to make climate risk disclosures obligatory.
Osborne Clarke comment
Of the package of green finance measures announced by the chancellor, the introduction of mandatory climate reporting will have the greatest impact on the majority of UK businesses. The report makes it clear that relevant organisations should consider taking the necessary steps now to build their climate-related data to ensure compliance with these new requirements. Even businesses that are not included within the predicted roadmap of measures should take note of these changes, as this announcement emphasises the government's focus on ensuring adequate climate reporting and is unlikely to be the final development in this area.