A UK parliamentary committee, the Environmental Audit Committee (EAC), has released its latest report: Greening Finance: embedding sustainability in financial decision making.Among other things, the report calls on the UK government to set a deadline for all UK listed companies and large asset owners to report on climate related risks and opportunities in line with the Task Force on Climate-related Financial Disclosures (TFCD) recommendations (on a comply or explain basis) by 2022, and for this requirement to be reflected in amendments to the UK Stewardship and Governance codes.

Key Points

  1. The report recommends that the government set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities, in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, on a comply or explain basis by 2022.
  2. The UK government should issue guidance clarifying that existing disclosure obligations under the Companies Act 2006 (UK) already require companies to disclose climate change risks where they are financially material.
  3. The Financial Reporting Council's (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority's (FCA) listing rules should be amended to explicitly require climate related financial disclosures on a comply or explain basis by 2022.

Further Detail

Findings and recommendations include the following.

  • Confirmation from government that climate risk is a material risk to present and future value: The report notes that in some quarters, there is an 'outdated perception that climate change is purely an ethical or corporate social responsibility issue rather than a real material risk to present and future value'. The report suggests that the UK government should 'clarify that pension schemes and company directors have a fiduciary duty to protect long-term value and should be considering environmental risks in light of this'.
  • Existing financial and governance frameworks should be used to implement climate risk reporting: 'Embedding climate risk reporting in relevant UK corporate governance and reporting frameworks could negate the need for new legislation' the report states. More specifically, the report calls for:
  • The UK government to issue guidance clarifying that existing disclosure obligations under the Companies Act 2006 (UK) already requires companies to disclose climate change risks where they are financially material.
  • In addition, the report calls for the Financial Reporting Council's (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority's (FCA) listing rules to be amended to explicitly require climate related financial disclosures on a comply or explain basis by 2022.
  • The report goes on to suggest that the UK government should review implementation after a year. If implementation, monitoring and management of climate risk by regulators has not improved, then it's suggested that the UK government should pass new sustainability reporting legislation, similar to France's Article 173.
  • There are inadequacies in how the UK's framework of financial regulation is currently managing climate change risk.
  • The report found that with the exception of the Bank of England and its Prudential Regulation authority, UK financial regulators have not given climate risk reporting sufficient attention. 'There is a compelling case for other regulators to use the current round of adaptation reporting required by the Climate Change Act 2008 to integrate climate change risk management into their work' the report states.
  • The report adds that there is financial regulators 'are to play a part in implementing the recommendations of the TCFD disclosures it is important that they have gone through their own process of analysing the risks of climate change for their area of work and the firms they regulate'. As such, the report recommends that the secretary of state for environment, food and rural affairs use his adapting reporting powers under the Climate Change Act 20018 to require the 'Financial Conduct Authority, Financial Reporting Council and the Pensions Regulator to produce Adaptation Reports'.
  • Requirements should apply to both large asset owners and listed companies:
    • The report recommends that the government set a deadline that it expects all listed companies and large asset owners to report on climate-related risks and opportunities, in line with the TCFD recommendations, on a comply or explain basis by 2022.
    • It's necessary that the requirement be extended to include large asset owners (as well as listed companies) on the basis that currently, adoption of the TCFD recommendations is not universal among large asset owners, which the report suggests, creates risk for beneficiaries. 'We believe this patchwork approach shows the need for TCFD reporting to become a mandatory requirement for all large asset owners by 2022' the report states. 'We need to see a 'green thread' running through the investment chain. This would ensure that climate risks and opportunities are considered at every point in the investment chain' the report argues.
  • Latest call for climate reporting to be made mandatory? Citing recent calls by activist investor Christopher Hohn to the Bank of England in May (see: Governance News 28/05/2018), The FT suggests that the report is the latest call for financial regulators to take a more proactive approach managing the systemic risks that could be caused by climate change and goes on to add that this the report is the latest call to make TCFD guidelines mandatory.

    Australian position

    Commenting on the report, MinterEllison Special Counsel (Climate Risk Governance) Sarah Barker said that it reflects the growing global trend toward integrating climate risk into financial reporting as a matter of course rather than as a separate ‘environmental’ issue. Climate risk has 'moved into the mainstream of financial reporting' Ms Barker said.

    Ms Barker said that the report was also reflective of the growing support for, and use of, the TCFD Recommendations as a guide for reporting, noting that asset owners in the Climate Action 100+ worth around US$30 trillion have now indicated that they will be engaging with investee companies to request TCFD-aligned reports. Ms Barker added that though the TCFD Recommendations are yet to integrated into mandatory reporting requirements in Australia, there have been strong ‘suggestions’ from regulatory authorities that corporations should have regard to them. For example, the recently released draft revised ASX Corporate Governance Principles and Recommendations include (among other things) proposed changes relating to sustainability disclosures including that the commentary be amended to suggest that listed entities with material exposure to climate change risk implement the TCFD recommendations. This change is in line with the Federal Government’s recent Response to the Senate Economics Committee of Inquiry into Carbon Risk Disclosure, in which the government called for the ASX and ASIC to issue further guidance on climate risk reporting.

    The fact that climate disclosure featured in the list of ASIC priorities for upcoming financial reporting, is also Ms Barker suggested, an indication of the broader shift in thinking about climate risk. Referencing a recent report from Cambridge Institute for Sustainability Leadership into the level of engagement of the governments of G20 countries with the TCFD: Sailing from Different Harbours Ms Barker commented that it is 'interesting that 15/20 governments have actively engaged with the recommendations and added that multinational companies that ignore the TCFD may soon find themselves well behind stakeholder expectations'.