Roadmap outlines staggered compliance timetable for UK asset owners and financial institutions.
Starting from early 2021, asset owners and institutional investors across seven financial categories will need to adhere to a five-year plan for mandatory climate-related financial disclosures set out by the UK Joint Government-Regulator TCFD Taskforce.
The interim roadmap report follows the announcement made by UK Chancellor of the Exchequer Rishi Sunak in his address to the Green Horizon Summit earlier this week. Sunak pledged the UK would be the first country in the world to enforce mandatory disclosures by 2025, alongside plans to issue the UK’s first sovereign green bond next year.
“As investors become increasingly concerned about ESG issues, we would expect these bonds finds a committed audience,” said Andreas Billmeier, Sovereign Research Analyst at Western Asset Management.
“The confirmation of mandatory climate governance and the TCFD reporting requirements for all UK DC and DB schemes with at least £1 billion of assets from 2023 could catalyse demand.”
The UK Taskforce outlined its strategy for compliance across seven categories of organisation, including UK-registered companies, banks and building societies and Financial Conduct Authority-regulated (FCA) pension schemes.
The UK Taskforce asserted a correlation between cutting emissions and economic growth, with the economy growing by 75% over the past three decades as emissions have been cut by 43%. The report said tackling climate change should continue to “contribute to the UK’s economic recovery”.
“High quality disclosures about how organisations and assets will be impacted by – and impact – environmental change will improve transparency, encouraging better informed pricing and capital allocation. This is turn should drive investment in more sustainable projects and activities,” the report said.
Compliance with TCFD disclosure recommendations by UK-based organisations is expected to build awareness of climate-related risks, opportunities and impacts across the economy, as well as successfully integrating the assessment and management of these areas. The UK Taskforce noted that, in order for organisations to be considered compliant with the mandate, they must make visible progress towards empowering stewardship and driving economic change to support the transition to a lower carbon economy.
The mandatory disclosure timeline
Occupational pension schemes with assets under ownership of more than £5 billion, banks, building societies and insurance companies and premium-listed companies will be brought into the scope of mandatory disclosures from 2021.
By 2022, this will have been extended to occupational pension schemes with assets under ownership over £1 billion, as well as the UK-authorised asset managers, life insurers and FCA-regulated pension providers. The remainder of asset managers, life insurers and pension providers will fall under the scope of the UK Taskforce by 2023, depending on an updated consultation that will take place in 2022.
Subject to consultation, rules will be introduced in 2024 and 2025 to cover all other occupational pension schemes not yet falling under mandatory disclosure requirements, although the report noted this is also subject to consultation results.
Alongside the TCFD’s consultations in the pension space, the Ministry of Housing, Communities and Local Government will be conducting its own consultation next year on the implementation of the Local Government Pension Scheme by 2023 and how this aligns with climate-related disclosure.
According to the Roadmap report, the FCA plans to consider the “appropriate scope of proposed rules, with a view to promoting TCFD-aligned disclosures directed at clients and end-investors by firms responsible for setting investment strategy and making investment decisions on behalf of institutional and retail investors”. The regulator will report its findings in a consultation paper due to be published in the first half of 2021.
The UK Taskforce anticipates the FCA proposals will include “disclosure of strategy, policies and processes at the firm level, covering recommended disclosures; complemented by more targeted disclosures at the fund or portfolio level”.
Although the exact scope of funds or portfolios that would fall under these proposals has yet to be determined, the report noted the FCA is expected to set a scope prioritising the information needs of UK clients and end-investors.
“Subject to consultation, cost-benefit analysis and other statutory requirements, the FCA would aim to finalise rules by the end of 2021, with these coming into force in 2022,” the report added.
Is enough being done?
The UK Taskforce report said the number of organisations currently making climate-related disclosures in line with TCFD recommendations is low.
“While there has been a lot of progress, there is more work to do,” the report said.
In 2019 research conducted by the FCA, only a third of premium-listed companies were making relevant reports that aligned with the TCFD’s 11 recommended disclosures. By making disclosures mandatory, the TCFD hopes to bridge the gap, even as it noted big changes cannot happen overnight.
“The Roadmap recognises that quality TCFD-aligned disclosure is a journey for every organisation and that different sectors may need to go at different paces.”
The UK Taskforce acknowledged that the benefits of mandatory disclosures are likely to increase with an organisation’s size, such as an investor’s assets under management (AUM) or a listed company’s market capitalisation. The proportional costs involved for smaller, less well-resourced organisations to put relevant processes in place in order to meet these disclosures means they need more time to meet TCFD requirements.
“Taking these matters into account, each sectoral regulator should consider thresholds for the implementation of disclosures within each category of organisation,” the report added.
The Taskforce expects to release more “detailed expectations for disclosures” throughout the five-year period to both supplement the TCFD recommendations and “enhance comparability across UK organisations”.
The report also asserts the UK Taskforce’s support for the International Financial Reporting Standards (IFRS) Foundation’s proposal to introduce a new global Sustainability Standards Board. The report noted this would go a long way to standardising international climate-related disclosures, not just the UK.
The government will provide an update on the roadmap’s progress in the 2022 refresh of its Green Finance Strategy.