On 9 November 2020, HM Treasury published an Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce together with a roadmap towards mandatory climate-related disclosures.
The Taskforce on Climate-related Financial Disclosures (TCFD) is a private sector led group convened by the Financial Stability Board in 2015 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 final report, published in June 2017, sets out overarching recommendations in four thematic areas: governance, strategy, risk management and metrics and targets. Underneath these sits 11 recommended disclosures that provide more granular detail on the information to be disclosed under each of the recommendations. The design and structure of the recommendations are intended to provide the market with decision-useful, forward-looking information on how organisations are addressing climate-related risks and opportunities in their activities.
A Dear CEO letter, published by the PRA in July 2020, observed that “most firms are making good progress in developing approaches to identify, assess, manage, report and disclose climate-related financial risks and have started to embed them in associated governance and control structures”. However, the PRA still observed that “best practice continues to evolve” and highlighted a number of gaps between firms’ intentions and the PRA’s supervisory expectations.
Given the urgency of the climate threat, a voluntary approach to climate related financial disclosure may not be sufficient. The Government and the UK regulators have concluded that the UK should consider moving 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, to help accelerate progress.
The Government and the UK regulators feel that mandatory TCFD-aligned disclosures would require that organisations provide decision-useful information to help:
- Build awareness of climate-related risks, opportunities and impacts across the economy.
- Integrate assessment and management of these risks, opportunities and impacts.
- Inform investment decisions, improving market effectiveness through more efficient pricing and allocation of capital, empowering stewardship and driving economic change to support the transition to a lower carbon economy and resilience to physical climate risks.
- Stimulate the development of green financial products and competition between providers of these products.
The roadmap sets out an indicative path for the introduction of regulatory rules and legislative requirements over the next five years, with most action occurring over the first three years. It illustrates how coverage of disclosures could increase each year as potential new measures come into force, subject to the outcomes of relevant regulators’ and Government departments’ consultation processes and other statutory requirements, such as cost-benefit analysis. The roadmap 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. Annex A to the interim report summarises the implementation approach for each of these categories.