UK firms worth £2.3tr to face new climate risk disclosure rules

Michael Holder
UK firms worth £2.3tr to face new climate risk disclosure rules

Large British companies with a combined market capitalisation of £2.3tr may soon be forced to publicly disclose the risks they face from climate change and the net zero transition "or explain why not", under new climate risk disclosure rules being drawn up by the UK's financial watchdog.

The Financial Conduct Authority (FCA) has unveiled new proposals that would require all commercial firms in the UK with a premium listing - covering around 60 per cent of the UK's total market capitalisation - to make such disclosures in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFDs), or publicly explain their reasons for not doing so.

The proposals, which could effectively make the voluntary TCFD guidelines a mandatory requirement for around 480 companies in the UK, are set out in a three-month consultation launched by the FCA on Friday. The body is also seeking feedback on how effectively existing requirements are operating to encourage large firms to make climate change and other sustainability-related risk disclosures.

FCA chief executive Andrew Bailey, who officially takes over as the Bank of England's new Governor next month when Mark Carney steps down, said climate change presented a "serious and wide-ranging threat to global economic prospects, society more broadly and our natural environment".

"The changes we propose will help to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change," he said. "Improved disclosures will support better asset pricing and enable investors to make more informed choices about where to allocate their capital - which will ultimately support the transition to a low carbon economy."

The work of the Climate Financial Risk Forum, an industry group jointly launched by the FCA and the Bank of England's Prudential Regulation Authority in March last year, will also help to build disclosure capabilities among UK firms, the watchdog added.

The Forum is soon set to publish industry guidance covering climate-related disclosures, risk management, scenario analysis and innovation in line with the TCFD's recommendations, which the FCA said would further complement the new rules launched for consultation on Friday.

Meanwhile, the FCA also said it was looking at how to beef-up climate related disclosures from regulated companies, including asset managers and life insurers, to "ensure a coordinated approach" across UK plc, as part of its work through the government's Green Finance Taskforce.

Companies and investors have faced growing pressure from shareholders and activists to disclose and take action against climate change risks, particularly with regards to exposure to high-carbon assets such as fossil fuel investments.

However, ClientEarth - which has led a series of complaints to regulators against firms on climate risk - said the FCA's new proposals allowed far too much wriggle-room for companies to avoid making full climate risk disclosures.

ClientEarth lawyer Daniel Wiseman argued firms already have a fiduciary duty to set out any major risks posed to their business and argued the FCA had "completely dropped the ball" by proposing "a complicated 'comply or explain' mechanism" for the TCFD recommendations.

"Markets, investors and consumers urgently want clarity on what businesses are doing to tackle climate change and align their business with the Paris Agreement goals," he said. "The FCA should just make the TCFD recommendations mandatory for all listed companies. This would be much cleaner and simpler and provide the certainty that companies and investors need to run their businesses effectively."

It follows comments from Bailey last week suggesting he would seek to make decarbonising the Bank of England's quantitative easing programme "a priority" when he takes over as Governor next month

During his pre-appointment hearing in Parliament last week for his new role, Bailey told MPs there was a "strong argument" for shifting the central bank's asset purchases to reflect climate concerns, and would "take it forward" with the Treasury which would need to approve any such changes.

Campaign group Positive Money welcomed Bailey's comments, arguing such a move could put an end to actions by the Bank such as in 2016 when it bought up bonds from firms such as Shell and BP through its corporate quantitative easing programme.

"Excluding fossil fuels from central banks' QE programme is a key step for greening the economy, as it would show a strong signal that such dangerous assets are no longer a safe bet for investors," said Fran Boait, executive director of Positive Money. "It is brilliant that Andrew Bailey has already committed to making it a priority."

The proposals are the latest in a string of moves from regulators and investor groups designed to ensure more listed companies enhance their climate disclosures. Just last week the Investment Association (IA), which represents 250 members with £7.7tn under management, announced a new three-year deadline for listed companies to clearly explain how they plan to measure and manage climate-related risks and opportunities through their annual reports. That move followed the launch of a review by the Financial Reporting Council to assess whether companies are complying with existing risk disclosure rules when iot comes to climate-related issues. 


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