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Breaking New Ground: The UK's Mandatory TCFD-aligned Disclosure Requirement

UK Chancellor of the Exchequer Rishi Sunak
UK Chancellor of the Exchequer Rishi Sunak

In an article posted by Mark Segal on ESG TODAY (9 November 2020), the UK’s Chancellor of the Exchequer has announced significant moves towards sustainable finance, which will have widespread implications for the sustainable operations of businesses around the globe. With the rest of Europe, the USA and parts of Asia tipped to ultimately adopt a similar stance, the pressure is now on for Australia to join!

The UK’s Chancellor of the Exchequer Rishi Sunak today made several significant sustainable finance announcements, including making the UK the first country in the world to mandate economy-wide disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD). The Chancellor also stated that the UK will issue its first-ever sovereign green bond and will implement a green taxonomy.

The new commitments were outlined as part of the UK’s plans to “bolster the dynamism, openness and competitiveness” of the financial services sector, following the country’s departure from the EU.

While many companies have ramped up efforts to operate more sustainably in recent years, and investors have increasingly pursued ESG integration in their investment decision-making, many often report that one of the greatest obstacles to these initiatives remains the lack of consistent, reliable data to know where to target efforts and to measure, analyze and track progress. The TCFD was established to help address these issues.

The TCFD was established by the Financial Stability Board in 2015, to develop consistent disclosure standards for companies, to enable investors and other stakeholders to assess the companies’ climate-related financial risk. The recommendations were published in June 2017.

The Chancellor announced that the UK expects to go beyond the “comply or explain” approach, aiming for mandatory TCFD-aligned disclosures across non-financial and financial sectors of the UK economy by 2025, with a significant portion of mandatory requirements in place by 2023.

According to Chancellor Sunak, the sovereign green bond will be used to help enable the UK to meet its 2050 net zero target and other environmental objectives, by financing projects that will tackle climate change and infrastructure investments, and creating green jobs across the country. The green bond is expected to be followed up with a series of further issuances to meet growing investor demand for these instruments. Several investors have been calling upon the UK government to participate in the sustainable finance market, including the Green + Gilt proposal launched last month by a group of asset managers and investor groups, representing £10 trillion in assets, urging the issuance of a sovereign green bond to finance the country’s green recovery efforts.

The UK green taxonomy will be designed to provide a common framework for determining which activities can be defined as environmentally sustainable, aiming to improve understanding of the impact of firms’ activities and investments on the environment and support the transition to a sustainable economy. The UK taxonomy will take the scientific metrics in the EU taxonomy as its basis.

Chancellor Sunak said:

“We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre. By taking as many equivalence decisions as we can in the absence of clarity from the EU, we’re doing what’s right for the UK and providing firms with certainty and stability."
“Our plans will ensure the UK moves forward as an open, attractive and well-regulated market, and continues to lead the world in pioneering new technologies and shifting finance towards a net zero future.”

Investors and sustainable investing organizations welcomed the announcement of the move to TCFD-aligned reporting.

Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, at Fidelity International said:

“We welcome the Chancellor’s decision for British companies to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) by 2025. Open, honest, consistent and transparent disclosure is a fundamental precondition for the realignment of finance and capitalism. The TCFD provides an essential platform for asset managers and companies alike to deliver this.”

Paul Simpson, CEO of climate-disclosure-focused organization CDP said:

“We very much welcome the UK government’s announcement that it will mandate climate disclosure in alignment with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations. As the first G20 government to do so, this sends a powerful signal to the market and other governments that they should follow the UK’s approach, ahead of COP26. We look forward to reviewing the scope of these proposed changes: it will be important that they cover all sections of the economy."
“This year more than 9,600 companies, representing greater than 50% global market capitalisation disclosed on climate change through CDP’s TCFD-aligned disclosure platform, including 84% of the FTSE100."
“Mandating climate disclosure in alignment with the TCFD recommendations will increase the critical mass of data needed by investors and other stakeholders to accelerate measurement and management of a broad set of environmental issues and will ensure that the data is in an internationally accepted framework that promotes greater comparability of disclosures."
“A large number of companies are already disclosing climate-related information through CDP in a way that is aligned with the TCFD recommendations. CDP stands ready to support the mandatory disclosure requirements – as our platform is fully TCFD-aligned and is one of the richest sources globally of self-reported environmental data.”

Article republished courtesy of ESG TODAY.


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