UK mandates TCFD climate disclosure for largest companies

The United Kingdom has become the first G20 country to make climate disclosure mandatory for its largest companies, with Task Force on Climate-Related Financial Disclosures (TCFD) aligned reporting set to be required of over 1,300 of the largest UK-registered companies and financial institutions by April 2022.

As COP26 gets underway the UK has taken a lead on climate disclosure, a move that is expected to be followed by many of the G20 countries.

By making it mandatory that climate-related financial information is disclosed, including risk, the hope is that it will help companies understand their risk and so enable them to manage it as well, smoothing transition pathways.

Of course, by reporting climate exposure it’s also likely that climate risk transfer, insurance and reinsurance will increasingly be seen as risk management tools that can help in the transition as well.

Many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover, will be subject to the new climate disclosure rules from April 2022.

The disclosures will be aligned with the Taskforce on Climate- Related Financial Disclosures (TCFD), an industry-led group which helps investors understand their financial exposure to climate risk and works with companies to disclose this information in a clear and consistent way.

The TCFD was launched in 2015 at the Paris COP21, but its origins go further back and the insurance and reinsurance market had a significant role in formulating the strategy.

In fact, what was once know as the 1-in-100 initiative, an insurance and reinsurance supported working group aligned with the UN that called for all major global companies to disclose their 1-in-100 climate, catastrophe, weather and natural disaster risks in their financial reporting, had a significant influence on the TCFD disclosures.

Stress testing and disclosing the risk held on corporate balance-sheets was seen as a way to stimulate better management of those risks, and also risk transfer use.

With the thinking being that it is only by better managing these risks, with tools like insurance and reinsurance, that transition pathways can be cleared and corporates take greater responsibility for the risks they bear and the people affected by them.

The UK government explained the decision to enshrine climate disclosure in law, saying, “It will increase the quantity and quality of climate-related reporting across the UK business community, including among some of the most economically and environmentally significant companies. This will ensure businesses consider the risks and opportunities they face as a result of climate change and encourage them to set out their emission reduction plans and sustainability credentials.

“The new requirements will help investors and businesses to better understand the financial impacts of their exposure to climate change, and price climate-related risks more accurately, while supporting the greening of the UK economy. By applying a common set of requirements aligned with the TCFD recommendations, UK companies will be provided with a uniform way to assess how a changing climate may impact their business model and strategy, and ensure they are well placed to harness opportunities from the UK’s transition to net zero.”

UK Energy and Climate Change Minister Greg Hands commented, “If the UK is to meet our ambitious net-zero commitments by 2050, we need our thriving financial system, including our largest businesses and investors, to put climate change at the heart of their activities and decision making.

“By mandating large businesses to disclose their climate risks and opportunities – the first G20 country to do so – we are showing global leadership by making our financial system the greenest in the world.”

Economic Secretary to the Treasury John Glen added, “With COP26 in just a few days, I’m proud that we are taking steps to enshrine the UK’s transition to a greener financial system into law.

“These TCFD requirements will not only help tackle greenwashing but also enable investors and businesses to align their long-term strategies with the UK’s net zero commitments.”

Reporting of the risks companies and asset holders or owners bear is a way to drive greater responsibility for them, which can only assist in avoiding greenwashing and stimulate action to better manage them.

In particular, once investors can gain a clearer view of climate related risks companies are holding, then they can take action and choose to back them, or not, which should provide some impetus to the management of climate risks, as well as the use of financial climate risk management and transfer tools.

These actions go hand-in-hand with the changing attitudes to climate regulation and credit ratings, with the focus on capital requirements we also wrote about last week another key lever in encouraging greater climate risk responsibility and management.

Also read:

PRA increases focus on climate capital requirements for re/insurers.

Next wave of climate ILS products in focus at Nephila Climate: CEO Rapin.

Howden calls to unlock $1.5 trillion of pension capital for climate risk.

Reinsurance rates must rise, to cover rising climate risks: Swiss Re’s Reichelt.

Time to “shift disaster risk architecture” as climate threatens: ARC’s Ndlovu.

Climate change not yet a significant determinant of reinsurance pricing: S&P.

Climate change impact on catastrophe claims is investors biggest fear.

Physical climate risk to major US banks over $250 billion annually: Ceres.

Climate change a threat, but also largest growth opportunity: Swiss Re.

Climate risk to drive property premiums and cat losses much higher: Swiss Re.

California climate insurance (with parametrics, risk pools & even cat bonds).

Climate change won’t impact ILS investments uniformly: Twelve Capital.