The UK will become the first G20 country to legally force large companies to report their exposure to climate risks using recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
The mandatory rules will take effect from 6 April 2021, and apply to over 1,300 of the largest UK-registered companies and financial institutions.
This will include banks and insurers, as well as private companies with over 500 employees and £500m in turnover, encouraging them to set out their emission reduction plans and sustainability credentials.
The announcement comes just days before the COP26 summit, and should increase the quantity and quality of climate-related reporting across the UK's business community.
Energy and climate change minister, Greg Hands, said: “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.”
The TCFD is 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.
It was launched at the Paris COP21 in 2015 by the Financial Stability Board (FSB) and Mark Carney, the UK Finance Adviser for COP26, and has since published a clear set of disclosure recommendations.
By applying a common set of requirements aligned with the TCFD recommendations, the government said that companies will be provided with a uniform way to assess how a changing climate may impact their business model and strategy as they strive for net zero.
Economic secretary to the Treasury, John Glen, said: “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.”
Commenting on the development, IEMA's Policy & Engagement Lead Nick Blyth stated:
"In my view this change significantly improves the potential for strong outcomes from this new policy. Scenario Analysis is the key forward looking tool linking business strategy to potential future outcomes, acknowledged as a key shortcoming in much TCFD reporting to date. This is a very welcome development called for by IEMA in our response to the Governments consultation."
Paul Pritchard FIEMA commented:
"In my view this change significantly improves the likelihood of TCFD becoming really important for sustainability. This view comes from working in the area of TCFD/scenario analysis over a number of years. Essentially the change guards against the requirements becoming mandatory but not particularly useful (or supportive of sustainability aims). Firstly I can understand why the Govt was cautious about requiring scenario analysis - experience from the finance sector indicates that it can be resource intensive and expensive.
Nonetheless it doesn’t need to be difficult and is the key forward looking tool linking business strategy to potential future outcomes (acknowledged as a key shortcoming in much TCFD reporting to date). Without it the disclosure looks more like a snapshot of current practice rather than something which requires the business to look forward and explain how it is going to be affected by, and respond to climate change risks."
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