Mandatory climate risk disclosure essential to get to net zero

In a new policy briefing out today, the Aldersgate Group calls on the government to introduce mandatory requirements in the early 2020s for businesses and investors to report their exposure to climate risks in line with the TCFD recommendations and set out what actions they are taking to manage these risks [1]. At a time when the UK has legislated a net zero emissions target and is poised to introduce a new Environment Bill, the Group argues that mandatory disclosure is essential to provide a level playing field across the economy, provide meaningful and comparable information to investors and ensure that business and investment strategies are aligned with the UK’s net zero target.

Today’s new briefing, which received significant cross-industry input, sets out key recommendations to accelerate the take-up of climate risk disclosure aligned with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure (‘the TCFDs’):

1. The Government should use its interim review of the Green Finance Strategy [2] in 2020 to make TCFD-aligned reporting mandatory by the early 2020s for all large companies currently reporting to the Streamlined Energy and Carbon Reporting regime. This should be done on a ‘comply or explain’ basis and should, once best practice and meaningful reference scenarios have been developed, be broadened to a wider range of businesses so that supply chains are comprehensively covered;

2. The introduction of a mandatory requirement to comply with TCFD-aligned reporting should be focused on disclosing decision-useful information, so that disclosure actually leads to a meaningful change in the way in which businesses and investors reduce their exposure to the physical and regulatory risks arising from climate change;

3. Companies should be provided with support to develop the meaningful long-term scenarios required by the TCFDs. The government should provide guidance setting out key assumptions linked to different temperature rise scenarios that companies can then use when developing their own scenarios. Building on the example of the Climate Financial Risk Forum for financial institutions, a Corporate Reporting Lab should be established to provide a safe forum where businesses, industry groups, academics and other organisations can develop sector-specific scenarios and trial different methods of disclosure;

4. In implementing TCFD disclosure requirements, the UK government should continue to work closely with international partners to ensure as much consistency as possible. The European Commission, which recently issued guidelines integrating the TCFD recommendations into the EU Non-Financial Reporting Directive, should, in particular, remain an important partner.

5. Investors should play a more proactive role, by ensuring that the companies they invest in are taking climate risk disclosures seriously and by holding them accountable for inadequate risk management.

Nick Molho, Executive Director of the Aldersgate Group, said: “Mandatory disclosure of climate risks focused on improving business and investor decisions is essential to drive economy-wide action to cut emissions in line with the UK net zero target and improve the economy’s resilience to the physical impacts of climate change and the risks associated with a disorderly transition to a net zero economy. Mandatory adoption of the TCFD recommendations is also essential to ensure that best reporting practice is adopted across the economy and that investors are provided with transparent, meaningful and comparable information.”

Nick Molho added: “The UK is in a leadership position when it comes to green finance and climate action. The government can extend this leadership by announcing the introduction of mandatory TCFD-aligned reporting as part of the interim review of the Green Finance Strategy in 2020 and by using its influential position as host of the COP26 climate summit to encourage its key international partners to follow suit.”