This week, the Department for Business, Energy and Industrial Strategy (BEIS) and the HM Treasury (HMT) released their landmark Green Finance Strategy in response to the Green Finance Taskforce’s 2018 report. The strategy details the government’s ambitious plans to encourage investment in sustainable projects, embed climate-related financial risks and opportunities into mainstream financial decision-making, as well as to cement UK’s leadership within green finance.
The strategy coincided with the launch of the Green Finance Institute (GFI), as well as London Climate Action Week, and followed on from last week’s legislative milestone of the UK becoming the first major economy to pass a net zero emissions target into law, demonstrating the UK’s growing efforts in driving the sustainability agenda.
Details of the Green Finance Strategy
Under the strategy, publicly funded financial bodies, publicly listed UK companies, pension funds, and asset managers will be expected to disclose climate risk and impact data by 2022 based on metrics established by the Task Force on Climate-Related Financial Disclosures (TCFD). Furthermore, the government detailed plans to establish a joint Taskforce with UK regulators to “ensure a co-ordinated approach on climate-related financial issues” which would examine the most effective way to approach disclosure, including “exploring the appropriateness of making reporting mandatory” in line with the TCFD recommendations from 2022 onwards.
Other measures set out in the strategy include joint funding with the City of London Corporation for the newly established GFI which will act as the UK’s principal forum for collaboration between the government and the private sector to mobilise capital towards zero-carbon and climate-resilient outcomes. The newly appointed CEO, Rhian-Mari Thomas, reiterated at the GFI launch held on 2 July 2019 that the transition to a low-carbon economy will be the “single greatest social and economic transformation in human history” impacting “every sector of the economy”, and stressed the need for urgent and effective action.
Climate-related financial risks
An increasing number of companies now disclose on climate risks, largely driven by reputational and shareholder pressure. However, there is now mounting concern about the long-term costs of climate change on profitability, the environment and the economy. A recent report by CDP (formerly the Carbon Disclosure Project) estimated that climate change poses a US$1 trillion risk to some of the world’s biggest companies. This includes insurance risks related to extreme weather damage, as well as potentially ‘stranded assets’ from fossil-fuel industries.
However, the CDP report also estimated that the potential revenue from low emission products and services could reach US$1.2 trillion, while the potential value of sustainable business opportunities could reach US$2.1 trillion. As echoed in the government’s Green Finance Strategy: “Managing these financial risks and delivering an orderly transition to a clean, resilient and environmentally sustainable economy will require the reallocation of tens of trillions of pounds of capital, presenting significant opportunities for the UK’s financial sector.”
Response to the strategy
In a joint statement, the Financial Reporting Council (FRC), the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) welcomed the government’s strategy stating: “Companies should consider the likely consequence of climate change on their business decisions, in addition to meeting their responsibility to consider the company’s impact on the environment. Financial risks will be minimised by achieving an orderly transition and via a collective response.”
In a separate statement, the FRC commented that “reporting should set out how the company has taken into account the resilience of the company’s business model and its risks, uncertainties and viability in both the immediate and longer-term in light of climate change ... Companies should also reflect the current or future impacts of climate change on their financial position, for example in the valuation of their assets, assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities and financial risk disclosures.”
The government’s new commitments to green finance will not only expectedly boost investment in sustainable projects, but are also likely to transform the landscape of financial reporting requirements in the UK and globally. With regulatory changes becoming an increasing likelihood, more businesses will need to accurately track and monitor their emissions, as well as create comprehensive strategies to manage risks and opportunities associated with climate change.
The government will be publishing an interim report by the end of 2020 to examine their progress. In the meantime, companies that haven’t taken climate-related risks into consideration and do not yet report on sustainability metrics are encouraged to seek consultation in order to prepare for any potential regulatory obligations in the near future.
For more information on sustainability reporting and the TCFD Guidelines, please contact the Greenstone team.