10 Mar The implications of new climate disclosure plans for UK businesses
Recent proposals from the Financial Conduct Authority (FCA) could result in many major UK businesses being forced to publicly disclose the risks associated with climate change and the transition to net-zero.
In a recent announcement, large British businesses may soon be required to publicly display the potential risks they are experiencing regarding climate change and the net-zero transition under new climate risk disclosure plans by the UK FCA.
The FCA proposals would require all major commercial businesses in the UK, encompassing over half of the total market share in the UK to make clear disclosures that meet the Taskforce recommendations on climate-related financial disclosures (TCFSs) or publicly provide information on the reasons why they are not doing so. The FCA is exploring how effective the current requirements are in supporting large businesses to implement climate change and other sustainability-related risk proposals.
Andrew Bailey, the chief executive of the FCA believes that climate change represents a serious challenge to our global economy, society and our natural environment. Bailey believes the newly announced plans will enable further market transparency, allowing a clearer picture of how well businesses are responding to the risks associated with climate change. Improving the disclosure system will generate improved asset pricing and allow investors to make better decisions on where to spend revenue, according to the CEO of FCA.
The plans created by the industry group the Climate Financial Risk Forum, a jointly led project by the FCA and the Bank of England will support the development of disclosure capabilities with UK businesses. The forum is expected to publish industry guidelines relating to climate-focused disclosures, scenario analysis, and risk management plans.
The FCA has also stated that it is exploring how to improve climate-focused disclosures from regulated businesses, including asset managers and life insurers. Businesses are facing mounting pressure from stakeholders to reveal more information and clearly show they are taking action against the risks related to climate change, especially with high-carbon assets like fossil fuel investments.
The disclosure plans are facing some criticism with ClientEarth stating that the FCA proposals are too lenient and will allow businesses to avoid making committed climate risk disclosures. Client Earth emphasise that these businesses already have an existing duty to display significant risks posed to their company and believes the proposal is a complicated ‘comply or explain’ mechanism. Investors and stakeholders are actively wanting more detail on what businesses are doing to tackle climate change and how their activity is meeting the targets enforced in the Paris Agreement. CleanEarth believes the FCA should be implementing mandatory measures for all listed businesses.
In recent discussions with Parliament Bailey informed MPs that there was a strong argument to transform central bank asset purchases to align them closer to climate-related concerns. The approach from Bailey was welcomed by many organisations stating that such as move would eliminate certain actions by Banks who previously purchasing bonds from oil majors via its corporate quantitative easing program.
Campaign groups believe that the exclusion of fossil fuels from central banks’ quantitative easing program is a critical step in working towards a greener economy, suggesting that it would show a clear signal that these assets are no longer a stable choice for investors.
The recent proposals by the FCA are the latest of a number of plans announced by regulators and investor groups developed to focus on ensuring businesses improve their climate disclosures. In the last few days, the Investment Association (IA) revealed a new three-year deadline for listed businesses to clearly show how they intend to measure and control the risks and opportunities associated with climate change.