Companies to report on financial risks from climate change

The government is to introduce requirements for publicly listed companies and large asset owners to disclose by 2022 how climate change risk impacts their activities, as part of a newly launched green finance strategy

The Treasury and Department for Business, Energy and Industrial Strategy (BEIS) say they will work with regulators to explore the most effective way of doing this, including whether mandatory disclosures are necessary.

The requirement is one element of the green finance strategy which sets out plans to increase investment in sustainable projects and infrastructure, as part of efforts to ensure the UK meets its 2050 net zero carbon emissions target.

In the announcement, the government said it will be clarifying the need for financial regulators to have regard for climate change when advancing their objectives and discharging their functions – including the Prudential Regulatory Authority, Financial Conduct Authority and Financial Policy Committee.

The regulators have published a joint statement on climate change issues, which stated: ‘We recognise it presents far-reaching financial risks relevant to our mandates from both physical factors, such as extreme weather events, and transition risks that can arise from the process of adjustment to a carbon neutral economy.

‘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.

‘We welcome the action being taken as part of the UK’s green finance strategy to ensure a coordinated approach and look forward to further collaboration to advance progress in the near term on climate-related issues.’

In its response, the Financial Reporting Council (FRC) highlighted that the new UK stewardship code requires investors to integrate stewardship and investment, taking into account material environmental, social and governance issues, including climate change, while the updated UK corporate governance code requires boards to discuss how the matters (including environment matters) set out in section 172 of the Companies Act 2006 have been considered by the company.

Going forward, the regulator said it will continue to review whether companies are complying with the statutory disclosure requirements of the strategic report (which includes reporting on principal risks and uncertainties) as well as any financial statement implications of climate change. The FRC’s audit monitoring will include consideration of the adequacy of the auditors’ work on principal risk disclosures, including climate risk and the financial statement implications of climate change.

The FRC’s financial reporting lab will be providing practical guidance later this year on how companies can best consider and report on climate related risk and opportunities, and the  FRC’s project on the future of corporate reporting will also consider the need for improved non-financial/sustainability information from companies.

Other announcements in the green finance strategy include jointly funding the Green Finance Institute with the City of London, to foster greater cooperation between the public and private sectors, create new opportunities for investors, and strengthen the UK’s reputation as a global hub for green finance.

A £5m green home finance fund has been set up to help pilot products like green mortgages, which utilise green finance for home energy efficiency, and incentivises energy efficiency retrofit to make homes more environmentally sustainable.

There is also a green finance education charter to make sure financial services-related qualifications and certificates include developing practitioners’ knowledge and understanding of green finance, so they have the tools to take it up.

John Glen, City Minister, said: ‘The City has a vital role to play in securing a greener future for us all. By investing more in sustainable projects it can not only protect our environment, but also help establish London as the pre-eminent international centre for green finance.

‘Today’s green finance strategy will support this ambition, with new initiatives to boost funding for green ventures and ensure the environment is at the centre of all financial decision-making.’

Green Finance Strategy

By Pat Sweet

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