13 September 2021
UK-listed companies are legally required to report on their exposure to climate risks to their investors. But ClientEarth research shows the vast majority of the largest 250 companies are currently failing to disclose these risks correctly.
This failure raises concerns about how UK companies are prepared to address both the physical threats of the climate crisis, and the transitional impacts of a net zero economy.
Earlier this year, the UK financial regulator, the Financial Conduct Authority (FCA) proposed two sets of rules to beef up these climate disclosure requirements and widen the scope of companies that would have to comply with them.
Fundamentally, the changes require a wider range of businesses to publish information in line with the Taskforce on Climate-related Financial Disclosures recommendations (TCFD).
These recommendations are designed to provide a global standard for reporting so that companies and investors can improve their understanding of the financial implications of climate change.
We welcome many of the regulator’s proposals, but they don’t go far enough. Our lawyers have set out five key recommendations to strengthen the requirements, in order to ensure every company is doing their part to minimise their climate impact.
1. Mandatory reporting
The FCA has extended reporting rules to cover ‘issuers of standard listed equity shares’, which effectively covers all public companies in the UK. However, the rules allow leeway for companies to choose not to comply with the new requirements if they provide an explanation why they think they are not able to make full disclosures.
This is a huge concern. Applying a ‘comply or explain’ approach to these rules is both weak and confusing. They have to be introduced on a clear mandatory basis: anything less risks depriving investors and other stakeholders of the information needed to encourage finance to flow to more climate-friendly businesses.
2. Transition plans
The FCA’s proposals include requirements for companies to disclose how they plan to transition their business to fit a low carbon world. What is missing from these rules, however, is a clear obligation for companies to plan to reduce their emissions in line with the timeline estimated by the best available science. At a minimum, they should square with the UK Government’s commitment to achieving net zero emissions by 2050, as well as its ambitious near term reduction targets.
It is time to require all companies to play their part in achieving net zero. Not only will this help the UK meet its emissions reduction targets, but it will help companies navigate a smooth transition to a net zero world by avoiding the risks and disruption from inadequate transition planning. It will also provide investors with information they need to assess companies’ transition plans, when making their investment decisions.
In addition, companies must be required to reflect the impact of the upcoming transition in their financial accounts. Failure to do so can give a misleading impression of companies’ financial position to investors and directors, and hinders companies planning for the transition.
3. More urgency
The regulator’s proposals bring asset managers, life insurers and pension providers into scope of the TCFD requirements. This is a welcome extension, but the obligation will not kick in for some of those companies until January 2023.
Put frankly, we don’t have time to wait another year for these firms to bring their reporting up to a baseline standard. We need them to take urgent action to reduce emissions – starting now.
We propose that the rules are introduced for all in-scope companies at the start of 2022. This may appear ambitious, but it is achievable. What’s more, it’s entirely necessary, in light of the scale of the crisis we face.
4. Wider scope
Despite the regulator’s proposals extending the scope of financial firms that will be required to comply with the stricter reporting rules, they do not cover the whole financial sector. All financial firms need to disclose their climate risks. We are therefore calling for all FCA regulated firms of all sizes to report on their climate risks and opportunities in line with TCFD recommendations.
The regulator has also proposed that asset managers, life insurers and pension providers who manage at least £5 billion in assets should be required to disclose ‘product-level’ information on the climate risks of individual investment products. We welcome the introduction of product-level disclosures, but we believe this threshold is too high. Asset managers, life insurers and pension providers should have to report the climate risks of financial products, irrespective of size.
5. Greater enforcement
Beefing up the disclosure rules and widening the scope of their application is all well and good, but it risks becoming irrelevant if not properly enforced. Our research shows that the FCA has so far failed to hold business accountable for breaches of existing climate reporting rules. Such lack of enforcement poses a direct threat to the effective functioning and integrity of the financial markets, and puts consumers at risk.
Earlier this month, we reported two listed companies – online delivery platform Just Eat and cruise line operator Carnival – to the FCA for failing to address climate change in their annual reports. We also wrote to the regulator warning that ignoring our request to investigate these firms for the clear legal infringements identified risked breaching its own statutory objectives, as well as its new remit from the Government on climate change.
If the FCA does not secure compliance, it risks being ignored by those it regulates. Other regulators around the world are showing more clout. The Securities and Exchange Commission in the US is cracking down on fund managers in light of concerns that classification of investments as environmental, social and governance-focussed is giving rise to greenwashing. The FCA will fall behind if it does not use the opportunity provided by the new rules to close the accountability gap.
What’s needed are adequate powers and resources to hold laggards accountable for failures to satisfy climate change-related reporting obligations – both those existing and to be implemented – via robust, consistent, and timely enforcement action.
ClientEarth's consultation response to proposals related to asset managers, life insurers and pension providers can be accessed here. Its response to rules related to standard listed issuers can be accessed here.