UK comes out swinging on climate disclosure amid COP chaos

TCFD takes centre stage in efforts to push country’s financial sector ahead of climate summit

The UK’s government and financial regulators have laid out a series of plans to bolster climate disclosure and become the first country in the world to have mandatory TCFD reporting, despite growing uncertainty over its ability to host  a successful COP26 in Glasgow, Scotland, later this year. 

Recent weeks have seen the country thrown into the spotlight for its chaotic approach to organising the pivotal COP 26 climate negotiations. Prime Minister Boris Johnson sacked the ‘president’ of the talks – former Minister Claire Perry O’Neil – at the end of January, claiming someone more senior was needed for the role. Perry subsequently accused the Prime Minister of lacking commitment on climate change. Experts have questioned the short notice with which the UK government is trying to put together COP26 – hailed as the most important climate talks since the Paris Accord was agreed in 2015 – while others have suggested that the conference is being ‘weaponised’ by the Scottish government in a broader conflict with Westminster over Brexit and independence. Today, government officials confirmed that the Department for Business, Energy and Industrial Strategy is negotiating with a venue in London in case COP26 is relocated to the capital.

Despite all this, the UK is moving on climate finance, with a number of developments now confirmed as underway. 

The UK’s pensions law is set to be overhauled to include TCFD disclosure

The UK Government has tabled amendments to legislation that would require large pension schemes to report in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). If the proposal is successful, it will make the UK the first country to integrate the TCFD into rulemaking, and will mean occupational pension scheme managers or trustees must assess climate risks and opportunities and report them clearly to scheme members, or see their funds face fines of up to £50,000. 

The proposals are included in the UK Pension Schemes Bill 2019/2020, sponsored by Baroness Stedman-Scott – a conservative member of the House of Lords, former CEO of Tomorrow's People Trust and Trustee of New Philanthropy Capital – and the UK Department for Work & Pensions, the regulator for Workplace Pensions (company pension schemes).

Speaking at a PRI event in London today, Pensions Minister Guy Opperman said: “The Pensions Schemes Bill and the TCFD amendments that we laid out last night is the product of everyone from the Prime Minister downwards looking at this and deciding that it is the right thing for the UK to lead the way on the TCFD and to progress that to the next step.” 

He added: “It is imperative that the UK in a post-Brexit world is leading in ESG, green finance and Greentech.”

The Bill is currently in the House of Lords – the UK’s second chamber – under the initial stages of its passage into legislation. Once it clears the House of Lords, it will pass to the House of Commons for debate and potential amendment, before heading for royal assent (approval) later this year.

The UK government announced last year that it planned to have all listed companies and ‘large asset owners’ disclosing in line with the TCFD recommendations by 2022. 

Current UK rules already require smaller defined contribution schemes to publish a policy on how they consider climate change in their investment strategy and report annually on how they took the issue into account.

However, a spokesperson for the Pensions and Lifetime Saving Association (PLSA), the UK trade body, cautioned that the latest proposals could “give unprecedented new powers to government bodies to interfere and request changes to private sector schemes’ investment strategies”, which “would set a dangerous precedent and be wholly inappropriate”. 

But, according to Stuart O’Brien, a partner at London law firm Sackers, the amendments only give government the power to pass subsequent regulations on climate risk reporting.

“What I fully expect to happen is that having secured the power to mandate this, the DWP will at some later point look at how that power might be exercised and for which schemes,” he told RI. 

“This will probably depend on the adoption rate of voluntary TCFD reporting among pension schemes and whether the DWP thinks that this is sufficient or that it falls short. In practice, I think that mandatory reporting will be introduced for pension schemes of a certain size initially and may ratchet up over time.

“To my mind, this is signalling that the government is prepared to use both carrot and stick to get this done, with voluntary reporting being the carrot, and it is reserving the stick for now.”

The Financial Conduct Authority (FCA) will also propose TCFD disclosure soon

Speaking at today’s PRI event, Opperman urged the FCA to “move forward” on climate integration, adding that asset managers – one of the industries it oversees – are “just not being held to account”. 

“Some asset managers are embracing ESG and taking things forward, but many are not,” he said, calling for “a change in regulation to drive this forward”. 

Opperman met with the new Interim CEO of the FCA, Chris Woolard, last week and said that, although he acknowledged the regulator’s independence, he had “made [his] views clear”. 

Fellow panellist, Katie Fisher, the FCA’s Director of Strategy, pointed out that the FCA already has plans to tighten up on climate disclosure, confirming that it’s “going to be issuing a consultation proposing new disclosure rules for issuers, aligned with the recommendations of the TCFD” this quarter. She added that it would be introduced on a ‘comply-or-explain’ basis. 

“What we’re trying to achieve is that issuers provide the market with reliable and consistent information on their exposure to material climate risk and opportunities,” she explained. 

To help get buy-in from its stakeholders, it has been working with the Prudential Regulatory Authority to run a Climate Risk Forum over the past year, which includes asset managers, banks, insurers and regulators: “to try and produce some really practical guidance for firms in considering climate-related financial risks”. 

“We’ve had four industry groups looking at disclosures, innovation, risk management and scenario analysis,” she continued, and the resulting industry guides will be published “very soon”, outlining best practice and offering voluntary guidance, rather than regulatory guidance on the subject. 

The FCA is trying to take on greenwashing, too, she said, revealing that it is in the “exploratory stage” of looking at how firms design sustainable retail investment products and disclose information to consumers. “We intend to report back on that work later in the year.” 

The main UK pensions regulator will also use the TCFD as the basis for new climate guidance 

The Pensions Regulator will soon issue detailed guidance – based on the TCFD recommendations – to help trustees identify, assess and disclose the climate risks faced by their schemes.

RI understands that the three-part guidance will instruct trustees on how climate risk should be considered in setting an investment strategy and manager selection, trustee governance, risk management and investment stewardship. It will also include a supplement on climate scenario analysis.

The guidance will be launched in March, with a public consultation ending in May and final guidance issued towards the end of the year. 

This will feed into TPR’s risk assessment requirements under the IORP II directive.  

RI reported last year that the new guidance was being informed by a new Pensions and Climate Risk Industry Group hosted by the DWP, TPR and the Department for Business, Energy and Industrial Strategy (BEIS).

Sackers’ O’Brien, who chairs the group, emphasised that the guidance “does not impose additional requirements on trustees; rather it is to assist trustees to comply with the existing regulatory framework”.

New laws already require pension trustees in the UK to disclose their scheme’s approach to ESG factors including climate change. However, recent analysis by UK sustainable finance body UKSIF, which slammed the response from pension trustees as “thin and noncommittal”, found that only a third had complied with the new regulation.

A TPR spokesperson told RI that it is currently “developing a strategy to set out the improvements we expect over a specific time period” with regards to trustee disclosures: “This is likely to include steps to identify non-compliance and plans for when we will routinely enforce against the requirements. We may take action ahead of this against schemes where a failure to engage with climate risk and other ESG requirements appears to be part of a pattern of wider governance failings,” he said. 

“I think we’re all recommending TCFD reporting now” – the Financial Reporting Council

Also speaking at today’s PRI event was Jen Sisson, Chief of Staff at the Financial Reporting Council. She told the audience that the FRC is “working on climate across everything – stewardship, governance, company reporting”.

The FRC’s new stewardship code, which took effect at the start of 2020, will eventually include a tiering system, identifying the best and worst responses from investors – similar to the previous stewardship code, where those in the bottom tier were delisted. “The intention is not to do that in the first year,” though, according to Sisson: ”The plan is probably… to start with an assessment on the [asset] manager side, and to give the pension schemes a little bit longer, because we recognise there is a resource challenge and we want to incentivise more asset owners into the process.” 

On the TCFD, Sisson pointed to the recent report from the Financial Reporting Lab, which focused on TCFD reporting. “I think we’re all recommending TCFD reporting now,” she said, but warned that “people need to hurry up and get this stuff improved”, because currently best practice is a long way from most of the current TCFD reports being published. 

The developments in the UK comes as the TCFD announced today that it has reached more than 1,000 supporters globally – representing a market capitalisation of nearly $12trn. This includes British oil major BP which today announced an absolute net zero target by 2050. 

Read RI’s TCFD coverage here.