The UK’s Financial Reporting Council (FRC) – the regulatory watchdog behind the country’s recently-relaunched Governance Code – says it will report to government on how it is “addressing current and future climate impacts”.
The FRC oversees investor stewardship as well as auditors, accountants and actuaries.
The move comes on the back of a request from the Government’s Department for Environment, Food and Rural Affairs (DEFRA), which has also been extended to The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA).
Under the UK’s 2008 Climate Change Act, DEFRA has a power called the Adaptation Reporting Power (ARP).
The ARP allows the government to request disclosure from relevant organisations and sectors on how they are adapting their strategies to account for growing climate risk. It renews the call every five years, following a review and a public consultation.
DEFRA’s third consultation closed earlier this summer. As part of the consultation, the 59 respondents put forward nearly 40 suggestions of new sectors, bodies or institutions that should be included in the next round of reporting, due next year. In addition, the Parliamentary Environmental Audit Committee wrote a letter to the UK’s Minister for the Environment, Michael Gove, recommending that the three regulators, the FRC, the TPR and the FCA be invited to disclose under the ARP.
DEFRA confirmed in its summary report last week that it has asked the three “to consider participation in reporting” in the next cycle of the ARP. “We are in the process of determining whether these organisations will participate and the scope of their report,” it said.
A spokeswoman for the FRC has now confirmed to RI that it will take up the invitation. “The government has asked the FRC to participate in the third round of reporting under the Adaptation Reporting Power and we will be doing so in due course,” she stated. No further details were provided.
Under the rules, DEFRA requires participating bodies to produce a report that sets out “an assessment of current and future impacts of climate change on their organisation; and proposals for, and progress made towards, adapting to climate change”.
The FRC is the primary regulator for corporate reporting – meaning it is one of the main levers through which TCFD-aligned disclosure could be taken up.
Alice Garton, a lawyer with ClientEarth, which responded to the DEFRA consultation, described the FRC’s commitment to comply with the ARP as a “step in the right direction”.“Companies must report on material climate risks in accordance with their legal duties and the FRC has a critical role in monitoring reporting and audit quality,” she said, but pointed out that the regulator had included “next-to-no reference to climate risk” in its revised Corporate Governance Code for the UK, launched this week.
TPR did not confirm whether it would follow the FRC’s lead, but did tell RI it was “engaging with government bodies including DEFRA about addressing current and future climate change impacts”.
The FCA, which did not respond to a request for comment, was highlighted in the parliamentary committee’s letter as having a “particular need to update its thinking” on climate risk, “given its lack of guidance to contract-based pension schemes on environmental risks and the limitation of its Risk Outlook on climate change”.
DEFRA also asked the £6.7bn Pension Protection Fund pensions ‘lifeboat’ to participate. It did not respond to a request for comment.
This isn’t the first time finance has been such a big focus for the Government in its ARP process. During the second round of reporting, in 2014, DEFRA asked the Bank of England to engage, marking the first stage of broadening out beyond corporates. This request fostered the Bank’s subsequent analysis of climate risk in the UK’s insurance industry.
But DEFRA has ruled out requests to include “the whole financial sector – asset managers, asset owners, banks and insurance companies” and “insurance companies/pension funds with a balance sheet over a certain threshold and companies that have high levels of carbon-related assets” in their ARP work, saying they do not fall within its remit. “However, we are considering measures to support disclosure by these organisations as part of the Government’s response to the recommendations of the Green Finance Task Force,” it said in its consultation summary.
Notably on the corporate side, DEFRA has said it is considering engaging with fuel and oil companies on the topic as part of discussions around the third round of reporting.
The move comes as the UK’s Department for Business, Energy and Industrial Strategy (BEIS) announced last week that all large businesses will be required to publicly disclose their energy use, performance and emissions data, as part of its Streamlined Energy and Carbon Reporting review. The rules will come into effect next April. Link