Increasing Climate Disclosure Mandate in the United Kingdom
Earlier this month, the United Kingdom (“UK”) indicated that it is considering rules to require disclosure of certain climate-related risks. On July 2, the government released its Green Finance Strategy, which discusses the UK’s strategy for accomplishing its goals of net zero emissions by 2050. Among the actions discussed is a consideration of mandatory climate reporting. This builds on pre-existing reporting requirements, and any resulting mandate would be the country’s third increase in required climate-based disclosures within a matter of months.
The Status Quo
For many large institutions, there is likely already a requirement for certain climate-based disclosures.
In April 2019, the UK introduced the Streamlined Energy and Carbon Reporting (“SECR”) framework. This replaced the pre-existing Carbon Reduction Commitment Energy Efficiency Scheme and extended the scope of existing Mandatory Carbon Reporting regulations. As a result, many large companies incorporated in the UK, regardless of whether traded on a UK-regulated exchange, must now report on their energy use and efficiency in their company annual reports.
Separately, in Supervisory Statement (“SS”) 3/19, the UK Prudential Regulation Authority (“PRA”) reminded financial institutions, including banks and certain investment firms, that Basel Pillar 3 already requires the disclosure of information regarding material risks. However, this regulation only applies to a select group of companies and leaves significant leeway should a company decide that a certain risk is immaterial.
In part to address this, the UK has begun to elaborate on the types of disclosures it expects to see. In SS 3/19, the PRA has indicated that firms should use scenario analysis and stress testing to assess the impact of climate change on their current business strategies. While noting that firms may be impacted in distinct ways, SS 3/19 clarified that the PRA expects to see firms include at minimum (1) all material exposures relating to financial risk from climate change and (2) the methodology firms used to determine material exposures in the context of their businesses. Moreover, the PRA announced its expectation that firms consider engaging with the framework proposed by the Task Force on Climate-Related Financial Disclosures (“TCFD”).
Green Finance Strategy Updates
Most companies have not needed to file annual reports since the implementation of the SECR framework, and SS 3/19 does not come into effect until Oct. 15, 2019. However, the Green Finance Strategy expresses a government-wide expansion on their themes. Notably, the Green Finance Strategy states that the UK “expects all listed companies and large asset owners to be disclosing in line with the TCFD recommendations by 2022.” Likewise, the strategy indicates that the UK is considering mandatory reporting requirements. However, there is currently little information regarding the extent of any such requirements or what in fact would be required.
The PRA had noted that it planned to issue more detailed expectations in due course, which would likely include clarification on the kinds of risk that the UK considered material. Any requirement resulting from the Green Finance Strategy could fall into the same vein.
The UK’s recently published Green Finance Strategy highlights the UK’s rapidly developing approach to climate- and environment-based financial disclosures. Within a matter of months, the country has published three major updates to its expectations and strategies. The most recent of these included an expectation that companies disclose in line with TCFD recommendations by 2022 and an announcement that the UK was considering mandating certain forms of climate-risk disclosure, though the details of any such requirement remain to be determined. Although these actions were developed in an uncertain regulatory environment, regulators appear to have crafted them to function independent of the eventual resolution to the UK’s contemplated withdrawal from the European Union. Regardless, the UK has been taking concerted effort to position itself at the vanguard of green finance, especially in the realm of climate-related risk disclosures.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.