Climate reporting is set to become a mainstay of annual financial reports at large companies, after new long-awaited new rules came into effect from today

New climate disclosure rules for large, listed companies and big financial institutions have now come into force, in a major step forward for the UK’s plans to encourage more firms to be more transparent about the ways they are preparing for – and impacted by – a warming planet.

More than 1,300 of the UK’s largest companies and financial institutions are estimated to come within the scope of the new rules, which apply to the UK’s largest traded companies, banks, and insurers, as well as private companies with over 500 employees and £500m in turnover.

The rules, which were laid before parliament before the COP26 Climate Summit last autumn, mark a major milestone in the Treasury’s push to force companies and investors across the UK to align with standards set by the Taskforce on Climate-related Financial Disclosures (TCFD).

The requirements have applied to the small pool of companies with a premium listing on the UK stock exchange since late last year and are set to be extended to smaller asset managers with less than £5bn of assets under management from next January, as part of the Treasury and Financial Conduct Authority’s plan to gradually expand climate risk reporting across the economy.

The regulations require companies and financiers to disclose material information in their annual reports on all four of the TCFD’s core categories: governance, strategy, risk management, and metrics and targets.

Any omissions must be duly explained, and accompanied with information about how and when companies plan to make more consistent disclosures.

The hope is that standardised and mandatory corporate and financial disclosures will lead to greener decision making and capital allocation, accelerating the transition to a low carbon economy.

More uniform financial filings around climate-related risks will also make it easier for investors, citizens, and civil society to scrutinise and compare the ways businesses are stepping up to tackle the climate crisis and prepare for a warming world.

Setting out the rationale for the new rules in December, the Financial Conduct Authority said: “We see disclosure against the TCFD’s globally recognised recommendations as an important way for listed companies to build their capabilities to identify, assess, manage and disclose on their climate-related risks and opportunities. Clarity on disclosure expectations helps to encourage a structured dialogue within companies and their stakeholders on matters of governance, strategy and risk, and promotes more robust processes to support climate change analysis.”

The regulator added that implementing TCFD was an “important milestone” in the drive to establish a common baseline of corporate reporting standards on climate change.

The UK is the first country in the G20 group of nations to mandate TCFD-aligned requirements on large companies and financial institutions.

New Zealand was the first country to pass a law requiring large financial institutions, insurers, and equity and debt issuers to make TCFD-aligned climate-risk disclosures, however those requirements are not expected to come unto force until 2023.

The move from the UK is part of a global trend. Last June, G7 financial ministers and central bank governors said they would implement economy-wide disclosure rules in line with TCFD guidelines.

Subsequently, both the EU and US have moved to strengthen disclosure rules, with the US Security and Exchange Commission (SEC) last month unveiling a plan to mandate bigger businesses to disclose their emissions in a more uniform way. If the proposal passes, more detailed information on climate-related risks may need to be included in publicly available annual reports from as soon as next year.

The wave of new disclosure rules are also set to have significant implications for the many smaller firms that operate within the supply chains of larger corporates. The UK government is set to follow today’s rules with requirements for large listed firms to produce strategy documents detailing how they intend to deliver on their net zero goals, a move that will see more corporates call on their suppliers to help tackle their value chain emissions.

Speaking at last month’s Net Zero Finance Summit, hosted by BusinessGreen, Business Minister Lord Callanan conceded that firms’ preparedness for the new rules “varies”, but he urged all large businesses to embrace the opportunity to be more open about their climate plans.

Some firms are already disclosing their climate risks and opportunities, but “the problem is they haven’t been doing it in a consistent way”, he said, adding that “those that aren’t ready, we have to try to make sure they are going to be ready”.

“A lot of directors haven’t really taken the issue that seriously,” he said. I think this will make sure that they are going to be taking it seriously… I think sunlight is the best form of disinfectant. Transparency is important, and I think this will certainly help to add to the information stock that investors and shareholders have about their companies.”

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