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Climate-related financial disclosures under the microscope

ESG reporting has come under further scrutiny in the UK this week. HM Treasury has published the interim report of the Government-Regulator Task Force on Climate-related Financial Disclosures (TCFD), set up to examine the most effective way to approach climate-related financial disclosures, including exploring the appropriateness of mandatory reporting. The report sets out an indicative path to mandatory climate-related financial disclosures across the UK economy.

In June 2017, the Financial Stability Board’s TCFD published a set of recommendations to support complete and comparable disclosures that will be useful in decision-making. The UK Government was one of the first to endorse the TCFD’s recommendations. In its 2019 Green Finance Strategy, the Government set an expectation that all listed issuers and large asset owners would be disclosing in line with the TCFD’s recommendations by 2022. The Government–Regulator TCFD Taskforce, of which the Bank of England is a member, was established to consider how this expectation could be met.

The taskforce has developed a roadmap which it says sets out an indicative path towards comprehensive and high-quality climate-related disclosure across the UK economy. The implementation path presented in the roadmap builds on initial steps already taken.

An urgent threat

Given the urgency of the climate threat, the Treasury says it has highlighted the need to assess, manage, and deepen the collective understanding of the financial risks from climate change. A voluntary approach to climate-related financial disclosure may not be sufficient. Instead, the taskforce advocates a move towards mandatory TCFD-aligned disclosures across non-financial and financial sectors of the UK economy. 

The taskforce says that a coordinated approach across the economy will help ensure that the right information on climate-related financial risks and opportunities is available across the investment chain - from companies in the real economy, to financial services firms, to end-investors.

The ambitious but proportionate strategy presented in the roadmap seeks to improve the quality, consistency and availability of information on climate-related financial risks and opportunities across the UK economy.

The report itself covers the following topics:

  • The case for mandatory TCFD-aligned disclosure.
  • A roadmap towards mandatory climate-related disclosure, covering seven key sectors: listed commercial companies; UK registered large private companies; banks and building societies; insurance companies; life insurers; FCA-regulated pension schemes; and occupational pension schemes.
  • Next steps, including: progression of strategies outlined in the roadmap; working with industry to facilitate implementation; and co-ordinating with international organisations to further global work on climate-related disclosures.
  • Annexes provide an overview of proposals for each of the seven sectors within scope.

A separate roadmap document has been produced to summarise the proposed path towards mandatory climate disclosures.

Divesting from ESG risk

The report from the TCFD taskforce comes as Scottish Widows has announced it is to divest at least £440m from companies that have failed to meet its environmental, social and governance (ESG) standards. The insurer has warned that this figure could grow much further if companies do not take action to improve the sustainability of their business practices.

Scottish Widows says it is working with its fund manager partners to begin divesting from firms that pose the most severe investment risk due to the nature of their businesses. The new exclusions policy targets companies that derive more than 10% of their revenue from thermal coal and tar sands, manufacturers of controversial weapons and violators of the UN Global Compact (UNGC) on human rights, labour, environment and corruption - unless the size and type of investment means that the insurer can influence positive change in their business models.

Leading industry change

As one of the biggest pension providers in the UK, Scottish Widows says that its new exclusions policy will benefit nearly 6 million UK savers. These exclusions will be applied across the group’s life, pension and OEIC funds - including its flagship workplace default - and will apply to index trackers as well as its own active funds.

As part of the policy, the latest step in the implementation of Scottish Widows’ Responsible Investment and Stewardship Framework, the insurer is working with its strategic investment partners to apply the exclusions to the external pooled funds they manage on behalf of a broad range of institutions in order to benefit even more UK savers in the future.

“As a large institutional investor, we have a vital role to play in shielding our customers from ESG investment risks, as well as influencing positive change through the investments we hold," commented Maria Nazarova-Doyle, head of Pension Investments at Scottish Widows. "Our exclusions focus on companies we believe pose the most severe investment risk due to the nature of their businesses, which can’t be addressed through engagement. The growth of these ‘at risk’ companies is likely to be severely limited by future regulations and the changing views of customers and investors, leading to significant falls in their share prices."

The exclusions move follows the insurer’s collaboration with BlackRock to design a fund that integrates ESG considerations into its pension funds. The ACS Climate Transition World Equity Fund backs businesses that decrease carbon emissions, increase clean technology revenue and display more efficient water and waste management. The fund also makes significant ESG exclusions.

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