Will climate risk reporting become mandatory in the UK?

Global governments are beginning to take climate change more seriously. In 2016, the United Nations’ Paris Agreement came into force, with 197 party states agreeing to work together to mitigate the impact of climate change.

The primary objective is to keep global temperature rises “well below” two degrees Celsius, when compared to pre-industrial levels. The UK was the 111th country to ratify the agreement and is among the first developed countries to examine how it will meet these goals.

Britain has already made solid progress in reducing greenhouse gases domestically. Emissions slumped 42 per cent from 1996 to 2016, according to the Committee for Climate Change. Last year, the government launched the Clean Growth Strategy, which commits to lowering emissions by 80 per cent by 2050 (from 1990 levels).

But are big businesses and asset managers doing enough to factor in climate risk to their decision-making processes? The parliamentary Environmental Audit Committee doesn’t think so and has published a report urging the government to make climate risk reporting mandatory by 2022.

Committee takes aim at short-termism

MPs on the Environmental Audit Committee believe structural incentives across the UK investment chain neglect long-term risks, such as climate change, in favour of short-term rewards.

Yet, global warming will continue to have a direct financial impact on investments across multiple sectors in the coming decades, including agriculture, home building, insurance and infrastructure. Companies and investment managers may also be missing out on lucrative holdings in the clean energy, technology and transport industries.

The committee highlighted pension funds as a key candidate for change. Despite having £550 billion of investments, the top 25 pension funds in the UK still often showed outdated views that global warming was an ethical or social corporate responsibility issue, rather than a tangible financial risk.

“We want to see mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long-term sustainability, not just short-term returns,” said Mary Creagh, chair of the committee.

So where are organisations currently coming up short in their climate risk reporting approach?

Current problems with climate risk reporting efforts

Businesses don’t appear to be voluntarily considering the impact of climate change on their performance. In fact, 0 per cent of FTSE 350 companies that PwC reviewed had a principal risk specifically dedicated to climate change. Only 42 per cent even mentioned climate change in their annual reports or sustainability updates.

The most detailed disclosures are typically from carbon-intensive industries, such as energy, transportation and mining. PwC identified a number of other trends in climate change reporting:

• Global warming is seen as more of a stakeholder than a shareholder issue, so the impact on the company is often considered tangential;
• Disclosures are rarely clear about how climate change affects business models or strategies;
• Firms often imply the physical impact of climate change is a medium- or long-term consideration and thus outside the scope of a particular report; and
• Short-term timelines and impending risks are seldom discussed.

However, PwC highlighted BHP Billiton’s 2016 Strategic Report as a shining example of how climate change reporting can be done well. The Anglo-Australian mining giant set out its core beliefs regarding global warming, as well as the company’s adherence to international standards and future goals.

BHP also emphasised the board’s active role in meeting the challenges and opportunities posed by climate change, including scenario analysis, frequent senior executive discussions and overall governance aims.

How can the UK government improve climate risk reporting?

While most businesses are unlikely to take BHP’s multifaceted approach, the Environmental Audit Committee believes key reforms can encourage stronger climate change reporting.

The Companies Act 2006 already places a duty on organisations to disclose financially impactful climate change risks, but many don’t recognise or underestimate these dangers. As such, the committee requested several courses of action from the UK government:

1. Issue immediate guidance reminding businesses of their responsibilities under the Companies Act 2006;
2. Switch to a ‘comply or explain’ basis for climate-related financial risk reporting by 2022;
3. Encourage the FCA and FRC to amend company conduct codes to facilitate the ‘comply or explain’ rule;
4. Annually review the above implemented processes; and
5. Pass new sustainability legislation if regulators fail to monitor and improve climate change risk management.

These are sweeping reforms, but will the changes occur? At the moment, the government is remaining tight-lipped about the committee’s findings and recommendations.

“Every part of society has a part to play in tackling climate change, including business,” a government spokesperson told City AM in June.

“We’ll consider the findings of this report alongside our review of the Green Finance Taskforce’s proposals to encourage companies to put greater emphasis on environmental considerations when making decisions.”

So, no promises yet, but it appears the issue is taking centre stage in official circles, which means we could see considerable overhauls in climate risk reporting in the near future.

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