The UK about to impose mandatory TCFD climate disclosure and to issue a sovereign Green Bond

- 7-minute read - 

In November, the UK’s Chancellor of the Exchequer Rishi Sunak made numerous announcements related to sustainable finance, as part of the UK’s plan to bolster the dynamism, openness, greenness and competitiveness of the financial services sector, including making the UK the first country in the world to mandate economy-wide disclosures in line with the Task Force on Climate-related Disclosures (TCFD) by 2025. The Chancellor also announced that the UK will issue its first-ever Sovereign Green Bond and will develop a green taxonomy.

As co-president of COP26, the UK is also eager to show its climate ambition and its willingness to contribute to the Paris Agreement and the 2030 Agenda for Sustainable Development. The Prime Minister, Boris Johnson, announced this month a more ambitious Nationally Determined Contributions (NDC) to the Paris Agreement with several impactful measures (develop offshore wind power, encourage nuclear power, promote electric cars, heat homes and run public transport with hydrogen, plant thousands of hectares of trees and become a champion of carbone capture and storage). The plan will mobilize £12 bn of public investment and at least three times as much private investment. The most interesting measure is probably the anticipation to 2030 of the ban on the sale of new cars or commercial vehicles with thermal engines, whether diesel or gasoline (vs the initially date set at 2040).

This strategy is also part of the country’s desire to catch up with the European Union on the eve of Brexit, in a context where the European Commission has clearly taken the lead with its Sustainable Finance Action Plan (e.g. upcoming launch of a €225 bn green bond issue programme, representing one third of the EU recovery plan (see our previous article on the EU Recovery budget and package), EU  taxonomy on green & sustainable activities reaching its last step of Delegated Act or the issuance of more than €39.5 bn in Social Bonds with its SURE programme).

Chancellor Sunak said:

“We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre. By taking as many equivalence decisions as we can in the absence of clarity from the EU, we’re doing what’s right for the UK and providing firms with certainty and stability.”

Reminder on what does the TCFD recommend in term of climate-disclosure

The Task Force on Climate-related Financial Disclosures (TCFD) is a working group set up at the end of 2015, under COP21, by the G20 through the Financial Stability Board (FSB). It aims at promoting financial transparency related to climate risks. Its final report, published on June 2017, specifies the elements of climate reporting expected incorporates reference documents, focusing on 4 pillars: governance, strategy, risk management and metric & targets.

Table 1 - TCFD main disclosure recommendations

Source: TCFD Final Report (2017)

The Task force developed supplemental guidance for the financial sector and non-financial industries developed in the final report.

The TCFD highlights four sectors with high stakes: energy, agriculture, transport and building. Organizations with sales of more than $1 billion are required to conduct a more detailed scenario analysis: consequences of different regulatory assumptions, macroeconomic trends, energy trajectories, technology development assumptions about their business, measuring the resilience of their strategy, etc. In order to help investors, understand where the conclusions come from, companies are encouraged to publish the critical input parameters and the financial consequences (qualitative and/or quantitative) induced by these scenarios (e.g. scenario 2°C). The taskforce recommends that organizations provide climate-related financial disclosures in their mainstream (i.e. public) annual financial filings.

Today the TCFD recommendations are a reference in terms of climate-related financial disclosures. More than 1,400 organisations worldwide have now formally indicated their support to the recommendations (full list of current organizations supporting the work of the Task Force here). According to the CEO of climate-disclosure focused organization Carbon Disclosure Project (CDP), Paul Simpson: this year, more than 9,600 companies, representing greater than 50% global market capitalization disclosed on climate change through CDP’s TCFD aligned-disclosure platform, including 84% of the FTSE100. However, there is more work to be done as many organisations are not yet providing the full aligned disclosures that market players need to make reliable and consistent decisions. 

The UK will thus be the first country to give a definition and practical meaning to the TCFD at a governmental/ regulatory level.

In terms of timeline, the announcement by the UK’s Chancelor occurred the same day the Financial Conduct Authority (FCA), the UK financial services regulator, announced that all major listed companies that have a premium listing on the London Stock Exchange (LSE) will face tightened TCFD-aligned climate-risk disclosures from the start of 2021 on a “comply or explain” approach.

The joint Government Regulator TCFD Taskforce has published its roadmap[2] towards mandatory climate-related disclosures this month. The UK has divided the organization that will have to follow the mandatory law into seven categories: listed commercial companies; UK-registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes. A significant portion of mandatory requirements will come into force by 2023. Different regulators and government departments are integrated in this roadmap such as the FCA, the Department for Work & Pensions and the Department for Business, Energy & Industrial Strategy.

Table 2. Timeline of planned or potential regulatory actions or legislative measures

Source: Green & Sustainable Hub, Natixis (2020)

Why is this an important move for the sustainable finance market?

With a 2019 gross domestic product (GDP) of $2.83 trillion, the UK is the sixth-largest economy in the world and hosts the largest asset management market in Europe, with €8 670 billions in assets under management at end-2017, representing 36.5% of European AM’s market share[3]. As the first G20 government to make TCFD-aligned disclosure mandatory, the UK sends a powerful signal to the market and other governments. As such, the country  may pave the way for other countries for more transparency in the sustainable market. However, the UK was not the first country in Europe to work on a disclosure law. For instance, in France, the Article 173 of the law on energy transition and green growth, based on the comply or explain principle, defines the reporting obligations of institutional investors regarding their consideration of ESG criteria, has been in force since January, 2016, and has largely inspired the EU Sustainable Finance package.

The Task Force highlights that TCFD disclosures will require international standards to be more “consistent, comparable and enforceable”, so the government will continue to work with international organizations. However, the EU and its Non-financial Reporting Directive (NFRD) are not mentioned in its report. The UK Task Force, however, strongly supports the International Financial Reporting Standards (IFRS) Foundation’s proposal to create a new, global Sustainability Standards Board and the alliance of voluntary standard-setting organizations such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), the International Integrated Reporting Council (IIRC) and the Carbon Disclosure Project (CDP).

UK first Green Sovereign Bond 

The UK government also announced it intends  to issue its first green sovereign bond in 2021.

The objective is partly to finance the UK’s environmental transition to achieve carbon neutrality by 2050, by financing projects that will tackle climate change and infrastructure investments and creating green jobs across the country. On October 6, Prime Minister Boris Johnson also announced a series of investments and initiatives to develop renewable energy in the UK. To increase offshore wind capacity, the UK PM announced that £160 million will be made available to support the sector.

This sovereign issue announcement also meets investor demand. In October 2020, a group of investor[4], representing £10 trillion in assets, have launched the Green + Gilt proposal, calling on the government to issue sovereign green bonds to help finance the country’s green recovery plans. According to them, the UK green bond issuance would support the development of the sustainable finance market, encouraging further issuance by the UK private sector and local authorities, which until now have been extremely shy on the sustainable bonds markets.

UK’s taxonomy, what can we expect?

The UK taxonomy will reportedly be based partially on the EU taxonomy by reusing its scientific metrics as its basis. A UK Green Technical Advisory Group will be established to review these metrics and ensure they fit with UK sectors. Thus, it is still difficult to consider the position of the UK taxonomy in relation to the EU taxonomy. 

[2] Government Regulator TCFD Taskforce (november 2020), Roadmap, available here

[3]Efama (September 2019), Asset Management in Europe, available here

[4] Investors and organizations who signed the letter include Affirmative Investment Management, AXA Investment Managers, Association for Financial Markets in Europe (AFME), Barclays, BlackRock, Confederation of British Industry (CBI), City of London Corporation, Credit Suisse, Columbia Threadneedle Investments, Institutional Investors Group on Climate Change (IIGCC), Impax Asset Management, Legal & General, Legal & General Investment Management, London Stock Exchange Group, NatWest, Ninety One, Pension Protection Fund, Principles for Responsible Investment (PRI), Schroders, TheCityUK, and the UK Sustainable Investment and Finance Association (UKSIF).