MPs urge UK Government to make climate risk reporting mandatory
Ministers have urged the UK Government to make it mandatory for companies and asset owners to report on climate-related risks by 2022 in order to "fix" the short-term mindset of the current financial system.
The Environmental Audit Committee (EAC) has today (4 June) published a follow-up report to the green finance inquiry from November 2017. The report, which collates hearings from investors, asset owners and financial regulators, found that structural incentives across the UK investment sectors encourage focus on short-term returns, neglecting longer-term reporting needs on climate-related risks.
The EAC’s chair Mary Creagh said: “We need to fix the incentives in our financial system that encourage short term thinking. Long-term sustainability must be factored into financial decision making. Climate change poses financial risks to a range of investments – from food and farming, to infrastructure, construction and insurance liability.
“The low-carbon transition also presents exciting opportunities in clean energy, transport and tech that could benefit UK businesses. 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.”
Momentum regarding climate-related reporting is growing following the creation – and subsequent recommendations – of the Task Force on Climate-related Financial Disclosures (TCFD), which seeks to disclose climate information as part of mainstream financial statements.
The UK Government has endorsed these recommendations but has done little in the way of specific action, according to the report. The EAC recommends that the TCFD recommendations should apply to a range of pension and investment managers, as well as the listed companies that the Government has recommended.
Notably, the EAC does not believe that a voluntary approach will be effective in the medium-term, and has called on the Government to make climate risk reporting mandatory on a “comply or explain” basis by 2022.
The report recommends that pension savers should be given greater opportunities to engage with decisions as to where their money is invested. The UK's top 25 pension funds, with assets under management worth £555bn, are failing to account for climate-related risks, according to the EAC.
A survey of these 25 pension funds found that only 12 had considered climate risks at board level, with five funds being unable to identify one climate action they had taken.
There has been admission from the Department for Work and Pensions that there is little understanding amongst trustees on the scale of fiduciary duties that are related to climate and environmental risks. The EAC is therefore calling on the UK Government to clarify in law what duties pension schemes have to protect long-term asset value.
The report recommends that current legislative framework could be used to create mandatory requirements for climate reporting. The Companies Act 2006 requires companies to disclose climate risks that are deemed financially material. The Financial Reporting Council's (FRC) Corporate Governance Code and UK Stewardship Code, and the Financial Conduct Authority's (FCA) listing rules could all be amended to account for new climate reporting, the report adds.
If Government is unable to appropriately amend current legislation, the report recommends the creation of new sustainability reporting legislation similar to Article 173 in France.