Companies Can No Longer Dodge Climate Risks as U.K. Raises Bar
Companies Can No Longer Dodge Climate Risks as U.K. Raises Bar
(Bloomberg) -- The inescapable reality of climate change just became an unavoidable fact of life for U.K. companies. Businesses in other countries may face a similar fate shortly.
Starting in 2025, U.K. companies will have to disclose the extent to which their operations are exposed to the risks posed by global warming. While a number of companies already disclose some climate data, meeting the target announced on Monday by Chancellor of the Exchequer Rishi Sunak will require a significant increase in reporting standards for all.
The move underscores how climate risks, once a peripheral concern in financial circles, could become as closely followed by investors and regulators as earnings per share metrics or solvency ratios. Britain is the first major economy to make climate reporting mandatory, and could set the direction of travel in other countries as investors and consumers demand the information they need to make decisions in a carbon-constrained world.
“The writing is on the wall: Failure to respond quickly to this will result not just in a regulatory breach but will have wider implications for the sustainability of the business and indeed our planet,” said Fiona Davis, a partner at auditor BDO LLP in London. “It could also ultimately lead to the company’s own demise.”
Sunak told companies to prepare to make disclosures in line with the Task Force on Climate-related Financial Disclosures. The largest companies, pension funds, and banks will have to start disclosing this information as soon as 2021 with smaller ones to follow through a phased approach over the next five years.
“The phased approach is a good one and a sensible one,” said Paul Simpson, chief executive officer of CDP, a London-based nonprofit focused on environmental disclosures. “Large and well-prepared companies can do it quickly. Those who are smaller and haven't had such market pressure will need some time.”
The TCFD framework considers both the physical risks of global warming, from forest fires to coastal flooding, as well as the threats to operations and asset values from the transition to a lower-carbon economy. Michael R. Bloomberg, the founder and majority shareholder of Bloomberg LP, the parent company of Bloomberg News, is the chair of TCFD.
The call for mandatory disclosures comes a month after Exxon Mobil Corp. faced public backlash for failing to disclose customer emissions, called Scope 3, and provide short-term guidance to investors about carbon-dioxide emissions. Exxon had internal projections, never made public, that showed a 17% increase in CO2 emissions over the next five years, according to company documents reviewed by Bloomberg. In response, Exxon said those projections were “a preliminary, internal assessment of estimated cumulative emission growth through 2025” and that its projections had since changed.
The U.S. Commodity Futures Trading Commission said in September that companies should address climate-related issues that materially impact a firm in its financial statements and filings. A lack of disclosure could “affect market confidence in management, valuation multiples and the cost of capital,” the CFTC said.
“There is no denying the benefits to capital markets and the general investment landscape of stepping up climate-related disclosure in a structured and consistent way,” said Graeme Pitkethly, chief financial officer of Unilever and also a vice-chair of the TCFD. “It is a big undertaking and it takes commitment.”
While regulators in the U.K., European Union and China have been discussing mandating climate disclosures for some time, only about 10,000 companies, accounting for 50% of global market capitalization, currently disclose climate information to CDP.
“It’s like financial accounting: If it wasn’t mandatory, some companies would do it very late and some companies probably wouldn’t even do it,” said Simpson. “That’s why we do need mandatory disclosure requirements in all major markets. The U.K. is the first to announce that and we would very much hope that other G20 countries will quickly adopt the same approach.”
Simpson said companies that have yet to start climate reporting should be able to begin doing so in one or two years. It could cost up to 250,000 pounds ($331,100) for large firms, he said, but they might be able to defray the expenses as the disclosures lower risks for lenders and reduce borrowing costs.
No matter the cost or inconvenience for companies, it is an essential step if the U.K. is to take decisive action on climate, said Sasja Beslik, head of sustainable finance development at Bank J. Safra Sarasin in Zurich. The current emissions of U.K.-listed companies are positioned for a world in which global temperatures rise 3.4 degrees Celsius by the end of the century, he said, far above the 2-degree threshold set by the Paris agreement to avoid the worst impacts of climate change.
Yet reporting only highlights climate risks, it doesn’t resolve them. Investors need good data to push companies to make necessary changes. “Not everyone will disclose, let alone disclose well, and disclosures will not include key data points or unbiased and up-to-date data,” said Ben Caldecott, director of the Oxford Sustainable Finance Programme at the University of Oxford.
That is why, just like financial data is audited, climate disclosures should be rigorously evaluated by independent, third-party auditors. “As this goes mainstream, we will need and, in some respects, should be required to provide some form of assurance and verification,” said CDP’s Simpson.
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