Sunak Urged to Push Climate Risk Agenda Harder After Gilt Plan

(Bloomberg) -- Britain moved to become the first major nation to require large companies and financial firms to disclose risks from climate change, in a sign of what could become a powerful new regulatory requirement around the world.

The disclosure requirements announced Monday by Chancellor of the Exchequer Rishi Sunak would take effect in 2025. Already there are worries the new measures would only scratch the surface of what’s needed for the government to meet its ambitious climate goals.

Carsten Jung, who previously led the Bank of England’s work on financial risks from climate change under former Governor Mark Carney, said Sunak’s plan to issue Britain’s first green bond was good “but largely a cosmetic move.”

Sunak announced plans for a green gilt as part of a trio of measures that he said would see the U.K. become “a world leader in the use of green finance.” The moves won praise from executives at companies and organizations, including Barclays Plc, Aviva Plc and the London Stock Exchange. “This is a significant step forward that will provide investors with the information they need to make sustainable investment decisions,” said Lindsey Rix, Aviva’s head of savings and retirement, in a statement.

But Jung, who now works for the think tank Institute for Public Policy Research, said selling bonds won’t do enough to plug a 29 billion pound ($38.2 billion) gap of public investment that he says is needed to put the nation on a path to net-zero emissions by 2050. “The key is that enough climate investment takes place in aggregate,” Jung wrote on Twitter.

His concerns were echoed by Tanya Steele, chief executive of the U.K. arm of the World Wildlife Fund for Nature. While the announcements were a “good first step,” she said the government will need to go further than “just disclosing the damaging things that companies are doing.”

In Sunak’s first big statement on financial services since becoming chancellor in February, he told Parliament about the mandatory disclosure rules as well as the U.K.’s plan to issue its first green gilts next year. Sunak also said he would begin a review of the nation’s company listing rules in an effort to attract innovative businesses to Britain.

“We want to remain one of the most open places to do business anywhere in the world,” Sunak said in a Bloomberg TV interview. “Importantly, we want to be a leader in green finance.”

The government is trying to burnish the U.K.’s green credentials as the country gears up to host a major set of United Nations climate change talks next year, and deliver on its pledge to become carbon neutral by 2050.

U.K. Prime Minister Boris Johnson had been expected to deliver a major speech this week setting out a 10-point green industrial plan that would allow him to deliver on his promise of “building back better” from the pandemic, according to two people familiar with the matter. But that speech has now been delayed. Energy Minister Kwasi Kwarteng on Monday said it would come later in the year.

In an attempt to demonstrate the government’s commitment to tackling global warming, Sunak said Monday that many climate risk disclosures will become mandatory by 2023 with the proposals implemented in full by 2025. That would make Britain the first country in the world to introduce recommendations from the TCFD, according to Sunak.

The problem is that only about half of the world’s publicly traded companies disclose emissions information and estimating that data yields poor results, according to a recent study from the quant firm Research Affiliates. If investors are to back winners in a carbon constrained world, the researchers called for “mandatory and audited carbon-emissions disclosure.” 

In the U.S., Securities and Exchange Commissioner Allison Lee said last week the regulator should create rules for financial institutions to publicly disclose reliable information about the risks they face from climate change. The victory by President-elect Joe Biden, who campaigned on stronger climate action, will likely boost Lee’s proposal.

Jung said that without corporate climate targets, Sunak’s decision to mandate companies disclose their exposure to climate risks by 2025 will be insufficient. He said companies should be required to disclose their so-called Scope 3 emissions. That means emissions that they aren’t directly responsible for, but are found in their supply chains and end use of their products.

“Some policies such as climate stress tests are essential,” he said. “But overall, they are really just a bare minimum of what would be needed to make finance support the climate transition.”

Back in 2015, when Jung served at the Bank of England, then-Governor Mark Carney made an influential speech warning that climate change will lead to financial crises and crumbling living standards. Carney helped establish the Task Force on Climate-Related Financial Disclosures that same year, with the goal of standardizing the way businesses assess and reveal the dangers faced by warming temperatures. In his role as finance adviser to COP26, Carney is now asking all countries to set out timeline for making TCFD disclosure mandatory by 2023. (Michael R. Bloomberg, the founder and majority shareholder of Bloomberg LP, the parent company of Bloomberg News, is the chair of TCFD.)

Climate change is now seen by a majority of money managers and bankers as an economic problem as much as environmental one. The physical effects of global warming, from forest fires to coastal flooding, will have a dramatic effect on asset prices and company fortunes, as will the seemingly inevitable transition to a lower-carbon economy. More than 1,500 organizations, with a combined market capitalization of $12.6 trillion, have embraced TCFD’s recommendations, according to the group’s most recent report, although actual disclosures on the financial impact of climate change remain low.

“The chancellor’s plans to make disclosure mandatory for companies are right if the rules are compulsory and thorough,” said Doug Parr, the U.K. policy director at Greenpeace. “The real win would be to make all financial institutions put in place plans to meet the Paris Climate Agreement by the end of next year. Disclosure is a route to making that happen, but not an end in itself.”

©2020 Bloomberg L.P.