The local government ministry intends to next year consult on climate-related financial disclosures by local authority pension schemes, according to a policy paper published by the UK government in connection with a wide-ranging financial services announcement by the Chancellor yesterday.
According to the interim report of the UK’s joint government-regulator body on the Taskforce on Climate-related Financial Disclosures (TCFD) framework, the ministry of housing, communities and local government intends to consult next year on implementation of mandatory TCFD-aligned reporting in the local government pension scheme (LGPS) by 2023.
In a statement to parliament yesterday, Chancellor Rishi Sunak said the UK intended to introduce fully mandatory climate-related financial disclosure requirements across the economy by 2025.
Mandatory TCFD-based disclosure is one of the targets of the private finance agenda for next year’s UN climate summit (COP26), as laid out by Mark Carney yesterday.
Sunak also revealed the government would, subject to market conditions, make its green bond debut next year, and implement a “green taxonomy”.
Separately, the Chancellor said he was publishing a set of equivalence decisions for the EU and EEA member states and that the government would soon consult on a reform of the UK’s investment fund regime.
He committed to the first Long-Term Asset Fund being up and running within a year, “to encourage UK pension funds to direct more of their half a trillion pounds of capital towards our economic recovery”.
The UK’s asset management body has been pushing for the creation of such a fund, an open-ended vehicle designed to help defined contribution pension schemes invest in illiquid assets.
“Requiring UK companies to make mandatory disclosures against the TCFD framework is an extremely positive development”
Saker Nusseibeh, CEO at International business of Federated Hermes
Saker Nusseibeh, CEO at International business of Federated Hermes, welcomed the Chancellor’s green finance announcements.
“Requiring UK companies to make mandatory disclosures against the TCFD framework will move discussions from the ‘whether’ to the ‘what’ and ‘how to’ stage: this is an extremely positive development,” he said.
“Plans to issue the UK’s first ever sovereign green bond next year is also a very significant step that will encourage private capital to flow more quickly, encouraged by government financial support and incentives.”
Many UK investors have been calling for the government to issue a green bond, with pension funds among those backing a “Green+ Gilt” proposal developed by the Green Finance Institute, the Impact Investing Institute and LSE Grantham Research Institute on Climate Change and the Environment last month.
Sunak said the government planned to issue a series of green bonds, “as we look to build out a ‘green curve’ over the coming years helping to fund projects to tackle climate change, finance much-needed infrastructure investment, and create green jobs across this country”.
Moves towards mandatory TCFD reporting have already been initiated in the UK, with private sector occupational pension funds being the first part of the investment chain for which rules were presented.
Yesterday the CEO of the Financial Conduct Authority (FCA) revealed the regulator would be introducing reporting rules for premium-listed companies on a comply-or-explain basis, but would next year consider making them mandatory. Rules for asset managers are also being planned.
Taxonomy to lean on EU metrics
Sunak said the green taxonomy would ”help firms and investors better understand the impact of their investments on the environment”.
According to the government, the UK taxonomy “will take scientific metrics in the EU taxonomy as its basis” and a technical advisory group would be established “to review these metrics to ensure they are right for the UK market”.
The government also intended for the UK to join the International Platform on Sustainable Finance, a body set up last year by the EU and authorities in seven other jurisdictions. A Platform working group co-led by the EU and China is aiming to develop a “common ground taxonomy”.
Vanessa Bingle, ESG lead at asset management consultancy Alpha FMC, said the UK’s commitment to global leadership on green finance would be welcome to many fund houses, “particularly those who have already taken steps to move beyond regulatory minimum standards and subscribe to voluntary codes and industry working groups”.
A defined taxonomy, she said, would be a huge help for the investment industry “but will also make investment managers more accountable, with greater pressure to meet or exceed their stated objectives such as delivering Paris-aligned portfolios”.
“This is a good thing and I believe today’s announcement represents a major step in the genuine mobilisation of capital towards a more sustainable future,” Bingle added.
“However, how to practically create and implement this disclosure presents a challenge to many UK asset managers, who will need to upgrade their investment processes, data and technology infrastructure if they wish to remain competitive in this new landscape.”
The indicative path for the introduction of TCFD-implementing regulatory rules and legislative requirements in the UK is set out in a new ‘roadmap’ document, although the joint goverment-regulator taskforce behind it noted it did not reflect the intention for next year’s LGPS-focussed consultation.