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Mandatory Climate-Related Financial Disclosures: Aligning Standards Globally

On October 28, the UK government confirmed that, starting in April 2022, climate-related financial disclosures by companies and financial institutions will become mandatory by law, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This would make the UK the first nation to enshrine such disclosures in law. The UK government made this announcement just in time for it to host the United Nations Climate Change Conference (COP26) from October 31 to November 12, 2021. The Financial Stability Board launched the TCFD at the 2015 United Nations Climate Change Conference (COP21). Since then, TCFD's recommendations have been endorsed by the G20 governments as the global standard for corporate climate change disclosure and reporting. Other G20 nations are at different stages of implementing mandatory climate disclosures.

TCFD's disclosure recommendations have so far been voluntary, as part of the global environmental, social, and governance framework adopted by many corporations and financial institutions. DBRS Morningstar views the move toward compulsory climate-related disclosures positively, as it will (1) help companies make better decisions for their future business by assessing and understanding climate-related risks and opportunities; (2) provide transparency for corporations and investors about the financial impacts of their exposure to climate change; (3) boost investor confidence that they are investing their funds sustainably and responsibly; (4) allow improved pricing of climate-related risks where they occur; (5) help investors and businesses align their long-term strategies with national climate goals; and (6) help combat greenwashing. The new legislation will be mandatory for UK-registered companies that trade on a UK-registered market with more than 500 employees, and for private companies with more than 500 employees and GBP 500 million in revenue.

While a positive development in the long run, DBRS Morningstar recognizes that implementing and enforcing TCFD climate-related disclosures (or ones aligned with TCFD recommendations) will have its challenges. Corporations and financial institutions will have to clearly identify, quantify, and disclose their financial exposure to climate risks and the related opportunities. Disclosures will include greenhouse gas emissions and related risks, as well as a qualitative scenario analysis and closer alignment of the regulations to language used in the TCFD recommendations. We expect that climate-related mandatory disclosures will not be easy to fully implement, presenting accounting and reporting challenges for many corporations and financial institutions. Therefore, ensuring organizational leadership support for the enhanced disclosure is essential for successful implementation.